Economics, Taxes and Spending

Actually, Mitt Romney’s tax rate is too high

It’s real simple: If you think the biggest problem facing the United States today is income inequality, then you should be outraged that Mitt Romney’s income tax rate isn’t higher. But if you instead think America’s biggest problem is high unemployment and a lack of economic growth, then you should be outraged that Romney is paying any income taxes at all. Really.

See, most of Romney’s income is capital income—income from investments. And in the United States, capital gains generally are taxed at 15 percent vs. a top marginal income tax rate of 35 percent on ordinary wages for those making around $400,000 a year or more. But even folks with taxable income as low as $35,000 in 2011 will pay a much higher marginal rate, 25 percent.

Now, apparently that simple fact set is supposed to drive average Americans to a) seek out and join the nearest Occupy protest, b) support President Barack Obama’s “Buffett Rule,” so millionaires pay at least the same tax rate as middle-income households, and c) reelect Obama. At least, that’s how the liberal commentariat is playing it. Time for a reality check:

1. While Romney’s tax rate is—in his own words—”probably closer to 15 percent than anything,” that’s still higher than the 8.2 percent average total effective income tax rate (as of 2010) of U.S. households (once you factor in various tax credits). Indeed, nearly half of U.S. households pay no income tax at all. Their average effective tax rate is actually negative. Even if you add in the payroll tax, the effective tax rate of the middle fifth of U.S. taxpayers is 12.8 percent.

2. The 15 percent headline rate is just the start. The capital gains tax is a double tax. For instance, corporate profits are taxed first as income and then a second time when they are distributed to shareholders as dividends. And capital gains from investments are not inflation adjusted, so taxes are often paid on illusory profits.

3. We shouldn’t tax what we want more of. And the real problem with the capital gains tax isn’t the rate or how it is structured, but what is taxed: gains on investments, which are savings put to work. Economists of all stripes have been saying Americans have consumed too much and invested too little over the past decade. So why would we want to tax investment even heavier, as the Obamacrats want to do?

Indeed, we shouldn’t want to tax capital at all. As an AEI study on consumption taxes explains: “The income tax’s penalty on saving is an undesirable distortion of consumer choice. It also causes less capital to be accumulated in the United States. The reduction in capital accumulation reduces labor productivity and lowers real wages throughout the economy, depressing the standard of living of future generations. Some studies have found that a switch to consumption taxation would increase the size of the U.S. economy by as much as 9 percent in the long run, although other studies estimate smaller gains.”

4. So the main reason people want to keep taxing capital—or even tax it more heavily—is one of theology rather than sound economics. As the Concise Encyclopedia of Economics puts it: “Strange as it may sound, most economists would agree that having zero taxes on capital income is theoretically the best thing to do. But many reject putting this theory into practice because they think that too much of the benefit would go to the ‘wrong’ people, namely high-income households and the wealthy.” That’s right, the desire to make sure the wealthy like Romney “pay their fair share” is desired by class warriors even if it make everyone poorer than they otherwise would be.

5. Take it away, JFK ( in his Special Message to the Congress on Tax Reduction and Reform from Jan. 24, 1963): “The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital from static to more dynamic situations, the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential growth of the economy.”

Bottom line: Americans should pay taxes on their wages only, not on any income from saving. The right capital gains tax rate is zero, for everybody. Might a few rich people like Romney pay less in taxes? Maybe. But the result would be a stronger economy, more jobs, and higher incomes for all Americans.

UPDATE: I almost forgot a new study from Colgate University that found the following: “Lower financial income taxes stimulate innovation and enhance labor productivity in the long run.” More on this to come …

30 thoughts on “Actually, Mitt Romney’s tax rate is too high

  1. So just so I understand:
    1) Capital Gains should be zero because people who make less money in a year with economic stimulus taking the form of temporary tax credits pay a lower rate than multi-millionaires. This is an argument against the concept of progressive taxation at all and it is not a particularly honest one.
    2) It’s a double tax because corporate profits have already been taxed, but a very small amount of capital gains takes the form of dividends. Income from appreciation has not been previously taxed.
    3) We shouldn’t tax what we want more of? It is important to recognize the dead-weight loses of taxation but we cannot fund our government solely through pigouvian taxes. In the real world the less we tax capital gains the more we tax working which, needless to say is also economically productive.
    4) No, there is a solid utilitarian argument for income equality. I wouldn’t flip take a coin flip where heads I have to live on 10,000 a year and tails I get to live on 400,000 a year even though the expected value of such a wager dramatically exceeds my current income. The marginal value of a dollar does decline with quantity. That aside there are any number of people who find communism persuasive at the level of theory who are wise enough not to elevate it to practice.

