Romney’s Low Tax Rate

Romney’s Low Tax Rate January 18, 2012

In December, Mitt Romney’s advisers said he probably would not release his tax returns, as presidential candidates have traditionally done. I said at the time what was obvious to many, that the reason he would not do so is because he pays a far lower tax rate than most voters and this would make him the poster child of a broken income tax system. Now he’s admitted as much:

“What’s the effective rate I’ve been paying? It’s probably closer to the 15 percent rate than anything. Because my last 10 years, I’ve—my income comes overwhelmingly from some investments made in the past, whether ordinary income or earned annually. I got a little bit of income from my book, but I gave that all away. And then I get speakers fees from time to time, but not very much.”

That “not very much”? $360,000 in a one year period. I’d love to have that “not very much” income, wouldn’t you? Of course, to him that truly isn’t very much; it’s barely pocket change. Romney is worth an estimated $250 million, yet he pays just over half the federal income tax that I have paid the last couple years. That’s why this fake distinction between investment income and wages has to end. The tax on capital gains should be the same as the tax on income. But the Republican candidates have advocated that it be made even lower, some of them to zero. Yes, they think he should pay even lower taxes.

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  • eric

    Romney is worth an estimated $250 million, yet he pays just over half the federal income tax that I have paid the last couple years. That’s why this fake distinction between investment income and wages has to end.

    Totally agree.

    This is one of those wierd reverse-cases where you often find liberals proposing a very “conservative” position – do not use differential tax rates to do social engineering – while you find conservatives proposing a very “liberal” position – use differential taxation to encourage certain behavior, here, investment.

    Because of the difference in real tax rates between the rich and the middle, I also suspect that in the next decade we’re going to see the same reversal on support for flat or flatter tax structures. There’s going to be more support for it by Dems and more opposition to it by Rebs, for the simple reason that a real tax rate of 20-25% would be a decrease for the working middle class but an increase for the investing rich.

  • daved

    The supposed reason for low capital gains taxes, that it “stimulates the economy” or “creates jobs”, is mostly hogwash. If I buy IBM at 100 and sell it at 120, I made 20%, and the only economic activity I generated was to have to hand my broker about twenty bucks to process the two transactions. I did nothing to stimulate the economy or cause anyone to be hired. My income should be treated like gambling winnings, really.

    The only exception I’d make (maybe) is for returns on capital investments that really do stimulate the economy, like founding a business that actually hired people (and paid them). I’d still have to be convinced that this preferential tax treatment was causing more businesses to be started than would have been started otherwise. Somehow, I doubt that Steve Jobs co-founded Apple because he wanted to pay lower income taxes than he’d have had to pay by taking an office job.

  • davidct

    Much of the gain in an asset over time is due to an increase in cost due only to inflation. To tax this the same as annual income is not really equitable. That is why short term gains(less than a year)should be taxed as income while a lower rate is justified for long term increases.

  • Reginald Selkirk

    That’s why this fake distinction between investment income and wages has to end.

    All of the Bush tax cuts favor the wealthy.

    .

    Tax rates were lowered for all brackets, but lowered more for the higher brackets.

    .

    Capital Gains – does not to many minimum wage workers.

    .

    Share dividends – once again, the poor do not have dividend-paying investments.

    .

    Estate taxes – ditto.

  • Reginald Selkirk

    for the simple reason that a real tax rate of 20-25% would be a decrease for the working middle class but an increase for the investing rich.

    It would be a terrible burden on the poor though. The rich have gotten so much richer, maybe we need to add some extra brackets on the high end.

  • eric

    It [a flat tax] would be a terrible burden on the poor though

    Agreed. A flatter system could be more progressive than the system we have now (because the current system is regressive in many ways – how’s that for irony), but you’d still need some sort of low-income fix or exception.

  • eric

    david @3: Much of the gain in an asset over time is due to an increase in cost due only to inflation. To tax this the same as annual income is not really equitable.

    Why not? Much of the gain in my annual income over time is due only to inflation. If my labor’s cost-of-living raise is going to get taxed, why not your investment’s cost-of-living raise?

  • This is one of those wierd reverse-cases where you often find liberals proposing a very “conservative” position – do not use differential tax rates to do social engineering – while you find conservatives proposing a very “liberal” position – use differential taxation to encourage certain behavior, here, investment.

    It would be one thing if it actually worked. But all of the evidence suggests that cuts in the capital gains rate have done nothing to spur investment. Same with dividends.

    It would appear that the “social engineering” that conservatives are interested in is to turn the country into a plutocracy.

  • Michael Heath

    Ed writes:

    Romney is worth an estimated $250 million, yet he pays just over half the federal income tax that I have paid the last couple years. That’s why this fake distinction between investment income and wages has to end. The tax on capital gains should be the same as the tax on income. [emphasis mine -MH]

    Ed, my perception of your implied assumption seems equivalent to that of a mid-20th century liberal when the movement was at its most incompetent rather than as a libertarian or considering optimal policies while ignoring political ideologies.  In this case your arguing for social justice without even considering how raising taxes on capital gains would effect economic growth, the labor market, and discretionary (after-tax) median income and trends.

