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January 22, 2012 in Opinion
Smart Bombs: Get rich without a ‘job’
The reaction to Mitt Romney’s tax burden of 15.5 percent is predictable. Distressing, but predictable. The rich are not like you and me, according to the tax code. Why is this news?
Keep in mind that it was capitalism huggers, not “class warriors,” who forced Romney to divulge that information. So can we talk about this without resorting to rhetorical distractions, such as “envy” and “punishing success?” Good.
I am not jealous of Romney and neither is Newt Gingrich or Rick Santorum. They knew what the answer would be when they prodded Romney, because they’ve defended the tax code two-step that charges him less for “investing” than “working.” Those quote marks are necessary, because they have special meanings in his case.
When ordinary Americans go to work, they get something called a paycheck. From that, payroll taxes are deducted to finance Medicare and Social Security. From the remainder, we pay income taxes if the available deductions and credits do not lower our taxable income enough.
When Romney went to work at Bain Capital, where he accrued much of his fortune, he did not draw an ordinary paycheck. If he had, his income tax rate would’ve been 35 percent on much of his millions. But that’s not how it works when you’re a private equity manager. A recent NPR article explains:
“Many private equity managers are paid under a structure popularly known as ‘two and twenty’: They get a paid a fee that’s two percent of the assets under management, and they also get to keep 20 percent of the profits from their funds. That 20 percent is carried interest.”
“Carried interest” is taxed at the capital gains rate, which is 15 percent. The fee is taxed at the income tax rate. But Romney was unemployed last year (except for a few speeches here and there, for which he made a mere $374,000), so he was not paid any management fees. However, his Bain income was taxed at the capital gains rate because he worked out a special retirement deal in which his former employer agreed to payouts from the pile of money generated by investment gains.
Now it seems to me that being an equity manager is a job that entails creating those gains. In the lexicon of the tax code, it ought to be “ordinary” income, but it is not. What’s extraordinary is that this favoritism has withstood several challenges to end it. Then again, those who benefit from carried interest have plenty of money to sway the likes of Gingrich and Santorum.
Plus, it’s hardly news that many ordinary Americans insist on voting against their interests.
Tear this CODE down. Let’s imagine a scenario in which the top 1 percent of earners paid one-third of their income in taxes. It’s a common perception, so let’s make it true. One-third is a lot more than the average of 23.1 percent they paid in 2008. Let’s further suggest that stock dividends would go back to being taxed as ordinary income and capital gains would go back to being taxed at a top rate of 20 percent.
This is essentially the situation that existed for most of President Reagan’s eight years in office. Economist Bruce Bartlett, who worked for The Gipper, crunched the numbers on his New York Times blog and found that federal debt would be $1.7 trillion lower today. If the top income tax rate were returned to 50 percent, which is where it was for most of the 1980s, the debt would drop a lot more.
Now, nobody is suggesting a 50 percent income tax rate, but does altering the tax code to make it Reaganesque really fall into the category of socialism? Bartlett, a conservative, doesn’t think so:
“It is not class warfare to suggest that the richest 1 percent of people in society pay one-third of their income to the federal government, as they did under Ronald Reagan. Keep in mind that dividends were taxable as ordinary income every year of his administration, and in the Tax Reform Act of 1986 he supported taxing capital gains as ordinary income as well.”
As Mitt Romney’s tax burden shows, the equitable reform of 1986 didn’t last long. Nonetheless, Romney noted in an op-ed column last year that “Reagan’s legacy is very much alive.”
His accountant, whose income is merely ordinary, must’ve gotten a chuckle from that.
Associate Editor Gary Crooks can be reached at garyc@spokesman.com or (509) 459-5026. Follow him on Twitter @GaryCrooks.
Smart Bombs: Greatest generation? Not us 
AnalyzeThat on January 22 at 12:11 a.m.
Flat tax, now!
Orphan on January 22 at 8:11 a.m.
Until every one has skin in the game the tax code is wrong we need to go to a flat tax with a $5,000 deduction per person over 18. Do away with every other deduction. What we have now is some citizens paying 35% and almost half paying nothing and in some cases getting money back that they never paid in.