  2. You completely side-step the question of whether or not this income should be treated as capital income or wage income, which would make arguments 2-5 moot

  3. Mr. Pethokoukis has been one of the weakest pundits on economic policy and he doesn’t disappoint. Mr. Pethokous ignores the facts that if there is too much investment money chasing too little economic activity, bubbles are created. His points have already been disproven by Jared Bernstein’s recent blogs. Unlike Mr.Pethoukis, Mr. Bernstein backs his statements up by facts.

    Mr. Pethokoukis has a good hairdo, and about all you can say, he spouts his propaganda as a punch drunk bimbo

  4. Yes, about 47 percent of households are owed more in federal help than they pay in federal income tax. But it’s not because they don’t owe federal income tax. It’s because they’re owed other money that runs through the tax code.

    The Earned Income Tax Credit, is an income-support program created by Richard Nixon and expanded by both Ronald Reagan and Bill Clinton. The underlying idea came from legendary conservative economist Milton Friedman. So this is bipartisan stuff. And it was designed to run through the tax code rather than just send recipients a separate check. So if your income is low, you may (1) owe very little in income taxes, and (2) get a check through the EITC. The result isn’t that you don’t owe anything in federal income taxes, but that your income tax liability is wiped out by your EITC check.

    Most importantly, the ETIC is intended to MOTIVATE people to get off welfare and instead work. Ronald Reagan called it “the best anti-poverty, the best pro-family, the best job-creation measure to come out of Congress.”

    If you’re married, filing jointly, with no kids, your HH income can’t exceed $18,740 to qualify for the ETIC. Married/filing jointly/two kids, your HH income can’t exceed $46,044. So these households aren’t exactly sequestering away huge chunks of income with this credit. They’re spending this money on shelter, food, heat, health care, etc.

    But you knew all of this already, right James?

  5. “Indeed, nearly half of U.S. households pay no income tax at all. Their average effective tax rate is actually negative.”

    I’ve seen this comment on various sites a lot, but it is usually just stated as fact with no supporting material. Are there some examples which illustrate this point? Links would be fine. Thanks!

  6. Please comment on this plan with your suggestions, and if you like send on to your congressman.

    Part One, How Taxes and Transfer Payments Should Be determined

    This is a proposal to replace all federal taxes and transfer payments, also known as “entitlements” with a single act. Please understand that “all federal taxes” includes many that we pay each day, such as the tax on each gallon of gasoline, or the corporate taxes which are paid each time you purchase a product or service from a corporation; where else but from you, their customer, do corporations get money to pay taxes? Furthermore, these taxes are multiplied many times on their way from the source of the product to you. Taxes are paid by the retailer with whom you trade. He, in turn, pays his supplier taxes as part of the price of his purchases, and on down the road. You have a right to know, and will be astonished to know, how much you are paying in taxes. This plan is an attempt to reveal that amount by consolidating all taxes into one payment. Remember that by eliminating the hidden taxes, the cost of your purchases will come down drastically. This is one of two ways this plan is aggressively “progressive”, a term describing taxes which are easier on the lower income households who spend a greater part of their income. The second element of this “progressivity” is the large personal exemptions.

