It's not reality. It's perception.
Mitt Romney offered a partial snapshot of his vast personal fortune late Monday, disclosing income of $21.7 million in 2010 and $20.9 million last year — virtually all of it profits, dividends or interest from investments.
None came from wages, the primary source of income for most Americans. Instead, Romney and his wife, Ann, collected millions in capital gains from a profusion of investments, as well as stock dividends and interest payments.
The couple gave away $7 million in charitable contributions over the past two years, including at least $4.1 million to the Church of Jesus Christ of Latter-day Saints. Romney’s family has for generations been among the Mormon Church’s most prominent members.
The Romneys sent somewhat less to Washington over that period, paying an estimated $6.2 million in federal income taxes. According to his 2010 return, Romney paid about $3 million to the IRS, for an effective tax rate of 13.9 percent.
There are a lot of middle class families out there making $80-100k a year who are paying a higher marginal rate than Romney. It isn't Romney's fault that our tax rate on long-term capital gains is lower than it's ever been in modern history. But it isn't going to make his political situation any easier.
18 comments:
That's the problem for the tax-related GOP narrative since the Reagan days. If Romney becomes the nominee (which I'm starting to doubt), there will be an unavoidable discussion about the value of capital gains types of investments. It will dig into whether one really views what Romney did in 2010 as a "job creator." I have a hard time thinking the capital gains rate will stay as low as it is after a Romney candidacy. He will shine a spotlight on this area of our tax system, and the people will decide they don't like what they see. And, as you point out, it's not just the Warren Buffet secretary that is paying a higher rate, or in any way related to the 'lowest' tax bracket. What will do it in is those upper-middle class people paying a higher rate than this millionaire. When the poor are united with the white, independent upper-middle class, you are in trouble. Sure, you're not struggling at $100k a year, but you are still feeling the recession, and more worried or nervous than usual about money. And with this Class-A Rich Guy paying half your rate in taxes, that's going to bug you. You're busting your ass for that $100k. What's Romney doing?
Max,
Romney busted his ass for the money he first generated as wages. He paid a much higher rate in taxes earlier in life. Now, living off of investments, the tax rate is lower...but it is also the second round of taxes he is paying on that money. And raising capital gains taxes during a slow economy when capital is already limited might play into a Democrat-led class warfare argument and last-stand political calculation, but it will lock more private money out of any investment with risk.
And...without investors willing to take a risk, new start-ups are dead.
11.19 -
Here's Romney's financial disclosure forms for this cycle.
I don't see very much money devoted to start-up capital. In fact, I don't see any.
What I do see is a ton of money going to hedge funds, investment funds and other kinds of securities.
The only rich people who spend their investment money on start-ups are Venture Capitalists, the kind of folks who made a living judging and assessing the potential of small companies to make it big. Everyone else does it the old fashion way by investing in blue chips.
Let's not pretend for a second any start-up is dependent on Romney's money for it's life.
What a disconnect. Romney's investments do not need to be directly put into start-ups for them to be beneficial to the economy at large and entrepreneurial activity - even those dollars invested in blue chips.
But the point was changing the capital gains tax and its effect on start ups. Please explain to me how increasing capital gains tax would increase the amount of money available for economic growth?
@Anon, that's the thorny part of this argument though. No disagreement that Romney already paid taxes on the capital. What he didn't pay taxes on are the gains.
Joe Schmoe with a savings account pays taxes on his interest as ordinary income. Will Schmoe smile on the fact that he's paying his ordinary income tax rate on his passive income while Romney gets a lower rate based on meeting an entirely arbitrary qualification (i.e. holding the investment for over a year)?
Also, modestly higher tax rates aren't likely to squelch much investment, if any. What person is going to say "gee, these stocks/bonds/ETFs were a great investment when I was paying 15% on the gains, but now that I'm paying 25 or 28 or 33%, I'm going to stick my money under a mattress"? Their money earns nothing under a mattress. I'll take Warren Buffett's word on this, and the others like him who have echoed the same sentiment.
