Written on Saturday, December 3, 2011 by Nathaniel Davidson
President Obama is now touting his “We can’t wait” demagoguery in his end-run around Congress. But we really can’t wait for is a total overhaul of this current confiscatory and time-wasting tax code. In a previous column named Taxing the “rich”? No, ruining America!, I documented both how high tax rates throttle the economy, so turn out to bring in less revenue, and that simply complying with all the convolutions in the tax code wastes over $100 billion.
A number of the current Republican candidates have proposed some sensible reforms, some a lot better than others. Michele Bachmann has some very good ideas, as would be expected from my favourite candidate. Herman Cain’s famous 9-9-9 plan, as I’ve written, is a nice idea but problematic in the long run. Rick Perry’s flat tax is a good step in the right direction, because the flat tax is the real “fair” tax. Newt Gingrich has a bolder and better flat plan, as shown here (admittedly a biased source).
Bachmann, Cain and Gingrich rightly support lowering company tax as well, from its current 35%, the highest in the (Western) world. They point out that this would make America a much more attractive place to set up business, in contrast to Obama’s “laziness” in business friendliness. It would also encourage American business to return the well over 1.2 trillion dollars they keep overseas than see over a third of it gouged by our greedy government.
But one candidate who proposes very little change is Mitt Romney (see how Gingrich’s bold plan eclipses Romney’s), despite his verbose economic policy document that is 160 pages long.
Romney is certainly one of the leading Republican candidates, although he can’t seem to win over 75% of Republicans. But his convenient flip-flopping on many issues, such as abortion and global warm-mongering, doesn’t inspire many Patriots. We also must wonder how much he has really flipped from fanatical pro-abort rhetoric to pro-life, since Romney won’t sign abortion pledge.
Patriots, also remember how Romney forced homosexual “marriage” on his state (see Patriot column Romney Is What’s Wrong With The Republican Party. Also, how can we really expect him to repeal Obamacare when it’s so closely modelled on
Romneycare. Yes, he claims that it was only a state issue, and states are “laboratories of democracy”, but this lab experiment has failed miserably and he won’t admit it. This really shows that Romney is no conservative at heart, since he still believes in the fundamental liberal notion that government has the right to force people to buy health insurance.
For this column however, the main concern is Romney’s love of high taxes (or “fees” as he called them when he was Massachusett’s Governor). Back in 1996, Romney lost a senate race to the late, unlamented Teddy Kennedy, despite Romney’s best efforts to sound even more pro-abort than even the ultra-left Kennedy. Just after that, Romney spent $50,000 on full-page ads in Boston, Iowa and New Hampshire newspapers to oppose Steve Forbe’s flat-tax idea.
Gingrich said, “The Forbes Flat Tax is more than a big idea. It is the right idea and it is a doable idea.” A lot of Gingrich’s ideas show this influence
But as seen below, the Romney ad culminates in class warfare demagoguery of which Obama would be proud: “The Forbes Tax isn’t a FLAT TAX at all — It’s a TAX CUT for FAT CATS!” Now, when he wants the Presidential nomination, he has toned down the rhetoric a little, but has he really changed?
So let’s analyze these claims—it will be good practice when Obama tries them next time, just as he tried Romneycare.
First, the “fat cats” he names like the Kennedys, Rockefellers and Forbes: this is a dishonest bait-and-switch tactic, confusing income with wealth. These people have a high wealth, and the current high income taxes don’t touch it. This is why we have “patriotic millionaires” who call for higher tax rates on themselves—but refused to donate more to the government voluntarily when given the chance in this video clip:
Rather, they punish hard workers who aspire to be wealthy (see more in the Patriot column Taxing the “Rich” – Part 2). The same, of course, applies to Obama’s obsession with taxing “millionaires and billionaires”, when his tax gouges start for incomes of $250,000 families who are not necessarily “rich”.