    The annual personal exemption is set as 2000 times the minimum hourly wage (2000 = 50 weeks times 40 hours per week). We have adopted a minimum wage as the least a worker should receive for his efforts. How, then, can we justify taking some of that sum from him in taxes? This exemption is allowed for every adult (20-65) in your household, and is reduced in steps for those younger, and increased in steps for those older, recognizing the differences in the cost of living to these on the opposite ends of the age span. This formula may be too much or too little as the economy changes, so the plan requires Congress to reset the wage each year, In that “resetting”, Congress will be determining the federal budget, which will be forever balanced. Actually, because Congress has overspent for decades, the plan uses the past year’s taxable income times the new flat tax rate, also set each year. Result? As long as the economy grows (as it does almost every year), a modest surplus will develop to pay off the debt over a period of many years. When the economy grows rapidly, the amount taken out to repay the debt is larger; in a recession, that amount is smaller, as is the budget for government spending.

    Now beyond “transparency” the idea that you ought to know what taxes you’re paying, and “progressivity”, the idea that taxes ought to be paid (more) by those more able to pay them, what other modification to the idea of everyone paying the same, the “fair share” of taxes should be part of the plan? It’s reasonable that government policy should be designed to maximize growth, again for two reasons. First, “growth”, an increase in the wealth from which we all share, is in the interest of all. Second, growth means an increasing tax base. That in turn means more money to pay for legitimate government expenditures, like roads, law enforcement and other services, without an increase in the tax rate. If this growth in the tax base exceeds the growth in the cost of government services, we’re getting more for the same portion of your income. We all want that.

    What contributes to that growth? “Crony capitalism” and corruption in Washington has resulted in a lot of special deals that contribute to the growth represented by and for special interests. A plan good for no special interest is good for us all. This plan suggests three things are of universal value in assisting growth. Those three are education, health care and investment. So this plan exempts those three expenses from taxable income. It does so broadly, so that government is not telling you what educational choices you make, what health care (and health care insurance) you buy, and what investments you make, (and charity is an investment). You can make those choices better than can Washington.

    Many states and cities have been getting into financial trouble. It is not the Federal government’s duty to bail them out, or even correct the practices that got them in trouble. But if this plan makes sense, if it could correct the revenue problems that the other levels of government have encountered, then the federal government can help them out by making the plan available, optionally, to them. But the feds should not impose anything on those other levels of government.

    Finally, after all the exemptions are taken, some will have more exemptions than deductions. Should they be helped, and to what extent? Consider calculating aid by multiplying their shortfall by the flat tax rate. As with taxes, their assistance will be reviewed by and adjusted as part of the budget process each year. That way, everybody pays the same rate from top, the “billionaires” to bottom, the least among us. For those whose income exceeds exemptions, they pay taxes equal to the rate times the excess. For the least among us, their income supplement, replacing Welfare, Medicaid, Medicare, Social Security and other “entitlements”, is reduced at the same rate. Is this fair to all?

    Finally, if you have read plans that embrace sales or value-added taxes in lieu of or in addition to income taxes, consider this: an unlimited exemption for savings makes this plan exactly like a sales tax; if what you save is exempt, then you’re only paying taxes on what you spend.

    Part Two

    THE TAX AND TRANSFER PAYMENT PLAN

    1. All persons residing in the U.S. shall come together in households for the purpose of reporting all income from any source, each item to be identified by payer’s and payee’s tax number, and for receipt of federal and state benefits. Members of a household need not be related, need not reside together, and a household may consist of as few as one person. The federal government shall collect no taxes other than provided in this act. The federal government shall make no payment to any person, group or other entity except in return for goods or services rendered to it, or as provided for in this act.

    2. Each year congress shall set by legislation a “minimum wage” and a “tax rate”, which in turn will be applied to the previous year’s reported incomes to determine the maximum expenditures of the federal government.

    3. The following income shall not be subject to taxation:
    • An amount equal to a year’s earnings (2000 hours) at the minimum wage rate, for each adult (age 20-65) member of the household, decreasing 10% per year to 50% at age 15, and increasing 10% per year to 150% at age 70.
    • All payments for what is classified as necessary health care for all members of the household including medical care, any pharmaceuticals prescribed by a recognized health care professional, vision and hearing aids, and membership fees for health-enhancing entities such as gyms or other exercise facilities. Health care insurance premiums may be deducted but not health care expense paid for by such insurance.
    • All educational expenses including day care for young children or legally incompetent persons, that portion of state and local taxes identified as spent on education, that portion of parochial school tuition, fees and other expenses identified as going for non-sectarian education, and tuition, fees and educational materials for private school education at any level.
    • All income saved into an identified account from which investments may be made. All withdrawals from this account for the benefit of any member of the household shall be reported as income to that member. Withdrawals, such as for charities, special interest groups, or political campaigns, that do not accrue to members’ benefit, will not be counted as income.

