Sunday, August 19, 2012

Should we be increasing taxes on Mr. Romney's capital gains?

The big issue regarding what rate Mitt Romney may have paid on this income stems from the fact that our system taxes capital gains at a lower rate than income. W.W. Houston writes in The Economist that we should, instead of debating what Romney may or may not have paid in taxes, be talking about whether it makes economic sense to tax capital gains at all. As he points out, taxing capital income leads people to invest in other countries where capital investment is taxed at lower rates. And he quotes from Paul Ryan about the perverse economic effects of taxing capital gains.
Raising taxes on capital is another idea that purports to affect the wealthy but actually hurts all participants in the economy. Mainstream economics, not to mention common sense, teaches that raising taxes on any activity generally results in less of it. Economics and common sense also teach that the size of a nation’s capital stock — the pool of saved money available for investment and job creation — has an effect on employment, productivity, and wages. Tax reform should promote savings and investment because more savings and more investment mean a larger stock of capital available for job creation. That means more jobs, more productivity, and higher wages for all American workers.
Wallace then counters the populist arguments that Obama is making that rich people should be paying more.
But isn't it just outrageous that a man so wealthy should pay so little? All I can say is that I'm not outraged. Tax policy ought not be primarily a matter of rigging things to satisfy gut judgments about fairness. Our priority in the design of tax policy ought to be to identify the most efficient way of raising the funds necessary to finance government and pay down debt. If the tax burden in a decently efficient scheme happens to flout common intuitions about equity, we always can tweak it at the margins to minimise offense. Still, we should be careful to keep our priorities straight. The tax system is in the first instance a tool for financing public spending, not a tool for maintaining a particular pattern of income and wealth.
Exactly. We shouldn't be devising our tax plan on what feels good about socking it to the wealthy, but instead about how best to craft a tax system that will both raise the money our government needs but still not harm the economy. If higher taxes on capital gains would lead to less investment in our system and harm economic growth, then that is not the policy we should be advocating. So if Mitt Romney's income comes from capital gain investments, is it so bad if it taxed at a lower rate than regular income? And remember the money to invest in capital gains has already been taxed when the investor earned that money as income in the first place.