    We compete in a global economy where our tax policies affect all of the above factors given how changes to policies effects our competitiveness. I of course abhor the fact that Mitt Romney’s effective tax rate on his income (but not gains in the sale of actual capital) is lower than others making far less. But that alone is not cause to decide to raise a certain tax without first considering how it will impact both the American job market and our discretionary income.

    From my readings over the decades it does seem increasingly wise to keep taxes on capital gains low and lower given the rising influence of a global market with increasing competition. If we were to keep the income tax as a primary generator of federal revenues, than it would be more prudent to consider higher individual rates, consumption taxes on luxury goods, higher estate taxes, and most importantly, a far narrower definition of what a capital gain is relative to unearned and earned income (in Romney’s case taxing his unearned income at his bracket’s marginal income rate but not taxing his capital gains as he buys and sells assets).

    If my previous paragraph’s suggestion to narrow what is a capital gain to generate a higher rate on investment income is what you intended to mean and just got sloppy with your proposal which I emphasize above, than my critique is directed not at you but instead those liberals who advocate this rather than you. However you precisely argued you wanted an increase in capital gains, rather than reforming what is and is not a capital gain.

    Because progressive tax schemes have been empirically validated as superior to flat tax structures when it comes to increased economic growth, especially because rising income inequality suppresses future growth, I don’t seek for people like Mr. Romney to pay less in taxes but in fact more. However there is a good argument to be made that because of the nature of our economy and its strengths and weaknesses within the context of a global economy where other countries have advantages and weaknesses relative to our own, we must promote both increased investment (capital) and capital liquidity (the ease of selling capital to buy into new opportunities). That argues for lower rates when selling capital (assets) at a profit, not more.

    Too often liberals, including in this venue, seek first to get more from the rich without even considering how those marginal changes would effect all of us, including their own situation or that of people in their socio-economic class. They either react emotionally to strike out at the rich or have the naive view that changes in the tax code won’t effect anyone’s jobs, careers, or future income potential. National income is dynamic and impacted by the prudence of tax policy; the negative impact of implementing poor policy is ever-growing because of increased competitiveness in countries who are increasingly able to exploit the market when we reduce our own competitiveness. Given the stated objectives of both our political parties is the same, economic growth and a stronger labor market, it would be in all our interest if we advocate scoring and considering all tax proposals’ impact to these objectives prior to considering the fairness.

    This suggestion is one of the few areas where we’re improved our governance, as the CBO’s scores have been gaining influence making it more difficult for Republicans to refer to scores by sheisters like the Heritage “think-tank”. (who scored the Ryan Plan’s revenue projections and Bush’s tax-cuts.) It’s my opinion my analytic approach rather than making a political case, favors the left, yet their now-dysfunctional legacy of wanting to stick it to the rich without even considering the impact remains par for the course for far too many on the left. Which is another example of the left snatching defeat out of the jaws of victory. Thankfully the current president does not think like this, which is one reason I think his healthcare plan actually passed, because it made economic sense.

  • Michael Heath

    A little perspective on my post above. I of course think the left has far better arguments on nearly all policy debates, “of course” as validated in the proportion of criticisms I direct at conservatives, which is far higher than on Democrats. I’ve also argued the Democrats were a handful of Senate votes from historic governing greatness over the past 3 -5 years, stymied only by having a few conservatives within their midst and the weakness of Senate Majority Leader Reid’s inability to prevent his own caucus members (e.g., Ben Nelson, Blanche Lincoln, Mark Pryor, Joe Lieberman, WV’s new senator) from obstructing floor votes where the Democrats had around 55 votes. But the debate about capital gains is one where I think liberals make arguments as bad as conservatives, where both seem to wedded to the wrong anchor points. When it comes to the left its an unthinking fealty to social justice and disdain of the wealthy, with conservatives its purposefully protecting the plutocratic class even if it harms the national interest. In both ideological camps it also appears to me they favor policies which in the long-run, hurt even their own groups’ adherents.

  • Jordan Genso

    The Tea Party Republicans love to rail against government “picking winners and losers” when it comes to things like supporting green energy, but isn’t treating types of income differently also the government “picking winners and losers”?

  • juice

    I propose a flat personal income tax rate of 0%.

  • keithb

    “yet he pays just over half the federal income tax that I have paid the last couple years.”

    I am sure you mean tax rate here. Even if his effective rate was 1/250, I am sure he pays a much higher *amount* than you do.

    I think Romney is waiting until April so he can show *last* year’s return and is purposely cooking the books to pay more tax. I bet he doesn’t ever release 2010 or earlier returns.

