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More on the Romney Income Tax Debate
By JLP | January 24, 2012
I read a couple of follow-up stories/opinion pieces on Mitt Romney’s tax bill.
The first one, Romney and the Burden of Double Taxation, echoes the point I made last week about dividends being taxed at the corporate level before they paid to investors.
He goes on…
This is ironically the embodiment of the “corporate personhood” legal doctrine otherwise so decried by the left. The law taxes corporations as if they were separate beings from the shareholders who own them and then levies a separate tax on shareholder payouts and gains. This double taxation brings the effective tax rate on investment income to as much as 44.75%.
Now, this point is ONLY relevant if the corporation is actually paying federal income tax.
The other article (also in today’s paper) gives a little more depth to Romney’s taxes:
Mr. Romney reported $21.7 million in income. He paid $3 million in federal taxes, slightly more than the $2.98 million he made in charitable donations.
Of Mr. Romney’s 2010 income, he noted a capital gain of $12.6 million, taxable interest of $3.3 million, ordinary dividends of $4.9 million and smaller sums of gains and losses on business income, refunds and other income.
In an estimate of his 2011 taxes, the Romney campaign said Mr. Romney would pay $3.23 million in federal tax on $20.9 million in total income. He said he would have itemized deductions of $5.7 million, including $4 million in charitable donations.
Personally, I think all politicians should receive this kind of scrutiny.
Topics: Politics, Taxes | 27 Comments »
January 24th, 2012 at 12:49 pm
Either a corporation is a separate person or not. The people pulling the strings like to pick one version over the other depending on the best outcome at that specific point in time.
January 24th, 2012 at 2:40 pm
BG hit the nail on the head…
As for Romney’s taxes… After it’s determined that a candidate paid all of their taxes within the law, I couldn’t care less what his or her tax rate is.
If Gingrich wants to lambast Romney for paying a lower rate than his secretary… let him… Romney can say… Man, Newt, you sound like a Democrat!
January 24th, 2012 at 6:49 pm
tom) you have no interest in changing the (tax) law?
From media (Fox News) reports — people demand that the 50% of the population who pay nothing in income taxes should start paying (though they do pay a ton of FICA taxes).
And other media (everyone except Fox News) reports — people demand that the ‘wealthy’ should be paying more. Specifically hedge fund managers and other high level executives who manage to have lower tax rates than their secretaries.
I can’t believe that there are people who think today’s existing tax laws are perfectly fine.
January 24th, 2012 at 9:29 pm
No, no, no.
I didn’t state that.
My point was that I believe attacks on Romney’s tax return are pointless and stupid. He paid his taxes within the guidelines of the laws. End of story. Nothing Romney could do about it.
January 24th, 2012 at 10:02 pm
Tom – I understand your point. Forget that it’s Romney. We hear about these things in the abstract, million dollar earners paying 15%.
Seeing a return for real, as compared to my generating a sample using TurboTax, is eye-opening. Funny, when I added $1000 in cap gains, I see my federal tax rise by $225, the effect of AMT. That doesn’t seem to happen to the uber-rich.
This exemplifies changes needed to the code. In the spirit of not hurting the widows, how about a phaseout? After, say $200K of 15% dividends/cap gains, it ticks up, to 25%, or even 30%?
I’m open to how to fix this seemingly broken system.
January 24th, 2012 at 10:40 pm
The system is broken but only because it’s so confusing with too many deductions and too many loopholes.
BG,
You think the 50% of the population that pays nothing in income taxes should continue paying nothing? Forget about payroll taxes. THEY AREN’T THE SAME THING.
January 24th, 2012 at 11:58 pm
I don’t know about you… but I do not want the capital gains tax to change. I don’t even have any taxable investments.
A low capital gains tax encourages investments in our financial systems allowing for our economy to grow more rapidly. Sure you can argue that some of this economic investment goes towards the absurd benefits packages of senior executives.
If anything, leave capital gains taxes alone and impose some type of regulations on executive pay or tax executive stock options at income tax levels (or make a specific options tax). Many executives have low salaries (think $1), but massive stock option bonuses that are taxed as capital gains.
