Under Newt Gingrich's economic plan, Mitt Romney would owe roughly $0 in federal taxes. Let that irony wash over you for a minute.
The authentic political issue lurking in the pages of Mitt Romney's tax return is the failure of extreme tax policies authored and still promoted by Newt Gingrich to achieve their aims. The highly favorable treatment of capital gains (15%) and dividends (0%) over the past generation has failed to promote new business and economic growth. Instead it has encouraged asset churn and business liquidation. Contrary to every tenet of far-right economic theology these policies have dragged business investment while pumping up the national debt. We could fix it, but we probably won't.
The bearded Communists over at Forbes magazine report that 97% of all capital gains in the U.S. in 2010 were earned by people who make more than $1m a year. That's fine in a sense. After all, capital gains are supposed to reward people for the risk and challenge of developing new ventures. Capital gains, in principle, only occur when people create valuable economic activity.
In the real world, however, Paris Hilton is the beneficiary of favorable capital gains and dividend treatment while the overwhelming majority of small business owners earn ordinary income and pay up to 35%. How many jobs did Ms. Hilton create last year? Favorable capital gains treatment is not a factor in stimulating new business development.
According to the Bi-Partisan Policy Center, for the year 2007:
Capital gain or loss transactions on partnership, S corporation and estate or trust interests accounted for only 2 percent of all transactions, and less than 6 percent of all net capital gain
What composes the rest of the capital gain pool?
The much greater part of capital gains realized by individuals is on sales of corporate stock by portfolio investors, rather than sales of businesses owned by entrepreneurs.
So what incentive is actually created in the real world by the favorable treatment of capital gains?
A tax preference afforded to all capital gains steers scarce resources also to all other kinds of investments -- including precious metals, collectibles, U.S. government bonds, and so on -- instead of to the rewards to true entrepreneurs, much of which flow in the form of ordinary income.
Those entrepreneurs who are doing the heavy lifting of economic development and bearing the risks of failure on the strength of an idea and a dream are mostly paid in ordinary income. While a wealthy heir owes 0% on dividend income and 15% on money made selling their great-grandfather's stock, small business "job creators" can pay up to 35% of their income in federal taxes, plus FICA, state taxes, etc.
In summary, our system offers generous tax subsidies to financial speculators and the already rich while placing a vastly higher tax burden on entrepreneurs, small business people, and anyone who earns their money from working. Work for a living -- pay up to 35% plus extras. Liquidate an asset -- pay 15%. That's not the incentive scheme conservatives had in mind when these tax breaks were implemented. It is time to rethink the extremely generous treatment of capital gains.
Newt Gingrich is getting away with an attack line -- condemning Romney's tax rate -- while simultaneously promoting a plan to relieve Mitt Romney from paying any taxes next year. No one seems to be picking up on the scam and hardly anyone on the right is allowing themselves to consider the rest of the implications.
Romney, as the only guy in the race who hasn't been in Congress, bears less responsibility for tax rates in this country than any of his challengers. What's more, Romney's economic plan would cost himself many millions more in taxes than he would pay under a President Gingrich (0%), a President Santorum (12%), or a President Paul (0%).
Makes you wonder who he'll secretly be voting for in the primary, doesn't it?