  • Jordan Genso

    @ Michael Heath (I’m using “–” to indent my paragraphs as I don’t know how to make them look as separated as yours)

    there is a good argument to be made that because of the nature of our economy and its strengths and weaknesses within the context of a global economy where other countries have advantages and weaknesses relative to our own, we must promote both increased investment (capital)…

    –I am in strong agreement with your preference for having objective groups such as the CBO determining the potential impact of proposed policy changes, and agreeing ahead of time to support the policies with optimal impact, but I do feel you may be ignoring other ways in which your stated goal in the quote above (promoting increased investment) can be reached.

    –Investments will only be made if the potential reward justifies taking on the perceived risk. Increasing the tax rate on income derived from investments decreases the potential reward, and therefore puts downward pressure on new investments. But, that can be offset by decreasing the perceived risk.

    –Much of what is keeping new investments from being made in the current economy is a lack of demand making those investments too risky. If the government were to use the increased revenue received from the increased taxes on investment income and put that money into drivers of demand, the perceived risk for new investments could decrease.

    –I’m not saying anything you don’t know, as it’s the basic concept behind ‘stimulus’. But my position is that the upward pressure on new investments from increased stimulus could offset the downward pressure from increased taxes. It would be difficult to objectively measure both the upward and downward pressures, but if an organization was able to do so, I would discontinue my support of the policy if their analysis showed it to be harmful. But I currently have no reason to believe that such a plan couldn’t be successful if designed properly.

    –(I have ignored the capital liquidity half of your position, but I do recognize that it is another downward pressure that would need to be offset)

  • slc1

    Re Reginald Selkirk @ #5

    It would be a terrible burden on the poor though. The rich have gotten so much richer, maybe we need to add some extra brackets on the high end.

    Not necessarily. A flat tax can be made progressive by judicially choosing the amount of personal and dependent exemptions. For instance, take the 20% figure proposed by Mr. eric @ #1.

    Let’s take an example. Suppose this was coupled with an exemption figure of $10,000. That would mean that a family of 4 with an income of $40,000 would pay no income tax at all. A family of 4 with an income of $100,000 would pay $12,000, an effective rate of 12%. A family of 4 with an income of $1,000,000 would pay $19,200, an effective rate of 19.2%. that’s probably effectively more progressive that then current system.

    Clearly, one can adjust the 2 parameters, namely the tax rate and the exemption amount to arrive at whatever might seem equitable and that would raise the required amount of revenue for the government.

    I tend not to agree with Heath about national sales taxes or VATs. The former is an important source of revenue for most states and the latter would appear to necessitate the creation of a massive bureaucracy, which my information is that it has led to in those European nations that have it.

    As for what should be done with capital gains, I tend to agree with Heath. Before of blindly raising or lowering the rate, a narrowing of the eligibility requirements would seem to be in order.

  • slc1

    I would, however, be in favor of raising the federal gas tax and encourage the states to replace or supplement their gas tax with an engine displacement tax to encourage conservation. Engine displacement is the most important parameter for gas mileage. Automobile engines using current technology generate nearly twice the power/liter of displacement then did engines of 30 years ago and get commensurately better mileage.

  • “I think Romney is waiting until April so he can show *last* year’s return and is purposely cooking the books to pay more tax.”

    That’s possible, but the timing has a more prosaic explanation. By April he will have had the nomination sown up. It will be too late to affect the primaries, but by the time the general rolls around, it will be old news.

    Whatever the case, I think we can all agree that it definitely has nothing to do with principle.

  • Brain Hertz

    That “not very much”? $360,000 in a one year period. I’d love to have that “not very much” income, wouldn’t you?

    …and it’s only a little less than the salary one receives as President of the United States. Awesome. Incidentally, the number I heard quoted yesterday was $375k. Not sure where the discrepancy could have come from. Tips, perhaps? Or maybe he used $1000 bills to light his after-speech cigars with?

    Area Man:

    That’s possible, but the timing has a more prosaic explanation. By April he will have had the nomination sown up. It will be too late to affect the primaries, but by the time the general rolls around, it will be old news.

    Yes, I agree that that has to be part of the thinking, but it’s probably a bit of both. I seriously doubt we’ll get to see returns prior to 2011. What occurred to me is that if he releases them now, his primary opponents can attack him for it, which gives Obama a helpful free ride, rather than waiting until the attacks can only be mounted by Democrats.

  • Brain Hertz

    Whaddya know:

    But the key is he’s saying he’ll only release his 2011 returns, in other words, the ones his tax preparers are preparing now.

    (from TPM: http://talkingpointsmemo.com/)

  • Michael Heath

    Reginald Selkirk:

    All of the Bush tax cuts favor the wealthy.

