WASHINGTON - Why do Mitt Romney and other wealthy investors pay lower taxes on the income they make from investments than they would if they earned their millions from wages? Because Congress, through the tax code, has long treated investment more favorably than labor, seeing it as an engine for economic growth that benefits everyone.
President Barack Obama and the Occupy Wall Street movement are challenging that value system, raising volatile election-year issues of equity, fairness - and Romney's tax returns.
Romney, who released his 2010 and 2011 tax returns this week, has been forced to defend the fact that he paid a tax rate of about 15 percent on an annual income of $21 million. His tax rate is comparable to the one paid by most middle-income families. His income, however, is 420 times higher than the typical U.S. household.
The U.S. has long taxed capital gains - the profit from selling an investment - at a lower rate than wages.
William McBride, an economist at the conservative Tax Foundation, says it is unfair to tax income more than once, and capital gains are taxed multiple times. If you got the original investment from wages, that money was taxed. If the stock you own gains value because the company you invested in makes a profit, those profits are taxed through the corporate tax. And if that company issues dividends, those are taxed as well.
Liberals and some moderates argue that lower taxes on investments are a giveaway to the rich because they are the ones who get the most benefit. Last year, two-thirds of all capital gains went to people making more than $1 million, according to the nonpartisan Joint Committee on Taxation.
Obama said at his State of the Union address Tuesday that people making more than $1 million should pay at least 30 percent of their income in taxes. The proposal has little chance of passing a divided Congress this year.
Conservatives argue that increasing investment taxes would make it harder for businesses to raise capital, restricting job growth and hurting financial markets.