Double taxation? Nonsense!

Andrew Tobias is treasurer of the Democratic National Committee, so he might be presumed to have it in for Mitt Romney, or any other Republican presidential nominee. However I think he does an excellent job, in today's edition of his blog, of explaining why a lot of the talk about "double taxation" is double talk.

I think his basic point is that you can't argue that rich Americans shouldn't have to pay any income tax on their capital gains because the corporations whose stock furnished their capital gains already paid 35% income tax. You can't simply add the 35% corporate rate (which, as Tobias notes, is mostly theoretical) to the 15% current tax on individuals' capital gains and say those individuals are really paying 50% in taxes. Corporations do not pay ANY capital gains or other taxes on increases in the value of their stock, which is where individual capital gains come from.

*************************

Here is what Tobias writes:

So Mitt Romney pays 14% of his $20+ million annual income in federal income tax. Some have argued this is misleading because it ignores the 35% corporate income tax paid by the companies from which he profited. Add that, they say, and he paid nearly fifty percent.

Nonsense.

Leaving aside the fact that few companies actually pay the full 35% rate, here’s the deal. Say, through his stake in Bain, Romney invested $5 million in a company and, three years later, reaped a $25 million gain. Chances are good that, during the brilliant Bain-engineered turnaround that led to this profit, this company had little or no taxable income. In that case, his share of the corporate income tax paid on that little or no taxable income would also have been little or nothing.

Even if the company had been solidly profitable all three years, those three years’ earnings would have paled in comparison to the realized gain. Right? The company made (say) a 10% pre-tax profit each year – 30% in all. But Bain, in this example, made a 500% profit on its investment, not a 30% profit. So even if the company did pay the full 35% rate on its profits, Romney’s share of that tax would have been little more than a footnote.

The broader point when it comes to any form of “double taxation,” I think, is that – except in egregious cases – I just don’t buy it. Take, for example, the estate tax. Yes, you paid taxes all your life, and now, when you die, your estate has to pay tax again. But we need to get tax revenue someplace, so why not raise some of it from people who truly, categorically, unequivocally don’t need it – because they are dead.

Would it be nice to tell a billionaire’s children they will inherit it all without the government taking half first? Sure, I guess.

(Mitt Romney has pledged to eliminate this burden, shifting it from billionheirs to the less affluent. How can he possibly justify this? The jaw drops in disbelief.)

But for now, only the first $5 million or so of an estate passes tax free, and after that Uncle Sam does indeed get nearly half to help pay for all the things in his budget.

Is there too much spending in that budget? Perhaps. Maybe we don’t need such a large army, maybe we don’t need to honor our debt obligations or issue the Social Security checks people have been promised – but that’s a different topic. Whatever our elected officials obligate us to spend needs to be paid for, either with taxes or borrowed funds. And no matter what kind of budget you would write, if you were Congress, it would require tax revenue.

So the question is: since we need taxes, on whom should we levy them (and for whom should we lower them)? The Romney answer, when Bain and others were lobbying for the 15% rate on hedge fund managers, was: cut taxes on rich hedge fund managers and shift that cost to everyone else. The broader Republican answer has been: cut taxes drastically for the rich – lowering the tax on dividends from 39.6% to 15% and on capital gains from 20% to 15% (Newt would lower them to zero) – and make up the difference by shifting that burden to everyone else (whether via higher taxes, reduced benefits, crumbling infrastructure, or accumulated debt). I can see why some rich people would favor that – but why would anyone else?