Thursday, January 19, 2012


Political Mayhem Thursday: Why should investments be taxed at a lower rate than income from working?

It's late-- I'm just back from speaking at St. Mary's Episcopal Church in St. Paul, where I got great introductions from Bishop Brian Prior and Rector LeeAnne Watkins and had a wonderful time. It's a warm and loving church, which was a good thing on a cold, snowy night.

Now I'm home, though, and I'm fascinated by the story that Mitt Romney pays about 15% of his income in taxes. That's the same as the lowest rate overall on income from working-- for example, what low-paid teachers might pay.

How does that work? Put simply, Romney's income is mostly classified as "capital gains"-- that is, money earned from investing money. While the top rate on income from working is over 33%, the top rate for capital gains is 10%. In other words, you pay far less tax on money you earn from investments than you do from working.

I don't like the values behind this tax system-- I believe in the value of work, and think it should be taxed at the same or a lower rate than what people make from investments.

One argument for low capital gains taxes has always been that it "encourages investment." That makes no sense to me-- what else are people going to do with their wealth, other than invest it in one way or another?

Ayn Rand taught me that if I am mean to rich people (who are naturally and obviously my betters) then they will go off and live under a rock, where presumably they will survive having apotheosized into divinities not plagued by such human frailties as hunger. Ergo, we must appease rich people by taxing their income at a lower rate than working people, or they will take their ball and go home.
Hey, when was the "Ask Mitt Anything" event? I want to ask him about how I can get his tax rate.
1. What else would people do with their wealth if not invest it? Spend it. If you raised the capital gains rate to >30% perhaps disposable income would then be spent in the economy, rather than invested... in businesses operating in the economy. Maybe this would be good.
2. Query: Haven't the capital gains I'm generating already been taxed substantially at the entity level? For example, my capital gains realized of $75 from the sale of Apple stock have already been reduced by the $25 in taxes Apple paid on its original earnings (related to my shares) of $100. DISCLOSURE: Not a tax lawyer.
I agree completely. It's ridiculous.
First, let's have working class people pay less to the support of our government than the wealthy.
That said:
Hasn't the conservative position been to point to the revenue decreases during the years with higher capital gains tax rates as evidence that increasing the rate doesn't help solve any problems? Will someone explain why the decrease happens? And also why an increased rate would help?
Anonymous correctly identifies a common argument for having a lower capital gains tax, i.e., the theory that the corporate taxes have been paid on those gains. Leaving aside whether one agrees with the theory, the average effective tax rate for corporations is less than the statutory corporate rate. And, in one three year period for which I saw statistics, 82 of 275 companies looked at paid zero or less in federal income tax for at least one of those years (and many for all three years), despite earning over $100 billion in pretax profits. Many corporations, despite earning hi incomes, generate so many excess tax breaks that they receive rebate checks.
Susan raises a good point:

You cant have a real conversation about what rates should be (either for income or capital gains, etc.) until you talk about closing loopholes and simplifying the tax code. As it stands, the overwhelming complexity of the code disproportionately benefits the wealthy and corporations, who can pay teams of people to search for deductions and exemptions.

But why do these loopholes exist? The clear answer is twofold: 1) elected officials love to reward loyal constituents and benefactors, and 2) the tax code can be used to engineer social and economic conditions. One would expect a "true conservative" like Mitt Romney to denounce both of these influences.
All I know is that I'm self-employed, so I pay a much higher tax rate than Mr. Romney.
While I'm largely progressive, we have to be aware of unintended consequences.

When people talk about encouraging investment, I think it is in contrast to parking the money in non-taxable locations. One might raise the capital gains tax, only to find that an increasing number of people are now trying harder to legally (and illegally) avoid paying any taxes at all.

I would imagine that one great place to park money is in tax free government bonds. In that case, I'm not paying 15%, or more if the rate was raised, but 0%.
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