As President Obama delivered his State of the Union address, in which he wrapped his populist campaign theme of class warfare in the warm blanket of “fairness,” GOP presidential hopeful Mitt Romney released his 2011 tax return.
The two developments couldn’t be more instructive.
The hundreds of pages of returns Mr. Romney released appear to be comprehensive. His tax advisers say Mr. Romney obeyed all tax laws. Nonetheless, the general perception seems to be that the release will hurt Mr. Romney by revealing he’s rich and pays an effective rate of “only” 14 to 15 percent on his income, mostly from capital gains, which are taxed at a lower rate.
Mr. Romney paid about $3 million in federal taxes in 2010, on investment income of some $21.7 million, putting him among the wealthiest of American taxpayers. The former Massachusetts governor also gave nearly $3 million to charity — about half of that to the Mormon Church — which helped reduce his effective tax rate to the modest 14 percent.
Some cynics demand to know how many jobs were created by the millions Mr. Romney earned. And Mr. Obama had investor Warren Buffett’s secretary attend his address, using her as a prop to make his point that it’s only “common sense” for a billionaire “to pay at least as much as his secretary in taxes.” In fact, Mr. Romney will pay more in taxes this year than Mr. Buffett’s secretary likely will in her entire working lifetime.
If critics of Mr. Romney’s tax return seek to simplify the tax code, eliminating all deductions and going to a simple, single rate, so much the better.
Unfortunately, though, Mr. Obama and his supporters have no intention of pushing tax simplification. They would much rather continue to use the tax code as a tool for social engineering and wealth redistribution in their quixotic quest to impose some amorphous concept of “fairness” on the nation.
In today’s politics, given the nation’s overwhelming economic ignorance, the practitioners of class warfare will doubtless continue to bemoan Mr. Romney’s wealth — as though such liberal icons as Franklin D. Roosevelt and John F. Kennedy were backwoodsmen who pulled themselves up by their own bootstraps. But as John Berlau and Trey Kovacs of the Competitive Enterprise Institute point out in an op-ed in Tuesday’s Wall Street Journal, Mr. Romney’s tax rate is actually much higher than advertised.
The reason for this? The money invested by Americans — including rich Americans, but also virtually everyone with a 401(k) or IRA — doesn’t grow on trees in their back yards. They have to earn those dollars before they invest them. Those initial earnings were already taxed, usually at rates closer to 25 or 30 percent.
Some Americans then invest those earnings in the stocks and bonds of private corporations, who have to use the funds to hire people to create products and services that can be sold for a profit in order to pay the dividends demanded by investors.
This is how most jobs are created. Mr. Romney and others like him create thousands of jobs, not by placing “help wanted” ads and hiring a cook and a chauffeur, but through their after-tax investments. Then, when some earnings and dividends on their investments trickle back to investors including Mr Romney, they’re taxed again.
“This double taxation brings the effective rate on investment income to as much as 44.75 percent,” even if that rate doesn’t get compounded on the investors’ individual tax return, Mr. Berlau and Mr. Kovacs point out. In fact, in any sane world, if we wanted to encourage more job-creating investment on these shores, earnings on any after-tax income Americans manage to save and invest should be tax free, or nearly so.
Drive down almost any commercial street in Las Vegas. Count the empty storefronts. Yes, condemn the crony capitalism that short-circuits our fine bankruptcy laws, bails out failed banks and drains our paychecks to fund Solyndra and other green-energy boondoggles, by all means. But it looks to us like this town could use some more private capital investment right about now. Are those who take that risk villains because they’re taxed at “only” 14 percent on the occasions when they succeed — while swallowing 100 percent losses without complaint when they don’t?