Just a brief post to see if we can stir up any comments.
I’ve been struck by how much of the Republican primary has centered around Mitt Romney’s tax bill (as Mike pointed out). It is interesting to note “conservatives” turning on one another regarding someone’s taxes being too low, which goes against the de facto party line to lower taxes in general.
But it’s the specifics surrounding the 15% rate that I want to talk about. The President mentioned it in his State of the Union, and fan Warren Buffett has trumpeted his tax rate compared to that of his secretary for the last half year. While the morality of this gets debated, what seems to not get mentioned as much is the economics. 15% is the number used because that is the tax rate on capital gains – or investment income for those of us who have no capital gains and may not be familiar with the term. This is not a tax on wages earned or for work done. This is money that was invested so someone else could start a business or to buy shares in an existing business that you think has potential for growth. So our laws have created a separate rate to encourage people to engage in this behavior – and it has done just that.
But what could happen if the rate was 30% as the President suggests? Well, what if Mitt Romney stops investing? Let’s imagine he was getting dividend payments equal to one million dollars, so his tax paid at 15% was $150,000. The government would love $300,000 so they raise the rate to 30%, only Mitt decides to stop investing in equity and buys steady ole treasury bonds. So now, the government loses out on the $150,000 they would have gotten – gets in budget trouble because they projected $300,000 and now don’t have it, and on top of that they owe Mitt millions of dollars plus interest as part of the national debt. Plus that entrepreneur that was starting up a little search engine called Google doesn’t have the seed money he needed to buy servers and programmers and such, and so decides to return to mother Russia and we all are left trying to browse the internet on Yahoo. I can’t find a new job because Yahoo’s results return bogus results, so we are out on the streets and homeless with our 2-year old daughter. Shivering and hungry.
Man… can’t we just let the people have 15%.
Mark
Greg
Elijah
Pete
Michael
Josh
Isn’t it ironic that when Politicians propose sin taxes on things such as cigarettes, they recognize the fact that the tax increase discourages the behavior. However, when it comes to income and investment they often act as if it is preposterous to think that people might be discouraged from earning additional income or investing additional capital because of the same. Clearly in finance a 1% difference in return can mean the difference between investing and not, so if the tax on the gain is raised that will inevitably limit the number of projects funded.
Exploiting the capital gains rate in my view is nothing more than a cynical political ploy. Not only is the capital gains tax a double tax, being that the money was already taxed when earned, but historically lower rates have yielded higher revenues. Barack Obama admitted to Charlie Gibson in an interview in 2008 that he supported an increase in the capital gains rate, even though that would likely reduce revenues, because it “is an issue of fairness”. I guess hes never heard the phrase, “don’t cut off your nose to spite your face”.
It would be nice if advocates of higher tax rates, understood the difference between rates and revenues, as well as the fact that revenues fund the Government, rates do not.