    4, The “tax rate” shall be applied to any income over and above the deductions listed above, regardless of amount.

    5. There shall be no federal tax on corporations or other business entities.

    6. At the request, by legislation duly enacted by a municipality having greater than 100,000 inhabitants or a state, a surtax may be imposed on citizens of that municipality or state which shall be applied in the same manner as this tax.

    7. For households whose deductions exceed total income, the Federal Government shall make payment equal to the tax rate multiplied by the shortfall in income, as shall municipalities and states.

  7. High tax rates cause income inequality and low tax rates will improve income equality. If you refer to the basic Laffer curve, that is tax revenue on the vertical axis, tax rates on the horizontal axis Zero$ tax revenues at 0% tax rate and 100% tax rates and a curve with a point on it some place at the current tax rate and current revenues, Then from the base curve derive the size of the economy curve, by dividing the tax revenue by the tax rate, ie the reciprocal curve. It starts out unlimited high on the 0% tax rate and plunges to zero at 100% tax rate. Use this curve for a proxy for the number of jobs in the economy, unlimited potential jobs at low tax rates, no jobs at 100% tax rates. Now plot a horizontal line across the revenue axis somewhere near the current tax rate and revenue point. This is the size of the potential work force, that is, those capable of working.
    Where the number of jobs available is greater than the potential workforce (that is the left hand side of the chart where low rates are located) the pay for jobs is high, and employers will bid up wages up to near the point where the marginal wage equals the margin profit from that employee. This transfers capital to the worker, which allows said worker to save and invest and start his own business, It may mean too that the spouse can stay at home with the kids and remove one more worker from the active labor pool and drive wages up some more(just about the opposite of where we are now).
    Where tax rates are high and the number of jobs is less than the number of workers in the workforce, wages will be driven lower, the worker has to take what he can get, and both spouses work and struggle to maintain a standard of living.
    Under high tax rates the employer pays little for his labor and pockets big $ profits, under low tax rates the employer makes a fair profit and the employee is compensated fairly. High tax rates cause income inequality and low tax rates will improve income equality, at least as far as skills and ability allow.
    Also note when there are a lot of jobs available, government services are in less demand, people can take care of themselves for the most part. But this does not work in favor of the party of government, they want people dependent upon government and thus enhance government power. High tax rates are also advantageous to big crony capitalist corporations, they can hire the work force at cheap rates. Sure they pay some taxes, but their after tax profits can still be quite high, and provide plenty of big bucks for the crony capitalist big bosses. Low tax rates will benefit smaller, non crony capitalist businesses.
    Note too with high wages business owners will readily invest in labor saving automation, this increases productivity and productivity increases are what lead to higher standards of living. High tax rates lower the standard of living. Low tax rates will increase the standard of living.

    • Oh, the Laffer curve. You left out any mention of actual numbers. If you ask tax experts, as Ezra Klein did ( http://voices.washingtonpost.com/ezra-klein/2010/08/where_does_the_laffer_curve_be.html ) you get maximum revenue with a max tax rate of 60-70%. If you ask right-wing think tanks, you get answers around 10-20%, and most start talking about how there are factors other than the Laffer curve that are more important. So it is basically a completely useless model for any policy considerations.

      • It seems you think the goal of tax policy is to maximize revenue to government. I think the goal is to maximize the standard of living for the citizens of the country. And no matter what assumptions you make about the shape of the Laffer curve the shape of the size of the economy curve ie the reciprocal curve is always higher when tax rates are lower. And the economy is far smaller and falls to zero at high tax rates. With a stronger and larger private economy fewer and smaller budgeted government programs are needed and personal and economic freedom is higher. With a large and healthy private sector more jobs will be available and fewer people will need government sustenance. The value of this as a policy model is the visualization of the size of the economy dropping as tax rates increase. And the size of the economy is your standard of living.