Unless these people take their money out of our economy completely by burying it under a rock, somebody will be investing it. Even if they just put it in the bank, the bank will be lending it to other businesses or homeowners.
We saw extraordinary amounts of private investment in the 90's, when capital gains rates were modestly higher. The GOP gets hung up all the time thinking that tax rates are the only variable that determines the quality of an investment. But most of the time, given the magnitude of return that venture capitalists are shooting for, a couple extra percentage points in taxes are a total drop in the bucket.
I'd much rather raise taxes on capital gains and lower taxes on earned income, and given the choice, I'd bet the vast majority of Americans would agree.
RS,
Your points are valid on the optics of the argument, but your math is faulty. If Schmoe wants to take money from investment X and move it to Y, then the amount the gov't will take from that transaction has a net effect on the economy.
While the tax rate might not change the mind of the investor, it has a real impact on the entity trying to raise the capital. In an economy where capital is tough to come by, increasing marginal tax rates might play well, politically, but I still do not see how it improves economic activity.
Government spends everything it takes (and then some). So the only difference is if you think a private citizen will spend that money in a more stimulative manner than will government. Because the money is getting spent (or invested) either way.
I'll never argue that I think government is better at spending money than a private citizen, but from an economic standpoint, the end effect on the economy isn't much different.
Anon,
You may be technically correct based on the prevailing status quo, but you are only repeating that status quo. It is a narrative developed and entrenched for a few decades now. The problem is, when someone is willing to step up and challenge the status quo on its face, repeating it is no longer a viable defense. It requires specifics, and this is what a Romney candidacy might lead to.
For example, you said he busted his ass for that "income" originally. Fine. But, what happens when you can perpetuate that over a few decades. It's one thing for a family that maybe deals with only one or two major capital gains in their lifetime (a family farm or business). It's another thing when people utilize capital gains repeatedly as their only activity.
So Romney busted his ass for the first $10 million. But what about turning that $10 million into 20, or 20 into 30, and so on. With each recycling of it, the argument that he "busted his ass" starts to wear off.
Take the plumber working on the house down the street, or your neighbor working third shift in a factory. Do you really believe that Romney's private equity investments offer more "value" to society than those hard workers? Is it of such higher value that when Romney made that one-hundred-and-ninetieth million, it has such value to society relative to the plumber's that we want to tax it at half the rate?
You appear to think so, and that has been the narrative for years. I am just suggesting a Romney candidacy may challenge that narrative. Some people are going to have a hard time believing that flipping business at $20 and $50 million a pop is of greater societal value to than the plumber's work. The fact that some of those flips were the product of layoffs of bankruptcies (where from a private equity standpoint it is heads you win, tails the creditors lose), it will be all that much harder to make that argument.
Double taxation stings for mom and pop on their modest gains or that one family business. But for the guy that has been doing that, rinsing and repeating, for 20+ years and hasn't paid a typical tax rate ever since the first million, people are going to take a second look.
Maybe it trends into class warfare, but it is the very definition of perpetuating wealth. When it is so much easier to turn $20 million into $21 million (a modest 5% gain, but a whopping $1 million dollar gain) than it is turn turn $60,000 into $80,000 (a mere $20,000 gain), people are going to start to question the system. It perpetuates and promotes the growing gap between that person with $20 million and the person with only $60,000.
(continued in another post . . . )
On the other subject you raise, I have a hard time believing, as does RS, that the private equity firms will get out of the business.
If Bain Capital had an opportunity for a $50 million cost of acquisition and investment in a business with the prospect of selling it for $75 million (a 50% or $25 million capital gain), I cannot believe they would look at paying $3.75 million (15%) and think it's great, but the prospect of paying $6.25 million (25%) and only walking away with only $18.75 million makes the deal not worth it. Would they really say: $21.25 million on $50, let's do it . . . . oh wait, only $18.75 million on $50, that's totally not worth my money and I'm going to go elsewhere. I just don't believe it.
Care to share what investment "without risk" is out there will all this money will go? The stock market is nothing but risk. Real Estate? CDs? Bonds? None of these could give a return of $18.75 million on a $50 million investment in just 5 or 10 years (if even that long).
