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Romney and the 47%: Part of the same tax problem

September 25, 2012: 12:43 PM ET

Romney and the 47% are both taking what the tax code gives them, and the result isn't very pretty.

FORTUNE -- We've been hearing endless yammering lately about two seemingly unrelated things: that 47% of U.S. households don't pay income tax, and that Mitt Romney paid a lower effective tax rate on his $13.7 million of 2011 income than most American workers pay for just Social Security and Medicare.

But you know what? Romney and the 47% are joined at the hip, as well as at the checkbook. How so? They're both taking what the tax code gives them, and the result isn't very pretty.

Ironically, the reason so many U.S. households don't pay income tax, one of the conservatives' current laments, is largely attributable to policies pushed by two Presidents beloved by low-tax types: Ronald Reagan and George W. Bush. Reagan expanded the Earned Income Tax Credit, and Bush doubled the child care credit. Romney either didn't know this when he made his denigrating remarks about "the 47%," or else chose not to mention it. Putting things in perspective doesn't make for good applause lines.

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Now, to Romney's taxes. He has the cluelessness -- or maybe it's gall -- to boast about not deducting some of his charitable contributions, in order to boost his effective tax rate to 14%. Give me a break. People earning less than $110,100 pay an effective rate of 15.3% in just Social Security and Medicare tax on every penny of salary they make (including the employer's portion, which analysts say comes out of workers' pockets). Plus in many cases, they pay income tax, too. So forgive me for not being impressed with Romney's 14% effective rate. The fact that he could have paid only 10%, perfectly legally, is pretty appalling.

But we need some honesty and consistency in this discussion. If you're fine with the 47% taking full advantage of current tax law, you lose your standing to rag on Romney for doing the same thing. If you say that it's perfectly fine for Romney and other supposed job creators to pay less than what average workers pay just for Social Security and Medicare, you don't have standing to complain about the 47%.

The real problem here, I think, is that by using the tax code to advance social policy rather than to merely collect revenue, we've lost sight of the idea that all of us Americans are supposed to be engaged in a joint enterprise.

In an intellectually and morally honest system, we'd collect taxes from everyone. Then we'd mail checks to lower income people instead of giving them tax credits. We would also send checks to compensate people for some of their mortgage interest, real estate taxes, charitable contributions, and dividend and long-term capital gain income, rather than giving them tax money indirectly, via the tax code.

However, mailing checks would count as government spending while tax breaks don't. In addition, higher-income people would get bigger government checks than lower income people would. That sure wouldn't play well.

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So we bury social policies in the tax code, and obscure what techie types call "tax expenditures." Among the things obscured, according to the Tax Policy Center, is that a tenth of 1% of taxpayers get half the benefit (call it $38 billion) of having dividends and long-term capital gains taxed at preferential rates. The center says non-paying households are down to 46.4%, but I'll keep using Romney's 47%.

In my ideal world, everyone would pay at least a nominal income tax, in recognition of the fact that all of us Americans are engaged in a common enterprise. We would reduce or totally eliminate the advantage that income from investments has over "earned income" like salaries. And we'd certainly close the noxious "carried interest" loophole that allows Romney and a handful of other ultra-high-income types to pay ultra-low taxes on their piece of the profits realized by investors in buyout funds and hedge funds.

Changes like these would require the return of compromise and civil discourse to our national conversation. I'm a congenital optimist, so I've convinced myself that this will actually happen. Someday. Until then, though, we'll have to put up with the yammering about "the 47%," Romney's tax returns, and other topics du jour. More's the pity.

Additional reporting by Doris Burke

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About This Author
Allan Sloan
Allan Sloan
Senior Editor at Large, Fortune

Allan Sloan, who has been writing about business for more than 40 years, joined Fortune in July of 2007. Before that, he was the Wall Street editor for Newsweek for 12 years. His work also appears in The Washington Post. Allan is a seven-time winner of the Loeb Award, business journalism's highest honor, receiving awards in four different categories for five different employers. He is a graduate of Brooklyn College and has a master's degree in journalism from Columbia University. He and his wife live in New Jersey. They have three grown children.

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