    Depends on how you look at it. Bush in fact created the context which makes it difficult to impossible to raise rates on the poorest income quintiles who starting with his Administration. Note here how effective rates have changed over time, including even bigger drops in the lowest quintiles than the top: http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=456

    Since I argue we should consider economic growth, changes in the labor market, and discretionary median income trends, I would argue nearly all but the richest have been harmed by Bush’s policies because these metrics and their respective trends have suffered. But Bush only piled on to policies given the demise of all three started in the 1970s having more to do with an emerging global economy and congressional Republicans who refused to address fundamental problems with policies which didn’t fit 21st century economics.

  • matty1

    Michael Heath,

    I am curious as to how you would define capital gains for tax purposes. You clearly see the problems in allowing someone like Romney to treat what is in effect his income as capital gains and mention tightening the definition but I’m not sure exactly what this means.

    I have another, perhaps naive, concern about how different tax rates play out. To avoid this being about bashing the rich I will use a made up example to illustrate.

    Mr A works in a widget factory, in one year his work results in $20000 of sales of which he gets $10000 as salary and the other $10000 is put into new machinery.

    Mr B buys shares in same widget factory for $10000, which they spend on new machinery. He then waits till the share price has doubled then sells taking a net $10000 in capital gains.

    Now both Mr A and Mr B got $10000 to take home and do what they want with and both left the factory with $10000 to spend on plant. On what grounds do we say that Mr B’s take home should be taxed less?

  • Michael Heath

    Jordan Genso:

    Investments will only be made if the potential reward justifies taking on the perceived risk. Increasing the tax rate on income derived from investments decreases the potential reward, and therefore puts downward pressure on new investments. But, that can be offset by decreasing the perceived risk.

    True, but its apples and oranges because there’s two parts of capital investment, adding to the country’s private accounts by investing/saving (rather than consuming) and then companies accessing this capital to make new investment plays. Most capital investment decisions are done within corporations, where those managers consider the company’s return, not how their investors are taxed. The individual rates we were discussing happen as a result of their becoming an investor/creditor. But the actual investment happens due to a company leveraging the capital markets actually making a play.

    Essentially corporations have various financial triggers to decide when to invest. They then look at their cost of capital, k, which varies based on a number of factors including rates in the credit market and their risk profile which drives the rate they pay for credit. For example, while General Electric had a number of qualitative factors they considered prior to making an investment play (e.g., ability to be #1 or #2 in the target market niche), they also required a projected 25% return on investment (at least back in the Jack Welch days). Reducing corporations’ cost of capital by reducing the tax on capital gains of the investor/creditor class makes for more investment plays. More investment plays here, rather than elsewhere, is almost always advangeous to us, though bubbles can occur (capital moving from the stock market and funding Internet startups in the early 2000s to the housing market).

    Jordan Genso:

    Much of what is keeping new investments from being made in the current economy is a lack of demand making those investments too risky. If the government were to use the increased revenue received from the increased taxes on investment income and put that money into drivers of demand, the perceived risk for new investments could decrease.

    The current lack of aggregate demand is an an entirely different challenge related to where we are in the business cycle and the inability of our government to execute fiscal policy as economists prescribe. My policy argument here considers time spans longer than a business cycle.

    I agree with your prescription, but need to note it’s not related to my argument but instead a solid prescription for how to exercise good recessionary economic principles. And my argument wasn’t based merely on reducing the cost of capital, but also as I noted earlier, increasing capital liquidity (which you acknowledge). Nearly all large sales of assets have analysts first considering the after-tax returns. Keeping or reducing that liability encourages sale of assets in older, dying industries (coal, big oil) where sellers take a big tax hit to invest in emerging markets like solar and wind. So arguing for higher capital gain taxes marginally suppresses the investor class from moving their money from dying cash cow industries to high-growth sectors. Of course it would help if the government stopped subsidizing these old industries, but their cash-cow results allow them the money to lobby government so capital remains less liquid and prices are distorted to their benefit.

  • Michael Heath

    daved:

    If I buy IBM at 100 and sell it at 120, I made 20%, and the only economic activity I generated was to have to hand my broker about twenty bucks to process the two transactions. I did nothing to stimulate the economy or cause anyone to be hired. My income should be treated like gambling winnings, really.

    I can understand why people would think like you do, but it’s not so much about you but instead the impact on the corporation. The value of the company as expressed by their stock price and number of outstanding shares is their “market capitalization”. Their “market cap” has an enormous impact on their ability to develop an optimal debt and equity structure which is the basis of their future capital investment decisions. In addition, the stock price is a reflection of the market’s expectations of a company’s future earnings relative to a risk profile.

    As an example, a company I worked for went from making acquisitions and starting greenfield factories in the hundreds of millions per year to the billions within a few short years precisely and predominately because their stock price increased, which provided increased leverage to make bolder moves.

    So if your IBM buy and sell happened within a year and was due to not how the market perceived IBM’s sector but instead due to investors perceiving improvement of a combination of IBM’s perceived future earnings and risk profile, IBM would have, and their investors would demand, increased capital investments to fund even bigger future earnings (20% being healthy growth of the price of a stock).