The notion of locking up capital is just a huge myth in my humble opinion. Maybe locking up credit prevents one mega corp form merging with another mega corp, but it has nothing to do with small businesses in the current economy. Study after study has shown that since about 2009, small business are desperately in need of new customers. They do not identify regulation as a major problem right now, an they do not identify availability of credit as a major problem right now. They need customers, and they don't have any because those customers don't have any spare money.
I've said it before and I'll say it again - walk into any local business in your home town and ask them: Would you rather have: (1) cheap and easy availability of an additional $20,000 in credit at near-zero rates; or, $20,000 in extra revenue from customers walking through the door? I think you'll be hard pressed to find any local small business that will choose #1 over #2.
Maybe the plumber down the street would have a little more money to spend on local attractions, businesses and restaurants if he was taxed similar to Romney. But then, he isn't, because as a society we value Romney's long-term investment of his two-hundred-and-thirty-millionth dollar from recycling his capital gains for 20 years, more than we as a society value the work and income of the plumber down the street making $60,000 a year after doing it for 20 years.
I will try to briefly answer both here...
RS,
I just can't agree that gov't spending is stimulative in way similar to the private sector. Too long to dive into with my time today, but gov't spending and the debt we now endure, is not stimulative.
Max,
I never claimed that capital gains were "busting his ass," which is why it is treated differently than wages. And I think for good reason - capital gains are made from making your capital available to other entities to grow the economy. Clearly, our tax code rewards that. Your point seems to be that for guys like Romney, who are smart enough to get good returns on their investments should pay higher taxes. But he does not get those returns without tangential economic benefit to others.
As for the small business owner down the street, I don't need to go ask one. I am one. Have been for a long time. And our economy, I believe, is driven by small business start up and growth. Both of those things, while certainly reflective of market forces, are reliant on capital investment from others whether banks or individuals.
But we are having two different arguments here. Both you and RS are focused on the comparative nature of taxes on wages and capital gains. I am still waiting for the argument that shows me that increasing capital gains taxes improves the economy.
You also make the argument about Bain making decisions on taxes. I will concede that the tax rate does not have a fatal impact. But I am not talking about Bain, I am talking about company X that is looking for investment, but Bain has less money to invest because they sent more to the gov't.
According to 2008 census data, 61% of businesses employ fewer than four workers. Two-thirds of Americans work for companies with more than 100 workers. If you don't like that divider between small business and big business, half of Americans work for companies work for businesses with more than 500 employees.
I have all the respect in the world for people who run small businesses. There are many of them in my own family. But this ages-old canard about small businesses being the engine of the economy is a total fraud. Politicians pander to "small business" because romanticizing small businesses makes people wistful and nostalgic, the same way politicians wet themselves when talking about family farms.
The only small businesses that end up contributing significantly to the economy are the small businesses that become big businesses, a proposition so unlikely that trying to use government policy to induce it is about as reliable an investment as buying lottery tickets.
The vast majority of small businesses fail. The ones that don't fail rarely get above 10 FTE, let alone 100 or 500.
I'm all for providing occasional assistance to foster and encourage job creation and job growth - even small businesses, start-ups, etc. But to do so, we need to start targeting our efforts at what actually works, and stop wasting our money promoting overly-broad policies that miss the mark.
If you want to foster job creation, find the job creators and help them. Lower income taxes for the wealthy doesn't do that. The vast majority of people making over $200,000 are working for someone else. They create zero jobs. Artificially low rates on capital gains doesn't do that (and is hardly a policy with much history). Making secondary acquisitions of stock doesn't provide additional capital to the businesses who initially issued the shares.
If we were simply better at targeting our economic policies, we would lose less tax revenue, and the revenue we do collect and spend would be more effective. Unfortunately, it's the overly broad policies that politicians use to bribe voters because they have broader appeal.
So how does raising taxes on capital gains improve the economy?
Anon,
We are having two different arguments here, but I think they are related.
