Taxing credibility

Debate over Romney's taxes is a confusing distraction from the real issues

Much has been made of Mitt Romney’s remark that he is taxed at 15 percent on a lot of his income because it’s from investments.

His answer should be simple enough: “This election isn’t about my money; it’s about yours!”

But OK, let’s talk about it.

It’s interesting that the government is never asked how much money it really needs; it’s just our obligation to unquestioningly feed it what it wants. The debate, nicely framed by Democrats and their
compliant media, isn’t about what the proper size and role of government is – it’s whether someone is paying his or her “fair share.”

Often, the accusation of not paying one’s fair share is made by someone who pays little or nothing in federal taxes.

Regardless, the question has come up: Why are capital gains – money earned from investments – taxed at lower rates than other income?

Well, for one thing, investments are made with income that has already been taxed at the higher rate. And corporate profits are taxed before being disbursed to shareholders. But mostly, the lower rate is because of the societal benefit that accrues from incentivizing people to invest and create jobs and economic activity.

As for Romney’s 15 percent: That’s still more than most people pay after income tax deductions. And, as The American Enterprise Institute’s James Pethokoukis notes, nearly half of all households pay no federal income taxes at all.

“We shouldn’t tax what we want more of,” he writes. “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 ...?”

And this, from the Concise Encyclopedia of Economics:

“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.”

In other words, logic and numbers suggest lower capital gains tax rates – or none at all – but we won’t do that because it doesn’t feel right.

Envy and subjective notions of fairness sure are an odd way to run a free country.

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