Rand on January 22 at 8:27 a.m.
“This is essentially the situation that existed for most of President Reagan’s eight years in office. Economist Bruce Bartlett, who worked for The Gipper, crunched the numbers on his New York Times blog and found that federal debt would be $1.7 trillion lower today.”
Oh Gary if you believe this you are beyond hope. The debt would be 1.7 trillion lower than today if EVERYTHING ELSE WAS EQUAL. Do you really think people like you wouldn’t have spent that money as well?
gmorton on January 22 at 8:33 a.m.
A few good points, Gary, but you overlooked a few salient facts and as a result missed the bigger picture.
Assuming you’re gonna have an income tax, there is no justification for treating income from different sources differently. Dividends and capital gains should be taxed at the same rate as “ordinary income.” So you’re right on that point.
The reason they are not is, of course, the same reason mortgage interest, charitable contributions, investments in “green” energy, *et al*, are tax-deductible – they all represent efforts by gummint to manipulate the economy in order to obtain some politically desired result (and are usually counterproductive). In the case of lower rates for dividends and cap gains, the stated aim is to “encourage investment.”
Dividend income is a rather special case, however, in that its lower rate has a second justification: that income has *already been taxed*. The dividends represent what is left over after the corporation has paid income taxes on its profits. Hence taxing it again is “double taxation,” which is why Bush Jr proposed its elimination in 2003 (what we got instead was a lower rate for some dividend income).
The solution here is to eliminate the corporate income tax entirely, which merely raises prices and distorts the market as corporations maneuver to keep dividends competitive, and then tax distributed dividends, and capital gains, at the ordinary income rate.
The bigger question, though, is whether to retain the income tax at all. Says Bruce Bartlett (who lately seems to be trying to ingratiate himself with the Left), “It is not class warfare to suggest that the richest 1 percent of people in society pay one-third of their income to the federal government . . .”
Well, yes, it is, Mr Bartlett, unless you can produce some nexus between the 30% you advocate and the value of the benefits that 1% receive from government. If your only rationale for seizing 30% of their income is that “they have the money,” then you are a certified class warrior, nothing more.
Taxes pay for government services. They should be apportioned according to the value of the benefits each taxpayer receives from those various government services, insofar as those can be computed. Income taxes bear little or no relation to that distribution of benefits.
Orphan on January 22 at 9:06 a.m.
Well said gmorton
Scoutster on January 22 at 11:20 a.m.
Our method of taxing corp and investment income does stimulate investment, but in a global economy, that investment goes where it gets reward, and that’s not here.
The struggle is that we are asking the tax structure to do (at least) two things: stoke investment and pay for services.
A flat tax on all income regardless of source would be the solution, but there is an entire lobbying industry committed to keeping tax policy complicated, and money trumps smarts. We also should abolish corp taxes if we tax as above.
Bring back Gipper tax rates! See, I’m getting all misty dreaming of RR.
Jeffrey_Grey on January 22 at 1:43 p.m.
Yup. Flat tax is the way to go - with the proviso that I want to see full disclosure on the details of how it will work and I want to see a truly independent crunching of the numbers for whatever is proposed.
I also want iron-clad laws that prevent the ‘creep’ you just know will happen otherwise. ‘Rest assured my fellow citizens that I, your elected representative, believe whole-heartedly in a flat tax! But golly, don’t y’all think it would be a really wonderful idea, just this once, to make one teeny-tiny exception and grant an exemption for…’
Given that, I say let’s make taxation about generating needed revenue for the State.
Not about experiments in social engineering or economic theory.
richardch on January 22 at 6:39 p.m.
Another stink bomb, perhaps the filthy rich repubs should have made their money the way John Kerry did, marry it. But then again Senator John only paid an 12% effective tax rate. Gary, you’re a dolt, you also don’t mention that investment income is already taxed at the 35% corporate before it even gets to the investor, then she has to pay the 15% capital gains rate. If your trying to imply that Romney is some kind of criminal for investing his money in the Cayman Islands go back and look where Teddy Kennedy had his millions parked so the tax man couldn’t touch it.