  8. The problem is government spending is too high. I have a strong suspicion that anyone who tries to divert your focus on taxes is running a scam.

    Federal departments of Education, HUD, HHS, Agriculture, Energy, should be eliminated. Medicare/medicaid/SS should be abolished.

  9. What you have done is defended the preferential treatment of capital gains. Notably Reagan’s 1986 tax reform bill eliminated preferential treatment of capital gains, in favor of lower overall rates. However, Romney is likely benefiting more from the “carried interest” provision, which treats what appear to be management fees as capital gains. One could have preferential treatment of capital gains but not have the carried interest provision.

    • One reason we give a preferential rate to long term cap gains is because there is a danger of losing our whole investment. There is no risk for the wage earner that someone will come and take yesterday’s wage back.

      Another reason for the favorable tax treatment is that we want people to make investments in our industrial base. So, we encourage that.

      You also misstate carried interest. Any management fee is taxed at the wage rate. Carried interest refers to the profit on the investment and if the investment takes more than one year to materialize a profit, it is a long term cap gain.

      • What you say sounds reasonable. However, you seem to misunderstand how carried interest affects Romney. from the wall street journal:
        http://www.marketwatch.com/story/private-equity-carried-interest-and-mitt-romney-2012-01-18

        “Most private-equity funds are organized as limited partnerships with the investors (pension funds, endowments, foundations and wealthy individuals) contributing capital and becoming limited partners with a general partner — such as Bain Capital — that provides the entrepreneurial management of the partnership. The general partner is paid a management fee.

        The general partner may also contribute its own capital and, as an incentive, receives an additional interest in the overall eventual profits. This additional interest is known as the “promote,” “profits interest,” or “carried interest.” The carried interest is typically 20% of the profits and is generated from appreciation in the value of the partnership’s property realized when the enterprise is sold or taken public.

        The tax treatment of carried interest under current law allows managers of hedge funds, private-equity funds, venture-capital funds and others to pay a lower 15% maximum income tax rate applied to investment income as capital gains, rather than higher income tax rates for ordinary income which exceed 35%. This is a huge difference…..

        Many policy makers believe the carried interest paid to partnership managers is really compensation for their management services, which should be taxed at the higher ordinary income rate. On the other side, supporters of the current tax treatment say the carried interest is only a potential share of partnership profits and should not be considered compensation for services. ”

        Note in this scenario, Bain does not have same downside exposure. They would get 20% of any capital gain, but if the company decreased in value they would not lose an equivalent amount. See, they get preferential tax treatment for managing other peoples’ money, not from risking their own money.

        I understand the argument for preferential treatment of capital gains. It’s a separate argument as to whether private equity and hedge fund managers should get that benefit when it isn’t their capital at risk.

  10. The investment money that was used to make the investments which had the gain (which was then taxed) was itself also originally taxed (including interest). Note that losses can only be deducted only to the point where they are offset by income and other gains.

  11. There isn’t much argument in your article for your closing statement of “higher incomes for all.” It seems that the concept that lowering capital gains tax boosts the economy may be valid, but it has been clear over the last 2 decades that this does so in a very particular way: namely making the wealthy wealthier and increasing the gap between those who can benefit from the tax breaks and can not.

    This is simply more trickle down theory bullshit. America’s economy has been growing tremendously over the last 20 years. Thats not the problem, the problem is the majority of Americans have not benefited from it.

  12. “Indeed, nearly half of U.S. households pay no income tax at all.”

    Because they are too poor. If you’ve figured out how to get blood from a stone, please enlighten us.

    “3. We shouldn’t tax what we want more of. And the real problem with the capital gains tax isn’t the rate or how it is structured, but what is taxed: gains on investments, which are savings put to work”

    Try the flip-side of that argument. Do you value hard work? Do you want more of it? Then why discourage it by taxing it at a higher rate than speculation?

    Besides, Capital is not some scarce commodity. There is more capital in the world then there are smart investments. The desperate chase for investments that will yield a decent return is a major driver of the repeated asset bubbles of the last 2 decade. We don’t need more capital being pumped into an overloaded system. We need more good investments for the excess capital thats already around.

