Romney Must Turn His Tax Rate Into Teachable Moment

Many Americans probably don’t know this, but not all taxes are created equal.  There’s a reason for this: the less society understands about our tax code, the better it is for Democrats.  

The hapless Republicans haven’t seemed to catch on that Americans have suffered long enough now to need (and I would wager want) a financial education.  For example there’s a difference, and an important reason for the difference, between the income tax and the capital gains tax.  Paying much better attention these days, many people still don’t know this, yet they need to understand it.

It’s particularly important for Governor Romney that they do, because this is at the heart of yet another ginned-up attack on him by the ever-so-principled Mr. Obama. As long as people are ignorant of how and why our tax system works, the more successful our president will be in misleading the public about why Mitt Romney paid a lesser tax rate last year than the average secretary. (That Mr. Obama also paid a lesser tax rate than his own secretary seems not to be a consideration in his attack on the Governor.)

Governor Romney needs to step forward confidently as he releases other tax documents and explain to us that his tax rate was relatively lower because he paid at the capital gains tax rate.  Income tax is levied on a person’s income, whereas a capital gains tax is usually a tax imposed on the profit made, if any, on stock transactions. If a person buys and sells stocks and is able to turn a profit, the person is taxed on those earnings, though typically at a lower rate than if he earned the money as income.

This is for good reason.  In order to make money off of capital gains, you’ve already done two things: firstly, you’ve already been highly taxed on that money when you earned it originally as income, and secondly, you’re investing it back into society when you invest in the stock market.  Those investments help companies to grow, and growing companies mean more jobs for more people.

In real American life, as opposed to Obama’s utopia, we want to encourage investment.  Investment is how companies get off the ground; it’s how companies evolve from a notion in an entrepreneur’s brain into Staples or Domino’s or another household name.  So what we’ve done to encourage investment is that we tax capital gains at a lower rate than the income tax.  This way, the risk is reasonable for investors, and thus they keep putting their cash on the line.  

If we increased the capital gains tax rate, it would drastically alter the calculations investors make before they risk their money.  All of a sudden, they’d need to expect a much higher return on their investment because they’ll have to pay that much more in taxes if they manage to turn a profit.  So, the risk becomes significantly greater.  That means, if the capital gains tax rate gets too high, investment dries up, and so does innovation, hiring, raises, expansion and so forth.  The economy grinds to a halt.

Bottom line? People lose jobs.

Furthermore, investment capital was once income, meaning the investor had to earn the money as income and was taxed on it at the standard rate.  While an investor doesn’t get any money back if his investment doesn’t succeed, he does get taxed on his earnings if he manages to turn a profit.  So essentially, the capital gains tax is a double tax for those people willing to risk their money to help grow other companies through what they hope is a wise investment.

This all should be very straightforward.  However, it has become a major stumbling block for the Romney campaign because Mr. Obama has accused the Governor of not paying his “fair share.” To further pummel Governor Romney on this specious charge, Obama has demanded that the Governor release a mountain of tax returns in the hopes that he can make matters worse for the Governor.

The presumptive Republican nominee and his wife Ann earned roughly $21.7M dollars in 2010 and paid about $3M in taxes (or 13.9%), about the same rate as someone who earns $50k in income.  How can this be?  It’s because the Romneys earned the vast majority as capital gains, not as salary.  They put their money into other companies which helped them grow and provide more jobs, and in the hopes that they too would benefit from the success of the companies they helped. 

If the companies had failed, the Romneys would have lost their investment dollars, but they were willing to risk this, as all investors do who believe in the American economic model – capitalism. Yet the Obama administration, the mainstream media, and the rest of the left have used Governor Romney’s mutually beneficial contribution to the economy – the same investments that the majority of Americans themselves make – against him.

Although the Obama economy has destroyed investments (and jobs) across the board – in housing, real estate and the stock market – Wall Street, in particular, has seen less people invest than historically.  What are the implications of this? According to Gallup Economy:

“Even as stocks have surged over the past couple of years, it has been hard for most Americans to understand what is happening on Wall Street and why, leaving them hesitant to invest in the stock market.”

For this reason, among others unpleasant ones, less people are now investing in the stock market than they did before. In fact, stock ownership has gone down since 2007 when 65% of Americans owned stock; it is now 54%.

Needing to have more people invest in the stock market, the Obama nit-wits, employing their trademark dumb tenacity, attempted to fix this with their usual mindless, Draconian regulations. What Wall Street needed were sensible reforms, certainly not what the Democrats produced – the Dodd-Frank Wall Street Reform and Consumer Protection Act – whose hugely negative impact extends way beyond just Wall Street. On top of that, Obama attacked Governor Romney for his perfectly normal behavior that the majority of Americans also do (and which our economy needs them to do): make truly helpful investments where they can.

Romney’s success makes him a role model for all Americans. In fact, his success could turn out to be one of his greatest assets. Yet the Romney campaign hasn’t done a very good job parrying the Obama attack.  He should clearly explain the capital gains tax, why the rate is typically lower than the income tax rate, and why it was so important that he, and anyone else who can, invest his money back into the American economy.  He put his money to use for everyone’s benefit – his family’s, the companies’, the companies’ employees, and society at large.  This process is what the American economic model is all about, and it represents American teamwork at its best.

An entrepreneurial society thrives on investor dollars to help their companies grow, so it is of vital importance that those who can, do.  Bigger companies mean more jobs. The last thing we need in this economy is to encourage the investing class to be stingy with their money, yet that’s exactly what Mr. Obama advocates, since he chastises Governor Romney for having done so and for having benefited from it personally as well.  Horrors.

Governor Romney probably paid around 40% in taxes when he first earned his capital. With what capital he had left after the tax man took 40%, it was taxed another 14% when he turned a profit on it.  That’s a heckuva lot of taxes.  Still, the Romney campaign is acting as if he really did commit a shameful act, when it was anything but.  This is the exact wrong approach. 

The good Governor ought to use the left’s war on the investing class, i.e., most Americans, as an opportunity to educate the voting public on the American financial system.  Governor Romney played that system exactly as it ought to be played: in a way that benefits ALL, so he has nothing to hide. This will not only help his campaign, it will help other fiscal conservatives immeasurably and the American public as well. 

Romney ought to explain to voters that the capital gains rate is relatively low for a reason: so that Americans of all financial classes can keep chasing their dreams with the help of people who are priced in at a rate that justifies their crucial investments.

A rising tide, after all, really does lift all boats.