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This is an op-ed piece that I submitted to the New York Times (but was not published.)
A lot of time has been expended on this idea that Republican Presidential frontrunner Mitt Romney, and by association, the wealthiest Americans, pay only 15% of their income in taxes. As a former Accountant and a current Investment Manager, it’s quite vexing; not only because this idea is patently untrue, but also because it’s veering the national discussion away from the real problems with our tax system. If we have an issue, it’s not one of “low rates”, but one of tax complexity that is more likely to favor the wealthy.
For some context on this, it’s useful to go back to 1980, when the top nominal tax rate was 70%. Under Ronald Reagan, that rate was lowered to 28%. Yet, contrary to conventional wisdom, Reagan’s “tax reduction” actually increased the tax burden on the wealthy. In 1981, the top 1% paid 17.6% of the tax burden. By 1988, that share had increased to 27.5%! [SOURCE]
This seems counter-intuitive to many, but it’s not when you understand the nature of the US tax system. It was the complexity of the pre-Reagan tax code that allowed the wealthy to pay so little; even if the advertised rate said “70%”, many wealthy individuals were paying effective tax rates near zero. When Reagan radically lowered the nominal tax rates, he also eliminated a lot of the tax complexity that had allowed many ultra-wealthy Americans to pay virtually nothing. And in this sense, he increased the fairness of the tax code.