Benaround on January 23 at 7:41 a.m.
Why as an apologist for National Socialism (favoring select
business over unfavored business) would you be against the wonderful system of taxing individual’s income repeatedly ?
Tax it when they earn it…even if it is fluctuating commission
earnings…tax it if investing it is successful…then tax it again
when really successful people die and want to do something
stupid like leave business to their children. Take this triple
tax to allow no taxes for your biggest political donors like GE
in exchange for 24 hour infomercial worship from their NBC
network holdings. (Now they own 49% of NBC but still have
total content/program control) Any type of flat tax will never
fly…it doesn’t fit as well with your class hatred plans. I hope
the Spokesman-Review reverts back to paying you with beads
and pieces of small shiny- baubles. (Because of your hatred
of earned money.)
garyc on January 23 at 8:48 a.m.
What Romney is doing is perfectly legal. That’s the problem.
Flat taxers: Is the goal to raise the same amount that’s raised now? Or is it some search for fairness and the amount will be whatever it ends up being? Or does the rate keep changing to sustain current services?
In short, what’s the rate and why?
You can have simplicity and progressive rates. The people who lobby for the mortgage interest deduction aren’t going away just because the rates are flat.
Also, eliminating the health care tax break would end the employer-based system. Works for me. Are you prepared for the consequences?
Finally, it would probably take a constitutional amendment to get an ironclad law that the code cannot be tinkered with once you have the one you want.
Congress can’t pass laws that prevent future Congresses from overturning or tweaking them. That would be a bad idea.
Jeffrey_Grey on January 23 at 9:13 a.m.
Gary,
What ‘the rate’ will be is indeed a question. I don’t think it has to be carved in stone. I can see it fluctuating, dropping in times of prosperity, rising in times of need. (Paying for wars, for example.)
It’s not so important to me what the rate is. Just so long as everybody pays at the same rate. It doesn’t matter if you’re a minimum wage dish washer or a Wall St. tycoon. There is no, ‘who’, ‘what’ or ‘why.’ It’s not even a question. Once the money is in the bank, then you can try to convince the tax payers that whatever social engineering experiment you want to run or economic theory you’d care to try is a good idea. On it’s own merits. NOT because some politician says, ‘Embrace this program and it will lower your taxes!’
“You can have simplicity and progressive rates.”
You can also have simplicity with flat rates - probably more simply.
“The people who lobby for the mortgage interest deduction aren’t going away just because the rates are flat.”
But just because they won’t go away, does that mean we have to craft the tax code to cater to their demands? I think it’s getting to be time in the country when the answer to lobbyists has to be “no” - at least on occasion.
“Also, eliminating the health care tax break would end the employer-based system. Works for me.”
Works for me too, if you allow there’s more than one way to skin a cat.
“Finally, it would probably take a constitutional amendment to get an ironclad law that the code cannot be tinkered with once you have the one you want.”
I’m sure that’s probably the case. And I’m sure it would be a long, hard fight to get such a thing passed with no guarantee it’s possible.
Wouldn’t know until we tried, though - would we?
gmorton on January 23 at 9:26 a.m.
garyc wrote,
“Congress can’t pass laws that prevent future Congresses from overturning or tweaking them. That would be a bad idea.”
I’m sure the Supreme Court will agree, when the “Independent Payment Advisory Board,” a new “czar” body created by Obamacare, comes before them. Per the PPAC, this board, which will be charged with controlling Medicare costs, can only be abolished if a repeal bill is introduced during the 1-month period between Jan 1 and Feb 1 of 2017, is passed with a 3/5 majority, and the repeal would not take effect until three years later.
Moreover, rulings of the IPAB are declared to be unreviewable in federal courts.
No doubt the Supremes will love it.
richardch on January 23 at 1:22 p.m.
and hopefully they will declare the entirety of Obamacare unconstitutional and strike it down.
Scoutster on January 23 at 2:14 p.m.