  • Michael Heath

    Jordan Genso writes:

    I’m using “–” to indent my paragraphs as I don’t know how to make them look as separated as yours)

    In the row below a paragraph I’m adding a blockquote open tag. In the row below that I’m adding a close blockquote tag. As an example, where I replace less-than and greater-than characters with brackets to reveal what this looks like, see the below.

    [blockquote]

    [/blockquote]

    Replace the above two rows of brackets with less-than and greater-than characters and you’ve got yourself an additional space between paragraphs.

  • Michael Heath

    slc1:

    The former is an important source of revenue for most states and the latter would appear to necessitate the creation of a massive bureaucracy, which my information is that it has led to in those European nations that have it.

    I’ve never heard the argument consumption/VAT tax schemes require a massive bureaucracy. In fact proponents of consumption/VAT taxes point out we’d need far less resources to insure compliance than we need to monitor taxes on wealth and income, precisely because consumption/VAT taxes can be easily automatically and systemically calculated and collected at the point-of-sale. There are still compliance and illegal avoidance challenges of course, but again, I don’t see any valid opponents of these types of schemes making the argument you make here.

    The valid concerns I’ve encountered is how to introduce either scheme in a way that begins to improve growth and insure we maintain a sufficiently progressive structure to also promote growth.

    My own concern would be to introduce these sorts of schemes in a way that greatly reduces the motivation for businesses to lobby Congress in order to reduce their tax liability. That’s because I think this sort of scheme is one tool in the box that would help the people get their government back from the Corporatists.

  • Michael Heath

    matty1:

    Now both Mr A and Mr B got $10000 to take home and do what they want with and both left the factory with $10000 to spend on plant. On what grounds do we say that Mr B’s take home should be taxed less?

    Well, I don’t think about taxes as a tool to maximize fairness or social justice as I noted in my first post, I find that approach incredibly flawed while noting an overall progressive scheme promotes the same objectives I support as noted in the following. I instead think about how the government should collect revenue in a way that optimizes growth, the labor market, and median discretionary income – where I perceive the latter as a function more of economic growth than effective tax rates. So I’d argue you should consider other taxes to hit the investor with to reach a more fair tax scheme, like a luxury consumption tax, higher estate taxes, or higher marginal rates on his income. That fits in with my objective since lowering or eradicating the capital gains tax and therefore lowering revenues, especially given our current deficits, requires increased taxes from other sources to make up for this loss in revenue.

  • jnorris

    Mr Romney’s income and tax rate are red herrings. the real issue with him is the number of jobs he destroyed while making more money than god. Mr Romney has successfully shifted the discussion away from him being a job killer to his income.

  • dingojack

    Matty1 – Asked (way back at #21):

    Mr A works in a widget factory, in one year his work results in $20000 of sales of which he gets $10000 as salary and the other $10000 is put into new machinery.

    Mr B buys shares in same widget factory for $10000, which they spend on new machinery. He then waits till the share price has doubled then sells taking a net $10000 in capital gains.

    Now I’m certainly no economics super genius by any means, but what do you think the widget factory does with the money raised by issuing $10000 worth of shares? Keep in their sock-draw?

    The purpose of lowering the taxes on capital gains is to encourage people to gamble their money by investing in companies, so the latter can use the cash raised to buy equipment, re-train staff, re-tool machinary, do R & D, hire new staff, fix the blocked toilets on the 2nd floor & etc*.

    Here over 80% of the adult population own shares.

    Dingo

    —–

    * I’m sure others can explain it much, much better than I can.

  • dingojack

    Also – it can used to encourage investment generally, increasing the overall GDP which ‘raises all boats’ (although inflation is something to watch out for). This increase in economic activity keeps the money flowing through the economy and encourage banks to loan money for further investment and improvement (particularly important when in the recovery phase of a down-turn, I’d imagine).

    The big problem is voters like tax-cuts and hate tax-raises, especially when they think it hurts/doesn’t benefit them specifically (ie. people are stupid and selfish).

    Dingo

    —–

    Agan: I’m not an economist!

  • Michael Heath

    jnorris:

    Mr Romney’s income and tax rate are red herrings. the real issue with him is the number of jobs he destroyed while making more money than god. Mr Romney has successfully shifted the discussion away from him being a job killer to his income.

    Citation requested on the net change in jobs due to Mitt Romney’s actions at Bain.

  • organon

    dingojack–> Not bad. Some interesting thoughts.

  • Francisco Bacopa

    It’s time to increase capital gains to 28% and up corporate taxes out the wazoo unless they build factories and research labs and actually hire people to do shit.

    And lets but a cap on the home mortgage interest deduction. One home. Three hundred thousand. That’s all you get. Cut ag subsidies and let the market decide how our land should be uses. I think we might see more organic farms.

