Matt Yglesias commits prog heresy


Why Mitt Romney’s Effective Tax Rate Is So Low And Why It Probably Should Be

The news is out that Mitt Romney paid a 14.1% effective tax rate on an income of over $13.7 million in 2011, a number that will strike many people as high but that is actually artificially inflated. He didn’t fully deduct all his charitable contributions in order to make sure his effective rate stayed above 13 percent.

The main reason Romney’s effective rate is so low is that the American tax code contains a lot of preferences for investment income over labor income. That’s something that strikes many people as unfair on its face, and particularly unfair since it often means very low rates for extremely rich people like Rommey. And Rommey himself as a rich guy who’s also a member of the political party seen as favoring the rich, and who’s been recorded as whining that the working poor are undertaxed is perhaps not an ideal messenger for a defense of this policy.

But this is definitely an issue where the conservative position is in line with what most experts think is the right course, and Democrats are outside the mainstream.

The reasoning is basically this. You imagine two prosperous but not outrageously so working people living somewhere—two doctors, say, living in nearby small towns. They’re both pulling in incomes in the low six figures. One doctor chooses to spend basically 100 percent of his income on expensive non-durables. He goes on annual vacations to expensive cities and eats in a lot of fancy restaurants. The other doctor is much more frugal, not traveling much and eating modestly. Instead, he spends a lot of his money on hiring people to build buildings around town. Those buildings become houses, offices, retail stores, factories, etc. In other words, they’re capital. And capital earns a return, so over time the second doctor comes to have a much higher income than the first doctor.

So then there are too different scenarios:

— In the world where investment income isn’t taxed, the second doctor says to the first doctor “all those fancy vacations may be fun, but I’m being much more prudent. By saving for the future, I’ll be comfortable when it comes time to retire and will have plenty left over to give to my kids.”

— In the world where investment income is taxed like labor income, the first doctor says to the second “man you’re a sucker—not only are you deferring enjoyment of the fruits of your labor (boring) but when the money you’ve saved comes back to you, it gets taxed all over again. Live in the now.”

And the thinking is that world number one where people with valuable skills take a large share of their labor income and transform it into capital goods is ultimately a richer world than the world in which such people just go out to a lot of fancy dinners.

We want to encourage thrift, and we do this by incentivizing saving and investment. That’s one of the basic pillars of capitalism. We even teach it to our kids in fables like The Ant and the Grasshopper.

What is the point of delaying gratification if, after inflation and taxes, you end up with the same amount you started with or less? Let’s not forget that in most cases the gratification is delayed for years and that there is an element of risk involved as well. And the money being invested has already been taxed once.

Yes, there is a certain amount of luck involved. It’s not all hard work. A lucky few are like lottery winners who receive disproportionate rewards. But what is the rationale for hitting lottery winners with tax rates as high as 90%?

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24 Responses to Matt Yglesias commits prog heresy

  1. Oswald says:

    If you listen to the Vile Progs talk, they don’t just want to tax Romney’s investment income, they want to tax his wealth as well.

  2. Oswald says:

    Greg Sargent wins the Keep Fucking That Chicken Award:

    The Romney campaign also released new info on how much he paid from the years 1990-2009, claiming: “Over the entire 20-year period, the average annual effective federal tax rate was 20.20%.”

    That 20 percent figure sounds a lot better than 13 or 14 percent, right? Well, here’s the problem: It all turns on how that 20 percent figure was calculated.

    Roberton Williams, a senior fellow at the nonpartisan Tax Policy Center, tells me there are two ways to calculate it. First, the campaign could simply have averaged the rates against each other — treating the rates themselves as a collection of individual numbers — to calculate the overall average rate.

    The second way to calculate it would be to add up all the income Romney earned over the 20 years, add up the total amount he paid in taxes during that period, and calculate the overall average rate paid that way.

    The Romney campaign confirmed to me just now that the 20 percent figure was calculated the former way — it represents an average of the rates themselves.

    Williams tells me that this is a far less meaningful way to calculate the overall rate than the second way, which actually calculates the real tax rate Romney paid over the period.

    Here’s why: The first way obscures the fact that income may have fluctuated quite markedly from year to year. If Romney paid his lowest rates in a number of the higher income years, the overall 20 percent figure would overstate the rate he actually paid over the whole period. Williams provided the following purely hypothetical example:

    “Let’s say you have 10 years in which you paid 13 percent in taxes, and 10 years in which you paid 27 percent,” Williams told me. “If you average those rates, you’ll get an overall rate of 20 percent. But if the 13 percent years were high income years, and the 27 percent years were low income years, then his total taxes paid as a share of total income over the 20 years would be less, perhaps significantly less, than 20 percent.”

    Yet in that scenario, the Romney campaign would be claiming, by its chosen metric, to have paid 20 percent.

    How realistic is it that Romney could have had far higher income some years than others?

    “You can be a person like Romney and have a highly fluctuating income year to year,” Williams said. “Some years Romney’s income could be much lower than in other years. When you average just the rates, you can distort the rate you’ve paid relative to your income over the whole period.”

    Williams concluded: “The only way we can know for sure what rate he actually paid is to see what his tax payment and his income was for each of the 20 years.”

  3. angienc says:

    In the other thread DM said Reid owes Romney an apology. Here’s what he told a Nevada reporter today:

  4. myiq2xu says:

    Fried boneless cubed chicken, carmelized onion, sour cream, cream of chicken soup, chicken taco seasoning mix, tortilla chips.

    Combine in a casserole dish and top with cheddar cheese. Bake at 350 until the cheese begins to brown.

    Goes good with beer or boxed wine.

  5. myiq2xu says:

  6. myiq2xu says:

  7. HELENK says:

    Iowa Hawk

    MSNBC gives $4 million a year to charity. His name is Chris Matthews.

  8. DailyPUMA says:

    Does it matter where the money is invested? Do we really want to give the best tax rates to people who invest their money overseas?

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