    Oh, and it’s all fun and games to portray the push for less income inequality as some purely moral crusade by a bunch of naive wanna-be do-gooders. The reality is that income inequality always leads to civil unrest .. and worse. Go ahead and keep starving this tiger, but don’t whine when it finally leaps for your throat (sadly, I know you will)

    You really want to keep starving this tiger (The millions of Americans who have to work for a living) then go ahead, but please don’t whine when it leaps for your throat.

    • ALL investment is speculation.

      As is anyone who joins a tech startup where most of his compensation upside is stock options. A speculator.

      Plus, speculation has no barrier to entry. Anyone can do it. So why aren’t you? Oh, because it is hard to be good at it.

      Fool.

      • Speculation has no barrier to entry? Not for anyone with money they can afford to lose. For someone living paycheck-to-paycheck there’s a huge barrier, fool.

    • “Indeed, nearly half of U.S. households pay no income tax at all.”

      Because they are too poor. If you’ve figured out how to get blood from a stone, please enlighten us.

      Oh and these supposed “poor” don’t have ACs, iphones, ipads, cars, take vacations, refrigerators, spend money on leisure – total BS orchestrated by the progressives to steal more from the producers to give to the takers – EVERYONE Must pay into the system or you get what we have now – folks that will rationally vote for higher taxes because it’s in their own self-interest; the definition of “poor” in this country is a complete fallacy

  13. I applaud Jimmy P for the courage to say this.

    China, India, and Russia all have capgains tax rates of 0% to 10%. The US cannot expect to compete at the current rates (and note how quickly the market caps of Chinese and Indian markets have risen in relation to the US, over the last 4 years).

    Furthermore, Capital gains taxes are a true test of who is a socialist and who is not. Capital Gains may be concentrated amongst the rich, but raising the capgains tax rate causes the most economic damage for the least revenue increase, compared to any other type of tax.

  14. James,
    Please forewarn your readers that your posts are NOT for all IQs.
    Some comments here are from people who cannot write and probably cannot think either…
    Folks,
    Unless someone PROVES that Mitt Romney makes his money illegally, it is not anyone’s business to know what he does with it; AND it is certainly not the damn gov’s business to steal 50% or more of it so it could redistribute it to its preferential (read, special interests) LOOTERS.
    Our progressive tax system is good only for the progressives, a.k.a. the commies, as well as all the businesses born by this fraudulent enterprise.

  15. It is sad Romney and other Americans pay any Subtitle A, Income Tax as they are most likely not in a class of person who has had the income tax imposed upon them.

    WHO IS THE INCOME TAX IMPOSED UPON OR WHO IS OTHERWISE MADE LIABLE?

    Subtitle A, Income Tax found at 26 United States Code and all state and local income tax codes are imposed upon ONLY the following classes or categories of person:

    A) Non-resident aliens deriving US domestic source income.

    B) Foreign corporations deriving US domestic source income.

    C) US citizens (exercising the function of a public office) residing abroad deriving foreign source income.

    The withholding agent for A) or B) above is made liable for the tax before the US source income is sent to the foreign owner.

    If you want to know this information in more depth see: http://www.incometaxtruth.com

  16. A better solution is to shift to either a fair tax, or the Cain 999 plan. By shifting to a consumption tax, both capital gains, dividends, and ordinary income are taxed low or not at all. You pay the tax when you spend it. This encourages both investment and hard work, and only penalizes people who spend more than they make, a behavior that should be penalized.

  17. Out of the rapid fire of stale talking points above, I want to single out a real pet peeve: the “We shouldn’t tax what we want more of” line. Cloaked with assurances like “economists say”, it’s accepted as common knowledge by pundits and real journalists alike.

    But it’s completely bogus. It’s a thoughtless over-generalization of the concept that incentives matter – which is a valid concept insofar as the magnitude of those incentives and their influence on real human behavior in the face of countervailing forces are considered.

    Cutting capital gains tax, the story goes, increases the total return one receives on savings, and thus gives people the incentive to shift more of their income to saving and less to consumption. The only problem is…that’s not how real human beings decide how much to save! The empirical evidence bears this out – there’s no historical correlation between capital gains rates and savings rates – but the behavioral side is more interesting.