    And lets keep payroll taxes low and make up the gap in Social Security, Medicare, and Medicaid out of general income tax revenue. Let’s keep the payroll tax holiday where business are exempted from paying their share for a few months if they hire longer term unemployed people.

    We are a smart and productive nation. Let’s get back to work at being the awesome people we are. We are a First World nation (for now). Let’s act like it and invest in our advantages in infrastructure and education.

  • matty1

    I instead think about how the government should collect revenue in a way that optimizes growth, the labor market, and median discretionary income

    Fair enough but how do different taxes on Mr A and Mr B achieve these things? Both engaged in economic activity that left both the factory and themselves $10000 better off, both are free to spend their $10000 as they see fit whether on personal costs or new investment. So what is the relevant difference that means Mr B generates more economic growth?

    Now I’m certainly no economics super genius by any means, but what do you think the widget factory does with the money raised by issuing $10000 worth of shares? Keep in their sock-draw

    I thought I said in my example they spend it on new plant. Now what do you think they do with $10000 of profit resulting from the working of the factory?

  • Michael Heath

    matty1 to me (unnamed):

    Fair enough but how do different taxes on Mr A and Mr B achieve these things? Both engaged in economic activity that left both the factory and themselves $10000 better off, both are free to spend their $10000 as they see fit whether on personal costs or new investment.

    I do not accept that this premise is true.

    The following question responds to DingoJack, also unnamed.

  • matty1

    @ Michael Heath 34, I apologise for not naming who I was responding to that was poor form.

    As for my example it is artificial and I’m happy to be educated on how it departs from reality, that is part of what I’m trying to learn. Now which of my two premises do you reject – that labour can generate equal gains for a business to capital or that the recipients of capital gains and wages are equally free to choose how they spend the money, or is there some third assumption I don’t even realise I’m making?

  • Michael Heath

    Your calculation on the improved value of the factory for the employee and the investor.

  • matty1

    Michael Heath

    Your calculation on the improved value of the factory for the employee and the investor.

    I’m afraid I don’t get this, probably because I’ve been looking at the value of the factory in terms of how much is available to spend on the factory rather than value to the people. What do you mean by the value of the factory to the employee versus the investor?

  • dingojack

    Matty1 – so you did.

    But nevertheless, being an investor (as opposed to a creditor) is more risky. If I recall correctly, if the widget factory goes bust the creditors (who have contracts guaranteeing their loans) get the first dibs on the moneys realised by the sale of assets, shareholders get whatever is left after everyone else has got their cash.

    The greater risks justifies greater tax breaks (or that’s the conventional wisdom anyway)*.

    Dingo

    —–

    * As I have said: not an economist.

  • matty1

    Dingojack 38,

    Thank you, being so far from an economist myself your risk explanation for different tax rates is the first one I feel I understand.

  • dingojack

    There others such as Michael Heath who have a much better grasp of this whole (wibbley-wobbley, time-whimey) economics thing. 🙂

    Dingo

  • matty1

    On a tangent, I’ve recently learned about welfare traps, where “the withdrawal of means tested benefits that comes with entering low-paid work causes there to be no significant increase in total income.”

    In these cases there are disincentives to work. Now if it is desirable to use the tax system to encourage people to risk their money in investment because of the overall economic benefits surely by the same logic the tax system should incentivise moving from means tested benefits to paid work.

  • dingojack

    I don’t know what it’s like where you are, but here one can still receive benefits if you’re earning some money but at a reduced rate. So if you earn, say, $100 a fortnight, your benefits are cut by $50 a fortnight; at $150 you lose $60… and so on, until you get nothing in benefits.

    But once you get the idea that you could earn 3-4 times (or more) the dole easier than having to jump through government hoops, there’s no looking back.

    Dingo

  • Michael Heath

    matty1,

    I didn’t have hardly any time when I wrote @ 36. The reason we can’t use your premises to make any sort of informed argument is due to several reasons:

    1) The investor’s profit was almost assuredly already taxed at a corporate rate. Since I don’t know what that is I can’t make a comparison to the worker. So when it comes to fairness, which is your perspective, not necessarily mine, you need to consider the fact that investments which provide a consistent return are double-taxed albeit at different rates.

    2) The company also paid payroll withholding tax on the employee’s gross salary or hours worked times hourly rate.

    3) I don’t know the amount of profit the company made leveraging the investment so we can’t compare a value of the investor’s investment and the worker’s value that he provided.

    4) I don’t know the full the cost of the worker’s wages, which would include items like healthcare, vacation pay accural, 401K contribution, etc.

  • marksherry

    @dingojack

    What matty1’s talking about is when the clawbacks plus taxes exceed the amount of money earned. I did some research a few years ago, and just by having 3 kids or so, there were a couple of income brackets where you’d end up with less after-tax income for earning an extra dollar. Hypothetical example with made-up numbers:

    Dollars earned: $100

    Marginal tax rate (combined federal and provincial): 30%

    Child tax benefit 1 clawback rate: 20%

    Child tax benefit 2 clawback rate: 60%

    For earning an additional $100, your benefits decrease by $80, but you only get to keep $70 of the money earned, leaving you $10 worse off than before.

