the corner office

a blog, by Colin Pretorius

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Taxing the tree

Makes no diffs to me who wins the US Republican nomination but the news today was all waaah about the fact that Mitt Romney 'only pays 15% tax.'

Not true. I'll just quote a chunk from economist Steve Landsburg (whom I've mentioned before):

To understand Mitt Romney's tax burden, you have to compare him to his doppelganger Timm Romney, who lives on a planet with no taxes. In the year (say) 2000, Mitt and Timm both earned (say) a million dollars. Timm invested his million dollars, saw it double over the past decade or so, and cashed out his investment this year, leaving him with two million dollars. Mitt, by contrast, paid 35% tax in 2000, leaving him with $650,000. He invested it, saw it double, and cashed out last year, paying 15% tax on the $650,000 capital gain. That leaves him $1,202,500, which is about 60% of what Timm's got. In other words, the tax system costs Mitt almost 40% of his income.

By contrast, people on our planet without investment income collect their wages, pay 35% in taxes, and spend what's left. The tax system costs them 35%, while it costs Mitt almost 40%. In other words, people with investment income bear a higher tax burden, as a percentage of their income, than anyone else - and that's before you even start accounting for the taxes on dividends, interest, corporate income and inheritance.

In addition to being a double tax, taxing income on investments effectively punishes people for investing (ie. fewer factories, capital for businesses to start up, etc), and encourages them to blow their (already after tax) money on high living instead. How is this in any way progressive or sensible?

It isn't of course. But it's a great way to get people all worked up, which sells newspapers and wins votes.

(Update: more on the subject from City AM's Allister Heath)

{2012.01.24 - 23:09}

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