I hate the Warren Buffett analogy. He makes billions a year because he is a genius investor. Anyone can do what he does, he’s said that himself. Instead, how about we compare the tax rates of the sr. executives making $1,000,000/yr in salary to the average American. That person will pay $320,000 in taxes w/ an effective rate of 32% vs. 11% for the average American. They pay 3x more, fair? I’d say so.
That all said, the current structure is broken. Everyone should pay some type of federal tax (excluding payroll), even if it’s just $1. Eliminate all deductions, credits, everything for people and corporations. There is no reason anything should be subsidized. Bring the corporate tax rate down to 15%. Makes for a much easier tax season and the government brings in more revenue.
January 25th, 2012 at 9:29 am
JLP) payroll taxes are paid using the same 1040 tax forms — so there is no difference. It is not an investment into a retirement account, it is highly regressive tax, on EARNED income, paid predominately by people who earn less than $106k/year.
The next part of the tax code are the marginal income tax brackets: which are only paid by people who WORK.
Lastly, there are the ‘dividend’ people. Collecting incomes, while doing no WORK, and enjoying a nice low 15% capital gains rate.
Why should hard work be taxed more (punished) relative to people like Romney, who has’nt worked in YEARS, yet collecting millions a year in income?
There should be a single, flat, tax rate on all forms of income. Loopholes/deductions/exemptions should be eliminated on everyone, rich and poor. Franking credits should be employed to avoid double taxation of dividends.
Do those thing and you eliminate class warfare. People are in class warfare, because it is the TAX CODE that separates people into their respective classes!
January 25th, 2012 at 10:35 am
@BG…
How did the “dividend” people get the dividends?
They worked for them!
Capital gains/dividend taxes were not created for millionaires. It has nothing to do with income inequality or class warfare. It has everything to do with encouraging investment.
A majority of Americans could enjoy some sort of capital gains/dividends if they budgeted and saved instead of blowing all of their money on dumb crap. I can’t tell you how many middle class people I see around my town (a blue collar, middle class town) driving around in their new trucks, talking on their iPhones. These people are the NORM not the exception, no exaggeration.
I completely agree that there should be a single flat tax on income, but not capital gains, unless that single flat tax lower than the current CG/D tax rate. I also agree, as I said above, that we eliminate all deductions, credits, everything, for everyone rich, poor and corporations. Any type of credit, deduction, loophole is an unfair advantage/disadvantage for someone or something.
January 25th, 2012 at 10:49 am
BG,
How is social security HIGHLY REGRESSIVE?
We have been over this MANY TIMES BEFORE! You simply don’t get it. Those with higher incomes pay in the maximum tax but at RETIREMENT will get smaller benefits and those benefits will be taxed. So, your argument that social security is highly regressive ONLY takes in one part of the equation.
So, AGAIN…social security taxes and federal income tax are two different things.
January 25th, 2012 at 10:54 am
BG,
I am in 100% agreement on your idea of flat taxes.
January 25th, 2012 at 10:58 am
Tom,
Good points. We live in a consumption-based society where the kind of car you drive and the house you live in is way more important than how big your investment portfolio is.
When the majority of Americans consume everything they earn, it will be hard to build wealth. And, when they don’t build wealth, and other people do, they look only at the end result when making judgments. “Well, so-and-so is wealthy. He can afford to pay more in income taxes!” What they’re forgetting is the years of sacrifices made in order to BUILD THAT WEALTH.
January 25th, 2012 at 11:17 am
“…It has everything to do with encouraging investment. …”
The road to h3ll is paved with good intentions. Every tax loophole/deduction/exemption surely had good intentions when created. Now we see where that has gotten us: a totally unfair tax systems where people at the extreme top, and people at the extreme bottom are taxed significantly less than the people in the middle. The only ‘fair’ solution is the tax system I outlined in #8.
“…I also agree, as I said above, that we eliminate all deductions, credits, everything, for everyone rich, poor and corporations. Any type of credit, deduction, loophole is an unfair advantage/disadvantage for someone or something….
