This Ruthless World

Adventures in absurdity

Some Thoughts on Taxes, Inspired by Mitt Romney’s Tax Returns

Willard Mitt “Mittens” Romney has confirmed what most of us have been suspecting — that the taxes he pays on his astronomical income are a mere fraction of what most middle-class Americans pay to the government, despite our vastly more modest means. And it has been explained to us, of course, that the reason for this is that the money that ended up in “Mittens'” coffers isn’t really income — it’s “capital gains”. It’s a simple distinction, you see: income is any kind of revenue, unless it’s revenue from investments, in which case it’s clearly not income; it’s capital gains. I mean, it should be obvious. In any event, long-term capital gains are taxed at a substantially lower rate than ordinary income. Incidentally, revenue you get in the form of inheritance isn’t income either, because come on. These distinctions in our tax system — and indeed, that’s true of all the tax systems that have been proposed over the past several years — reveal that we are not quite sure what it is we want to tax: distinct units of actual cash, people or transactions.

To be clear: I don’t fault Mittens for taking full advantage of our country’s tax laws in order to pay as little as possible. Any one of us would have done the same. It’s perfectly natural and reasonable to try to get away with as much as you can. After all, it’s not like he cheated on his taxes. But, there is no denying that his taxes reveal a huge incongruity in our tax system.

The idea of distinguishing “capital gains” from “real income” and taxing long-term investment revenues at ridiculously low rates has never made sense to me. I mean, I understand that it made sense once upon a time — in the early 20th century, for example, when massive investment was needed to develop costly infrastructures, such as railroads and communications; and during the Great Depression, when people were particularly reluctant to invest. It also made sense, before the advent of modern computer technologies, as a tool to discourage extremely short-term trading. But those days are gone, and today, capital gains taxation is simply about privileging the wealthy and making them wealthier. Most remarkably, the Internal Revenue Code makes no distinction between investments that benefit the US economy and those that do not — such as investment in companies that create jobs overseas, while laying off American workers or competing with them. Why in God’s name are we encouraging that kind of investment? Pandering to the rich is the only answer I can think of.

An even bigger problem is that if we were to throw out the entire tax system and start from scratch, it wouldn’t change a thing. After all, when the present system was first enacted, it too was fairly simple. The income tax return was a one-page form, and the rules were pretty straightforward. Right away, however, the system came under two distinct pressures.

First, people began to engage in all sorts of shenanigans to avoid paying taxes or to reduce their tax liabilities. At a time when many middle class families lived on one income, bread-winners began legally assigning portions of their earnings to their wives and children in order to drop down to a lower bracket. Corporate executives began to restructure their compensation so that a significant portion of their remuneration came in the form of goods and services — most notably housing and food. Corporations began to hoard money. And so Congress went about closing loophole after loophole, which of course padded both the Code and the Regulations with additional requirements, definitions and so on.

The second source of pressure was from various interest groups that wanted special treatment — preferential tax rates, deductions, exemptions, exceptions, tax credits, you name it. Today, if we started with a completely new tax system, lobbyists would get to work on getting special provisions for their clients before the ink on it was dry. And the new and “simple” tax system would expand like the Blob, just as the one before it did.

So what’s the solution? In my opinion, taxing all capital gains at income rates and offering preferential tax treatment in a surgical fashion, where it truly benefits the US economy and society, would be best. Of course, that means the system would remain complicated as hell.

Then again, simplicity isn’t necessarily a virtue.

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2 thoughts on “Some Thoughts on Taxes, Inspired by Mitt Romney’s Tax Returns

  1. I agree that the only reason to treat capital gains in this way is a giveaway to the very rich. The typical argument, as you mentioned, is that people won’t invest if they’re taxed on cap gains, but this isn’t supported by any economic data, or really even common sense. If you’re interested, my take on cap gains here:

    http://520chestnut.wordpress.com/2012/01/20/should-the-capital-gains-tax-rate-be-so-low/

  2. The easiest approach politically would be your second suggestion of “offering preferential tax treatment in a surgical fashion, where it truly benefits the US economy and society . . .”

    Even that won’t be possible until and unless a Congress gets elected that would deal with the income inequality.

    I can’t wait until November!

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