    This particular situation only spanned an income range measured in hundreds of dollars, and was mostly due to a very high clawback rate on one of the child benefits, but I was only examining the impact of these two programs plus the tax rate.

  • Jordan Genso

    Thank you Michael Heath for your responses (and your lesson on paragraph separation).

    I agree with you that the discussion is flawed if it focuses on what’s “fair”, when such an idea is inherently subjective, and economic policy discussions can be more productive if they deal with objective measures. And I accept that your position could result in objectively superior outcomes than my position, so I am open to your ideas. If you are aware of any studies/essays/data supporting your position, I would be interested in reviewing them.

  • The Amazing Rando

    We need to start a grassroots movement dedicated to getting Romney to release his tax returns. If they can have the “Birthers” we should start the “Returners” and demand he release his tax returns!

    Release the Long Form Tax Returns!

  • D. C. Sessions

    Preferential rates for investment income spur investment? Aside from Warren Buffet’s observation, here’s Jared Bernstein with some history to bring facts to an ideological argument.

    BTW, if you’re worried about inflation causing the illusion of capital gains where none exist: preferential rates don’t really address that, since they give the same preference to both gains and “gains” from a year ago as to those from thirty years ago. An inflation adjustment isn’t exactly rocket surgery, especially compared to other part of the tax code.

  • D. C. Sessions

    So I’d argue you should consider other taxes to hit the investor with to reach a more fair tax scheme, like a luxury consumption tax, higher estate taxes, or higher marginal rates on his income.

    Luxury consumption is a small fraction of high-income budgets, and the main effect of taxing yachts and such is to put yacht makers out of work as the potential customers find it better to simply buy more tax-sheltered investments or buy said luxuries elsewhere.

    Estate taxes are nice, but rather easily dodged. More to the point, they have to be confiscatory to amount to a meaningful burden compared to income. Example: My grandfather leaves me a net of $1 million. Assume that it earns a net of 6% after inflation for the next sixty years, whereupon I leave it to my grandchildren. If the 6% is untaxed, I leave the grandchildren an estate of $33 million. If that 6% is taxed at 30%, the net ROI is 4.2% and the final estate is $11.8 million. In other words, to make up for a 30% income tax on capital gains, you would need to have a 64% estate tax (assuming a 60-year interval.)

    The political feasibility of that kind of rate is best judged by looking at the unstoppable extension of copyright terms.

    Higher marginal rates on zero income don’t make a difference, Michael. It’s trivially easy to turn any significant income stream into capital gains for tax purposes.

  • Paul Neubauer

    Michael Heath @24 described how to use empty blockquotes as paragraph separators. Here’s an alternate method that gets essentially the same separation for fewer keystrokes:

     

     

     

    Just put a non-breaking space on a line of its own. 🙂

     

    The ampersand (&) introduces an “html element”, which is then closed with a semicolon (Don’t forget the semicolon!!!) The element we want here is something invisible that your browser won’t just collapse, so a non-break space “nbsp”. Of course, to display the ampersand itself, I used the “html element” amp, preceded and followed by an ampersand and semicolon, respectively, so what I typed looks like & (or, in the case of my “second paragraph”, in order to get it to display, what I typed looks like:   but you just want to type the ampersand, “nbsp” and the ending semicolon.)

     

    Enjoy!

    Paul

     

    PS: Of course, the preferable solution would be for whoever is maintaining Ed’s CSS to just increase the paragraph spacing there so it would be easier to distinguish paragraph breaks in general.

  • netamigo

    Romney may likely pay even less due to loopholes and sheltering income in fake off-shore corporations. We really need to see his tax returns for the last five years rather than just this past year. He likely has tried to make this past year look like he pays taxes to aid his presidential bid.

  • matty1

    Michael Heath @43

    You’ve persuaded me that I lack the background knowledge to make that scenario is useful for exploring this topic so I’ll try another approach.

    One principle I try to use in decision making is to treat alike things alike. When I see money going into someones pocket from wages and money going into someones pocket from capital gains I see two things that are alike and fail to see why the tax system should treat them differently. You clearly see a difference between the two ways of getting money in your pocket that is relevant to how they should be taxed and I understand that this is connected to their effects on the overall economy. I just don’t see exactly what the difference is and why the economy benefits if risking capital on investment is incentivised over taking employment.

  • dogmeat

    Personally I have a problem with the argument that tax rates should be lower to encourage investment.

    First, the assumption always seems to be that investment creates jobs. The reality in a global economy is that investment can create jobs, can be job neutral, and can, in fact, destroy jobs. Also, nothing says that the jobs created will be in the United States so, in effect, the lower rate subsidizes growth in competing nations. Great for them, but is it something we really want to encourage?

