“15 Percent is Not Enough!” and Other Misguided Views on Taxes
Mitt Romney and others who ostensibly care about growing the economy need to grab hold of a teachable moment, right now, and have a frank conversation with the American public about taxation.
From the WSJ:
The former Bain Capital CEO and Massachusetts governor caused a brouhaha last week when he estimated the tax rate on his investment income at 15%. “How unfair!” pundits exclaimed, noting that the top marginal rate for wage income is more than 30%. The tax rate on investors is unfair, but for the opposite reason. Our tax code layers taxation of dividends and capital gains on top of a top corporate tax rate of 35%—which even President Obama acknowledges is one of the highest in the world. …This double taxation brings the effective tax rate on investment income to as much as 44.75%. In other words, after the combined top tax rates hit $100 of corporate income, $55.25 remains for the investor. And this figure doesn’t even include various state and local taxes, or the death tax. Moreover, like the rest of us, Mr. Romney paid income taxes before investing… Mr. Romney and other presidential candidates should use the opportunity of releasing their tax returns to make an important policy statement. They should include not only their individual returns, but information about the taxes their corporations pay. …In this way the candidates can help explode the myth of the U.S. as a low-tax nation.
Some people actually think that an effective tax rate of 44.75% on investment income — before state, local, and other taxes — is not high enough.
These people do not comprehend, or just ignore, the proven fact that higher tax rates discourage investment and therefore, jobs and economic growth.
They view taxes as first and foremost a way to punish wealth, not as the proper way to provide incentives for efficiently allocating capital to drive growth and jobs. This is a very clear divide in our country on this point, and the president is on the wrong side of it, with his class warfare rhetoric.
Ponder the irony: by erring in this way, the president and other class-warfare true believers indirectly advocate for poor economic health, fewer jobs, and a dismal future, which affects the very working people they claim to support much more than it affects the rich, who remain rich even during down economic times.
Regular folks like me, who rely on jobs and steady incomes to pay the mortgage and feed the family, need a functioning economy to do so. Rich people do not. And I have found, to my chagrin, that lots of rich folks who talk about taxes and economics don’t really understand what they’re talking about. Or, they’re just regular old partisan windbags who happen to be rich.
The Key Point to Understand here is this: tax revenue tends to rise and fall with the economy, not with tax rates.
To be more specific, tax revenue tracks with GDP, at around 18-20% through good times and bad.
So — tax policies that grow the economy and therefore create jobs also increase tax revenue.
And the tax policies that grow the economy? Lower tax rates.
The most basic reason it works this way is because incremental changes in taxation rates change our behavior. Tax rates are a signal from the government to those with capital to invest on whether right now is a good time to invest, or not.
If you run a business and have, say, $2M that you are thinking about investing in your business to grow it by, say, 10% per year, but you’re not too sure what new taxes Washington is going to cook up because of a constant tax-and-spend drumbeat, you may decide it isn’t worth the risk. Maybe the higher costs to your business, from the new taxes, will eat up all of your 10%, or so much of it that it isn’t worth the investment any more. Who knows? This is the problem, nobody knows. Investment requires pretty careful analysis, and when the risk of future costs becomes essentially unknowable, which is true today, the investment itself becomes too risky in the short term. The prudent course, the fiscally conservative course, is to sit on cash or some safe financial instrument, rather than to invest.
So, to sum up, no matter what your thoughts on government spending, the smart tax policy is the one that grows GDP and creates jobs: lower tax rates. Pushing for higher tax rates accomplishes only one thing: punishing those who work for a living.
As Daniel J. Mitchell notes:
I’ve had to correct Warren Buffett when he makes this mistake. One would think, though, that GOP presidential candidates would have a better understanding of taxation.
In addition to being wrong on policy, Romney also is politically tone deaf. By demagoguing against Gingrich’s tax plan, he lends credibility to the dishonest claims that his personal tax rate is “too low.”
As Ari Fleischer wrote on his Twitter recently (re-tweeted by me), “This tax return nonsense is one reason why a lot of good business people don’t run for office. And why we have the gvt we have.”.