You don't think government spending is stimulative, and you don't think increasing capital gains taxes improves the economy. Fine. But those go toward the larger issues of taxing and spending. They are distinct debates as you point out.
However, once you iron out a consensus view on overall taxing and spending, you then have to dig down into the specifics of that taxing and the specifics of that spending. In this case, for the taxes, I am absolutely discussing the comparative nature of taxes on wages and capital gains, as you correctly point out.
How can you not compare them? The rate you tax things at goes directly toward what one views as beneficial to society, stimulative to the economy, where we want incentives, rewards, etc. There are countless factors that go into these comparative measurements. So, when in such a comparison you have the blue color worker on one side earning "wages" versus Romney on the other side earning "capital gains" we must take a comparative look at how we tax those two earnings, and what that says about our priorities as a democratic government, as a capitalist economy, and more fundamentally as a society.
Right now, Romney is taxed at half what some are. So that begs the question - is Romney's investments and resultant gains more beneficial to society, more stimulative, more respectable or important, is it something that requires government incentives or rewards relative to the higher tax rates of the plumber's earned wages?
I'm guessing you and I would disagree on the answers to these questions, but this is the discussion that will be had with a Romney candidacy, and I think it may backfire on the GOP and their to-date successful narrative about needing to protect "job creators" and avoiding excessive "double taxation."
At the end of the day, it's going to be a hard sell convincing average Americans that Romney's $20+ million in earnings in 2010 was of such value or use to society that, as a society, we think it should be taxed at a far lower rate compared to what most of us actually pay.
Sure, this plays into the hands of the "double taxation" outcry, but it just might ring hollow to many salty Americans who are staring at a guy who made $20 million for being 'unemployed' as he called himself.
To answer your last question: it may or may not. What matters is how they are relative to other taxes. If, in my opinion, Romney's activities that led to his capital gains are of no better value to society than a third-shift worker, then I believe his taxes should be as high, or higher, than that third-shift worker.
That doesn't necessarily mean you have to increase capital gains. You could lower the third-shift worker's taxes to be less. "As high" could also mean zero. Eliminate all income taxes and replace it with a VAT. I don't know, I'm just pointing out the options are more vast than you are allowing for.
This debate is starting to really get down to a conceptual view of America - something I would welcome.
I don't care to get into a debate about how specifically increasing capital gains would specifically help the economy. It would increase revenue, but that doesn't mean a thing, because the government is fully capable of wasting that money. But, that's a different problem, and unrelated to the more conceptual issue of how we should tax capital gains relative to how we tax other forms of earnings.
If capital gains taxes and income taxes need to be modified and those modifications result in no net increase in revenue, then we can have a discussion. But that is not what is behind the class warfare being promoted by Obama these days. His goals are to pander to the left and get more $$$ into gov't.
So. A legitimate exchange on tax policy needs to start with a motive check at the start - hand check - let's see those cards.
I agree. But that includes the GOP, a party that since Reagan has gladly handed out budget-busting tax cuts without any regard for its effect on our nation's debt burden.
Another point that everyone is missing is that savvy CEOs have learned to structure their compensation from their employers so that it is taxed as capital gains or dividends rather than wages. If Romney took advantage of that while at Bain Capital, then he never paid a higher rate on that money he "busted his ass for" -- he (along with many other super-rich guys) is gaming the system. It's rather like calling your employees independent contractors so you don't have to pay the employer's share of FICA.
And now, thanks to the set-up by Ordinary Jill, if I may take us through the looking glass . . . what no one talks about is that it was big business that led to our complex tax system and complex regulations. It is what allows them to hire the bright folks to game the system, and the politicians can then turn around and milk them for money any time someone is talking about changing the regulations they are gaming.
If we actually had a simple tax system, regulatory system and limited the endless legal fiction corporate structures we allow for tax purposes, there would be nothing left for the businesses to game, and no reason for the politicians and those big businesses to live in a symbiotic relationship.
The ultimate irony of it all is that so long as there is corporate money in politics, we will never simplify the tax system or lower our regulatory burden. The big businesses will never let it happen. It's working too well for them.
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