    Normal people save in basically two ways. The first is paying off debt – most notably paying off a mortgage and building home equity. It’s the #1 way that Americans build wealth (not including Romney and co.). Cut the capital gains rate to zero or crank it up to 100, and everyone keeps making the same mortgage payment they did before. Their behavior is unaffected. As for the decision to buy in the first place, you’d be hard pressed to find someone other than a house-flipping real estate bubble speculator (like we need more of those!) who would be deterred by a high capital gains rate. Most people plan to live in their houses, not turn them over for profit. Those who do sell are overwhelmingly unlikely to realize a gain in excess of the $500,000 exemption for a primary residence. Capital gains tax simply doesn’t matter.

    The second critical way that people save is contributing to retirement accounts. Incentives do actually matter in this case…but they run in the opposite direction! Ask a financial advisor about retirement planning or use an online retirement calculator for the same effect: people decide how much to save for retirement by targeting a standard of living during their non-earning years, and work backwards using an expected rate of return to find the necessary contribution level. The lower the expected rate of return, the more you have to save to reach the same goals – and vice versa. Cutting capital gains tax allows people to get away with less saving and still reach their retirement goals.

    The same effect is responsible for under-contribution to corporate pension funds during the stock market boom of the 90′s, and home equity extraction during the most recent housing boom. This doesn’t contradict the concept of time-value-of-money, by the way. That bedrock economic principle applies perfectly well to business behavior and consumer borrowing. But the saving side of the consumer ledger doesn’t cooperate – and that’s the only part that matters for capital gains tax. And of course, that’s why there’s no empirical correlation between capital gains rates and savings rates.

  18. Unlike some commenters here, I don’t think issues like “fairness” are important when considering capital gains tax policy. We should be focused on how the policies affect investment decisions, and how those affect GDP growth and employment. Along these lines, some questions:

    If Mitt Romney and others like him already invest almost all of their money, how will lowering capital gains taxes incentivize them to invest additional money that doesn’t exist?

    The US recently experienced a massive bubble in stock market and real estate investments. Why would encouraging more of these investments create lasting economic growth rather than more bubbles?

    Why has the rate of investment in the US steadily increased since World War II, even when capital gains taxes increased (late 1960s-early 70s and late 1980s)? The rate of increased investment is not higher when capital gains taxes lowered or stayed steady than in the years after it raised.

    Finally, don’t investors, both individual and institutional, chase returns? A 10% return taxed at 30% beats a 2% return taxed at 30%, just like a 10% return taxed at 15% beats a 2% return taxed at 15, 20, or 30%. Why would someone like Romney, who has considerable income left over after buying any consumer goods he wants, prefer a savings account to an investment that he believes will get him higher returns?

    Thanks.

    • Good questions to ask. But it is not the Romneys, but the middle class, the corporations, the small businesses, and the international investors whose capital we should attract with a lower capital gains tax. Even among wealthy Americans, I believe economists estimate that several TRILLION dollars remain out of the market because of general uncertainty over the direction of the economy and the potential performance of equities. Lowering the capital gains tax would be one more assurance to investors that they can and should take small risks once again.

      The housing market is separate from the capital gains discussion as far as I know. But the capital gains tax does discourage investment in several areas other than the stock market, making stocks (high volatility) one of the only ways to really make a profit given the tax. This is doubly true for short-term investors. As a result, equities are always more favorable; that distortion might disappear with a better tax code.

      Hope that answers part of your questions. I’d love to hear other feedback as well.

  19. What an A-grade moron, this writer. Capital gains tax is not a tax on wealth, it is a tax on income in the hands of ultimate earner, who in this case is a fraudulent Scrooge called Mitt Fraudney. All that your idiotic fans need to know is that, the US enjoyed the highest growth rates at a time of high marginal tax rates. The declining tax rates have led to a stagnation of wages and concentration of wealth among lotus eating plutocrats.
    It is amusing that a bunch of kids in their underwear too dumb to find a job, have joined the parasitic septic tank called AEI to advocate policies that will ultimately impoverish their own parents.

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