Second: “0% tax on dividends”. Completely false. Dividends are paid to stockholders in a business, who are by definition part-owners. Their business profits, if any, are already taxed at the rapacious corporate rate of 35%. Dividends are distributed from these after-tax dollars. Any further tax on them piles this on top of the 35% already paid.
As I’ve written earlier, Australia’s tax code includes “dividend imputation”, which imputes (credits to the taxpayer’s bill) the tax already paid, precisely to avoid double taxation. This is eminently fair, and I advocated it in a previous Patriot column. However, failing that, an alleged zero percent tax on dividends has the virtue of simplicity, and avoids piling still more taxes on top of the 35%.
Third: interest. Think about what happens when you lend money for a set time. In that time, this money is no longer available for you to spend freely on things you want. So classical economists recognized that there must be some compensation for lenders, i.e. an interest payment. Furthermore, there must be compensation for the risk that a borrower might default, especially after Obama’s gangster government decreed that his union supporters would be paid ahead of legally secured creditors to reward his union allies. And it compensates for inflation. Without interest, lenders would not bother making this financial sacrifice.
But politicians don’t care if their policies kill the goose that lays the golden eggs they steal—as long as the goose dies only after their next election. But Romney, in common with the Left, is ignorant of this important role of interest. So it is not only taxed, but also taxed at the lender’s highest marginal tax rate.
Fourth: investment profits or capital gains. A high rate on capital gains will discourage capital creation. As Milton Friedman pointed out, if you punish those who have capital, then it destroys the incentive to build capital in the first place.
Also, like interest, there is an opportunity cost: money you lock up in capital, such as stocks or real estate, is money that can’t be used to spend on things you want to buy. And here there is a severe risk of capital loss, as the recent stock market and property crashes should have demonstrated. High capital gains taxes punish risk-taking and entrepreneurship.
Another point is that the capital gains are realized in the one year they are taxed, yet the capital has been tied up possibly for many years. A lower rate for long-term gains reflects this difference between this and income.
Added to all these problems is one glaring unfairness: the gains are not indexed with inflation. Historically, most capital gains taxes have been gouged from sales on properties that increased in nominal dollars, but have not increased in purchasing power. Even worse, some have been taxed for sales that have lost real value. But such manifest injustice evidently doesn’t bother the tax gougers on the Left or Romney.
Finally, it’s a crass tax, if the object is, as it should be, to raise revenue rather than pander to redistributionist class envy. Stephen Moore, a Wall Street Journal editor, points out in the Library of Economics and Liberty:
“For all the controversy surrounding the tax treatment of capital gains, that tax brings in surprisingly little revenue for the federal government. From 1990 to 1995, capital gains tax collections were between $25 billion and $40 billion a year, less than 3 percent of federal tax revenues. During the Internet boom, when stock gains were huge, capital gains tax collections peaked at $119 billion in 2000 before rapidly falling back below $50 billion.”
As shown above, I think that if Mitt Romney wins the GOP nomination it would be a terrible thing. But if he does, conservatives should hold their noses and vote for him anyway, as I’ve said before on Patriot, rather than waste their vote on a third party. A terrible candidate is still a vast improvement on the catastrophic Community Organizer in Chief. Romney at least doesn’t support post-natal infanticide as Obama does. Romney also proposes to lower corporate and personal income taxes, as well as eliminate the death tax that harshly penalizes saving for one’s family (see economist Arthur Laffer’s view, Spend It in Vegas or Die Paying Taxes: A 0% tax on carousing, but 55% on thrift, and Friedman video clip above).
Tax reform is a major priority for the next President and Congress. It is vitally important to understand the crucial roles of interest, dividends and capital gains to refute the high-tax demagogues. Sadly, among these demagogues is one of the leading Republican candidates, Mitt Romney. So the coming Republican primaries are too important to miss. If Romney gets through the primary, thanks to conservative apathy and vote-splitting on minor candidates, then all we can do is vote for him just to get rid of Obama.