Mitt Romney’s tax returns are now posted, along with that letter summarizing the previous 20 years of taxes. You can find them here.

Without delving too deeply into the return, I will say that Romney’s low effective tax rate is not a function entirely of Mitt Romney being a scoundrel as it is a function of the way the tax system is designed in America. None of Romney’s gross income came from wages or salaries or tips in 2011. All of it came from interest, dividends, a little business income, and capital gains. And we’ve been taxing that at ultra-low rates for some time, particularly since the Clinton Administration, but even more so after the Bush tax cuts. Because investment income, particularly dividends and capital gains, gets taxed at a 15% rate, if you make all or practically all your money from investment it’s pretty hard to raise your effective tax rate.

The Obama Administration, through calls for an increase in the capital gains tax, and the Buffett rule, the millionaire’s minimum tax, would alter this approach somewhat. The Romney campaign would not. In fact, under the Paul Ryan plan capital gains would hardly be taxed at all. As applied to Romney’s 2010 return, he would have under the Ryan budget a 0.82% effective tax rate. And I don’t think 2011 would be too different.

So draw your own conclusions there. But I want to address Matt Yglesias’ point about why investment income is taxed lower than labor income, and why most economists agree. He sets up an ideal, theoretical scenario, where two people with relatively similar incomes spend their money differently:

One doctor chooses to spend basically 100 percent of his income on expensive non-durables. He goes on annual vacations to expensive cities and eats in a lot of fancy restaurants. The other doctor is much more frugal, not traveling much and eating modestly. Instead, he spends a lot of his money on hiring people to build buildings around town. Those buildings become houses, offices, retail stores, factories, etc. In other words, they’re capital. And capital earns a return, so over time the second doctor comes to have a much higher income than the first doctor.

So then there are two different scenarios:

• In the world where investment income isn’t taxed, the second doctor says to the first doctor “all those fancy vacations may be fun, but I’m being much more prudent. By saving for the future, I’ll be comfortable when it comes time to retire and will have plenty left over to give to my kids.”

• In the world where investment income is taxed like labor income, the first doctor says to the second “man you’re a sucker—not only are you deferring enjoyment of the fruits of your labor (boring) but when the money you’ve saved comes back to you, it gets taxed all over again. Live in the now.”

And the thinking is that world number one where people with valuable skills take a large share of their labor income and transform it into capital goods is ultimately a richer world than the world in which such people just go out to a lot of fancy dinners.

In the perfect, hermetically sealed scenario above, this is all true. I would say two things. Number one, the fact that it makes sense to tax investment income lower than labor income generally says nothing about whether current US policy on capital gains, dividend and income taxes are optimal. I’m talking both about the spread between investment and labor income, which is so wide in America that it obviously invites cheating from fund managers who pretend their labor income is investment income, and the total rates of both. So you can adhere to this theory about investment and labor income while decrying the current state of affairs in the US.

The second point is that there are many possibilities attached to the word “investment.” The ideal possibility is what is in the example, investing in productive capital expenditures that pay off for the investor and leave a lasting increase in economic output for the rest of us (you could also argue that doctor number one is investing heavily in the travel and tourism industry, which also benefits the economy, but there we are). The investment that people like Mitt Romney actually engage in, by and large, looks almost nothing like that. The investments are more along the lines of purchasing credit derivatives or making bets off of where commodities might be priced in a year. To quote Doug Henwood:

Most investments are in previously existing financial instruments. As Alan Abelson used to say in the old Barron’s ad, someone buys a stock because he thinks it’s going to go up—but the person he buys it from thinks it’s going to go down. Almost all corporate investment in real things like buildings and machinery is financed internally, through profits. For the last few decades, corporations have been generating more money than they know what to do with, so they’ve been shoveling out to shareholders. (See here for more.) In Romney’s case, Bain largely invested in existing corporations—turning some of them around (mostly with other people’s money) and bleeding others dry (at great profit to Bain partners).

In a world of increasing financialization structured in the way Henwood describes, there’s no way to get to this theoretical preference for investment over labor taxes. I guess if you still wanted to place investment income taxes below labor income taxes, you could clear all this up by taxing financial transactions, and therefore all this paper maneuvering takes a hit. That would lead to investment actually having to be investment in order to get the tax preference.