You contradict yourself. In one statement you justify a tax loop-hole that is predominately taken advantage of by hedge-fund managers and senior executives. In the other statement you favor eliminating loopholes (I do too). The only way this will work is if ALL loopholes/deductions/exemptions are eliminated for EVERYONE. If you allow a single loophole, you open pandora’s box and are once again on the road to h3ll paved with good intentions.
“..How is social security HIGHLY REGRESSIVE?..”
Because it is a wealth-transfer system paid predominately by the POOR working class to old people (rich or poor). Did Romney pay any Social Security taxes? NO. He did not work, hence had zero EARNED income that is subject to that tax. I hate the SS system, the tax should be abolished, as well as the benefits. Of course that will never happen, so I can kind of agree with some of the GOP candidates that it needs to be phased out: lowering the Payroll tax rates, and cutting benefits to the RICH old people — eventually leading to a complete elimination of the system.
“…When the majority of Americans consume everything they earn, it will be hard to build wealth….”
I agree with that! Which is why we need to (perhaps slowly) convert from a government funded by income taxes, to a government funded by consumption (sales) taxes — just like the Texas state government.
“..What they’re forgetting is the years of sacrifices made in order to BUILD THAT WEALTH….”
Regardless of how long it took to build that wealth, it should not justify a loop-hole that allows a lower income tax rate on dividends produced by that wealth. If you allow any single loophole, you encourage government sanctioned SOCIAL ENGINEERING. People should be able to make decisions with their money that are not influenced by the tax code, period. Any form of flat-tax will take AWAY THAT GOVERNMENTAL POWER over us (which is a very good thing).
January 25th, 2012 at 12:10 pm
@BG… you left out:
“I completely agree that there should be a single flat tax on income, but not capital gains, unless that single flat tax lower than the current CG/D tax rate. “
January 25th, 2012 at 12:14 pm
Tax everything at 10 or 15%. Eliminating all deductions and loopholes. I can get behind that. Everyone pays.
BTW… the CG/D tax is not a loophole because it is not income.
January 25th, 2012 at 12:16 pm
Perhaps a large consumption tax would have people not buy the phones and trucks and other goodies and unemployment and capital investment can do a death spiral together. Moderation my friends…
The years of building wealth are going to be increasingly difficult for the average person. Hell, I can’t even find 1% on my savings accounts anymore! It’s becoming survival mode now. In the (mainly small business) accounting practice I work in there’s always a new sad story about someone losing their house. The tradespeople have been hit the worst–how can they make a house payment when there’s no work? In their case you would have needed a 2-year emergency fund and that might not have been enough…
January 25th, 2012 at 12:59 pm
“…BTW… the CG/D tax is not a loophole because it is not income….
So, you are claiming that Romney did not, in fact, bring home $22 million last year? It is this distorting of the word ‘income’ that allows a lot of these loopholes to exist.
I don’t care if you want to call it “income”, or a gift from the tooth-fairy. It should be taxed, EQUALLY, just like everybody else.
Now, in the single case where the money is a dividend from a company that ALREADY PAID income taxes — then the recipient of the dividend should be given a piece of paper (called a franking credit — look it up) indicating HOW MUCH corporate taxes were paid on the dividend. The recipient can then use that Franking Credit to correct his tax liability — this avoids the double-taxation problem. If GE makes billions and pays $0 in dividends, then there is no franking credit and the recipient needs to pay FULL income taxes on every penny of the dividends. If a corporation paid a massive tax bill, then it is hypothetically possible that the recipient gets the dividends PLUS an overpayment of taxes back from the treasury on his tax return (this only happens when the corp tax rate is higher than the individual rate).
January 25th, 2012 at 1:01 pm
Sorry, should say:
“…If GE makes billions and pays $0 in taxes, ….”
BTW: GE is the most famous example of a company with massive profits and ZERO tax liability to the federal government.
January 25th, 2012 at 2:17 pm
I really don’t care how money Romney, Obama, Buffett, etc. make, and don’t think they should apologize for being successful. This whole debate is just a distraction from the real issue— how to make real cuts in government spending, and reduce waste, fraud, abuse and stupidity. No ones fair share of taxes should be above 15% of their income. The burning issue of the day is government greed and cronyism, not individual or corporate greed.