    Second, I truly don’t buy the “they wont invest” argument. What else are they going to do with the money? Sit on it in mattresses? Seriously? Put it in the bank? Which then is lent out or invested. If the capital gains tax is more in line with the earned income tax I seriously don’t see how it would have a dramatic impact upon investment. I could see that this would be the case if the rate were significantly higher than the earned income tax rate, but I don’t buy the argument that Mitt needs to pay 1/2 what most Americans pay in taxes or he wont invest. That’s just ridiculous. It’s right up there with the idiotic argument that, if we raise the top bracket 3% they’ll suddenly get lazy and stop working. Again, ridiculous. As far as I can see these arguments are based upon some Randian wet dream.

  • Michael Heath

    D.C. Sessions in an apparent effort to claim by default we must tax capital gains higher because all other approaches won’t work:

    Higher marginal rates on zero income don’t make a difference, Michael. It’s trivially easy to turn any significant income stream into capital gains for tax purposes.

    Not true. In fact the hedge fund mgr. tax avoidance scheme required a change to the tax code so their earned income was magically transformed into capital gains. In addition the median effective rate for top income producers has closely tracked both the top marginal rate and the AMT rate in 1979 [1]. So it is possible to capture more revenue through higher marginal rates and a tax code that properly parses from gains earned as income from those earned through the profitable sale of assets. And such changes to the tax code can also reduce the variance between the median effective rate and the lowest and highest rates for a given category.

    I also disagree luxury taxes cause the rich not to buy far less luxury goods. Of course there’s a marginal drop if the economy doesn’t grow because of a smarter scheme. But I disagree this is anything but marginal where I’m also arguing optimal policies, which would increase growth rates and therefore demand for luxury goods.

    1) http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=456

  • Michael Heath

    D.C. Sessions,

    Bernstein’s primary flaw in the link you provide is one I repeatedly put into context in all these sorts of arguments. Our past had us not competing for capital like we’ve recently begun to do. If he wants to make his case he start with the 1980s, graph that, also consider other countries, regions, along with a global figure. All successful strategies ultimately fail, precisely because conditions change.

    It’s also hard to take him seriously when right out of the gate he’s framing his positions in an incredibly narrow manner, i.e., failing to consider how some income has been taxed as capital gains over this stretch of time, while other times it wasn’t. From my perspective he was making a partisan argument like a lawyer would for a client not delivering a sufficient set of facts to make an informed decision.

  • Michael Heath

    I followed through Bernstein’s argument arriving at three recent posts by Paul Krugman on the subject or close to it (corporate taxation effects on the top 1%). In all cases Mr. Krugman failed to distinguish between income taxed as gains, or how the recent past, current situation, and predicted future argue for how to treat gains.

    I’m a Paul Krugman fan and wish more economists made political arguments based on economic principles, but in this case he demonstrates being dominated by a preconceived position and makes a predominately political argument without good premises. He did not provide any empirical reasons of his, citing an Anrig blog post, justifying his position given the current state of the global economy and where it’s headed. Nor did Krugman provide a rational argument given his conflating income treated as gains with actual capital gains, a mutation of the tax code even many Republicans condemn, or even a compelling justification for making this conflation.

    Here are those links:

    http://krugman.blogs.nytimes.com/2012/01/19/the-dubious-case-for-privileging-capital-gains/ (the third link is embedded in this link)

    http://krugman.blogs.nytimes.com/2012/01/19/corporate-taxes-and-the-01-percent/

    Embedded in the first link is a link to the aforementioned Greg Anrig blog post. He cites a CRS paper that is skeptical that a decrease in the capital gains rate will increase output. So that’s a valid cite contra my position. However I find that paper flawed though I agree with its conclusion that a decrease in the capital gains tax will not, as many conservatives claim, increase federal revenues via supply-side voodoo – at least in the short- or medium term. Any loss in revenue by cutting the capital gains tax should be replaced with other taxes directed squarely on top income earners. I find the author of the CRS paper also doesn’t control for other factors or properly consider the global economy, but instead IMO treats the U.S. too much like an island which is critical to the argument for the status quo or lower capital gains tax (especially the best arguments, which narrow what capital gains taxes are to capture revenue from income now treated as capital gains).

    Because our economy has been so poorly managed the past eleven years, I think modeling it to understand a subset of factors is very difficult. For example, all the cash being hoarded the past fews years because the federal government and especially the states have predominately been employing neutral or contractionary economic policies in spite of our having exited the recession, the lack of sufficient growth post-recession, and a weak labor market. I think it’s important to control for these factors because I don’t think past success factors necessarily apply allowing us to quiet such distortions, especially those pre-1990. That’s due to corporations dramatically improving how they operate along with greatly increased competition beyond our shores.