Monday, September 24, 2012

TurboTax Romney

Two things I don't get about Romney's self-defense of his tax situation:

1) A rate of 14% is "fair" because the funds being taxed — capital gains — have already been taxed on the corporate level.

Huh? Capital gains are on realized profits from the sale of real property. If I buy a share of stock for $10, and I sell it for $15, my capital gain is $5. And if I held that share for more than a year, I am taxed at a rate of 15% on that $5, not an whatever rate my earned income is subject to.

But, who paid a tax on the any of this before I did? Or, looked at in reverse: Every dollar is taxed by the person or entity which owned it at one time. My employer pays taxes on the money his company earns, then pays me from what's left over. I pay tax on that, and spend some at the supermarket. The supermarket pays tax, and its employees ... and so on.

The fact that someone pays tax on that dollar upstream is as irrelevant as the fact that someone will pay tax on that dollar downstream. My paid tax on that dollar doesn't subsidize the supermarket. Why should a company's dividend to me be taxed any differently? And if you want to encourage long-term holding (a fine idea) you can penalize a short-term owner with a higher tax, rather than offering a discount for a long-term capital gain.

2) A lower capital gains rate is justified because it motivates investment and thus growth

Doesn't any capital that a taxpayer keeps or is returned motivate investment and growth, potentially? Isn't that, in fact, the blanket argument for lowering taxes across the board? What special magic does money earned from investments have over money earned from work? Would there be less investment if the capital gains rate was equal to that for earned income?

Yes? Then where would that money go?

The truth is that the public market is only one way to find money to back or grow one's business — the vast majority of businesses are not publicly-traded companies. Mostly seed money comes from friends and family initially, and, if you lucky then early-stage investors, angels and assorted venture capitalists. But none of this is public market money.

The biggest source of investment capital comes from a business itself. And the biggest source of capital for a business is receipts — money the buying public pays for goods and services.

Every time I try to get my head around tax, economy and public policy I end up in the same place: Business invests not when it has money, but when it has customers. The greatest spenders are in the middle class, which is the largest demographic in any developed nation. Make life as easy as you can on these folk, and your country thrives.

It's not hard. As Bill Clinton said, it's arithmetic.

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