January 25th, 2012 at 2:45 pm
@BG… it’s capital gains, not income. You may do with it as you wish as you would with income, but it’s still capital gains.
I agree that it should be taxed equally, as long as the tax rate doesn’t exceed the CG rate now. There have been studies on the effects of captial gains increases on the overall economy and the conclusion is negative.
I don’t disagree with the dividend statement you made, those should be taxed separately.
RE: GE… not a good example… that’s what happens when all of their profits are made overseas, and they suffered massive losses at home w/ GE Credit. Should profits (as long as they are kept and used overseas) made overseas be taxed twice, once in the country where they operate and a second time at home? That is ridiculous. From 2000-2009 GE paid $23B in taxes in non-US operations, not sure about 2010 specifically, but it’s not like they paid no taxes, just not at home.
January 25th, 2012 at 2:49 pm
Yet another complication to the tax code, BG? Just eliminate the stupid, wasteful corporate income taxes ENTIRELY, and tax it when it gets to the owners as dividends and capital gains.
January 25th, 2012 at 3:56 pm
Jack) Of course, if there were no corporate taxes, then there would be no need for franking credits to avoid the double-tax. But, if corporate taxes were to continue to exist, then franking credits solves to problem of over/under taxation on the recipient.
tom) “…There have been studies on the effects of captial gains increases on the overall economy and the conclusion is negative….”
I’m sure every single form of taxation has an overall negative effect on the economy. Still not a valid reason to have a loophole abused by one segment of the population (at the detriment of everyone else paying MORE to cover the shortfall).
“….but it’s not like they (GE) paid no taxes, just not at home.”
Exactly, they paid NOTHING to the federal government, yet THEIR dividends are taxed on the recipient at 15% just like corporations that pay 35% in taxes to the federal government. How is that fair?
The 15% rate (on the recipient) was the comprise to the double-taxation problem. But there is a gaping hole when the corporation, in fact, payed NOTHING in taxes to OUR government. Other nations have solved this problem already using Franking Credits. If you are going to have both corporate and individual taxes, then Franking Credits is the tried-and-true solution to ensure everyone is paying the exact, correct, amount in taxes.
Anyhow — your argument goes even further and says that CG/D should be taxed less regardless (you don’t even use the double-tax argument). It is simple: if you own 1/100th of GE as a shareholder, then you should pay the exact same tax on 1/100th of GE’s profits as someone who WORKS and earns the exact same amount.
I’m sorry, but you will never be able to convince me that one group should pay a higher tax rate than another based solely on the source of that income. Heck, you will never be able to convince me that one group should ever pay more than another under any circumstances (because the circumstance you pick is a LOOP-HOLE).
January 25th, 2012 at 5:45 pm
> if corporate taxes were to continue to exist,
> then franking credits solves to problem of
> over/under taxation on the recipient.
But it does NOT solve the problem of massive amounts of time and brainpower being devoted to the stupidity which is corporate income tax.
January 25th, 2012 at 6:29 pm
That’s a different problem.
What about all the massive amounts of time and brainpower being devoted to the stupidity with is the _individual_ income tax (code)?
I think Romney’s tax return was 500 pages — which is how he got down to 13-14% tax rates. GE’s tax return is something like 24,000 pages long — which is how they got down to the 0% tax rate.
Anyone who uses the 1040-EZ (one page) tax form is getting completed screwed, heh.
January 25th, 2012 at 6:52 pm
Rommney’s “capital gains” are derived from carried interest, a huge tax break which is allowed to the type of income that Rommney earns. This is the real break that he enjoys since he did not invest any of his own money to earn the capital gain rate.
January 25th, 2012 at 8:00 pm
Sure, BG. All of that could be solved by a sales tax in lieu of the income tax.
January 26th, 2012 at 10:54 am
Jack) Yep, it can be solved in any number of ways, including sales tax in lieu of income taxes.