Yes, I remember when Medicare was unconstitutional and going to be overturned, too.
It was all socialist and stuff.
Still waiting for the decision.
greenlibertarian on January 23 at 5:42 p.m.
http://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID875414_code570504.pdf?abstractid=875414&mirid=1
gmorton on January 23 at 8:01 p.m.
The link returns an “Abstract Not Found,” green.
And I’d love to see some evidence that progressive taxation furthers “voluntary community, provide restraints on power, and enhance social peace.” It seems instead to license class warfare, provoke resentments, and enhance the power of politicians.
valleyman on January 23 at 10:22 p.m.
Progressive taxation is just code for the bottom 50% paying nothing and the top 50% paying for everyone in the bottom to get everything they need for nothing…
greenlibertarian on January 23 at 10:46 p.m.
Sorry for the bad link, this one should work:
www.nesl.edu/userfiles/file/lawreview/vol40/1/Hoose.pdf
Think that up all by yourself, valleyman? Wow, really deep man.
valleyman on January 23 at 11:08 p.m.
More of your tired “don’t like the message, so put down the messenger” routine eh greenlib?
Disprove the premise.
And as for your own original thoughts, you’ve become nothing more than a copy and paste link poster regurgitating every parroted talking point you can find.
For those that don’t have the time to go through the piece you posted a link to, let me give them the reader’s digest version: Hoose, the author, argues that “real” conservatives should avoid arguing for changes to the current tax structure because it is “naturally ordered” and promotes “social harmony.”
WHAT A JOKE! It’s naturally ordered and promotes social harmony for the bottom 50% who get 95% of the benefits that the top 50% pay for.
If you had any sense for reading history/philosophy,you’d find that true liberty necessitates inequality (see the notion of freedom to succeed and freedom to fail) and this Utopian idea of egalitarian equality is a fantasy of the hard left that has failed each and every test throughout history.
Benaround on January 24 at 10:51 a.m.
Crooks: Tell Obama I am willing to pay even more in taxes
so he can put more of his Hollywood pals in Electric Sports
Cars. That should cheer the hopelessly-clueless man up.
gmorton on January 24 at 11:19 a.m.
valleyman wrote,
“Progressive taxation is just code for the bottom 50% paying nothing and the top 50% paying for everyone in the bottom to get everything they need for nothing…”
Yes, it is. The lefties, of course, think that is perfectly appropriate, since they hold to a radically different notion of what is the role of government in a free society than do the Founders or “classical liberals.” The latter believe that it is the job of government to protect the rights of its citizens, manage natural commons, and provide certain public goods. The former believe government is everyone’s perpetual parent, responsible for their personal welfare and “equalizing” the natural differences among them, by seizing wealth created by the productive and handing it over to the unproductive.
What method of taxation you favor will turn on which view of the role you envision for government.
MatthewRoot on January 25 at 8:54 a.m.
“Let’s further suggest that stock dividends would go back to being taxed as ordinary income and capital gains would go back to being taxed at a top rate of 20 percent.” That is a good idea, Gary Crooks.
I gained a large benefit from President Bush’s Wall Street bailout. I am not happy with executive bonuses being paid with that money, and the continued tight credit that has hampered the ability of small businesses to obtain loans. That said, everything I read indicates the bailout did stabilize the markets and likely prevented another Great Depression. Today, the markets have largely recovered.
Why shouldn’t we pay a little more in capital gains and dividends taxes for the benefits received by government action and investment? I could pay capital gains taxes at my marginal rate for the rest of my life and I would still be way ahead. A 20% rate seems more than reasonable.
Keep up the good, common sense editorials.
Arch_Druid on February 12 at 8:44 p.m.
So, for Valleyman and GMorton, how is it then that the “top 50%” look for all sorts of ways to get out of paying any taxes at all?
Read the form 1040 for a clue on how it is done.
In fact, read the tax exemptions and standardized deductions that eliminate a large chunk of change from the taxes that the gvt can in fact receive from anyone.
Then I have this question for the radicals on board, when was the last time you guys filed income taxes?