A speech on taxes that would help Romney’s run

January 19, 2012

By Daniel Indiviglio

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The following is an imagined speech that Mitt Romney could deliver to handle attacks on his private equity background and low personal tax rate while simultaneously appealing to moderate U.S. voters to help his run for the White House.

Today, I have released my 2011 tax return for my opponents to scrutinize. This disclosure marks a perfect opportunity to explain a big portion of my tax policy and why it’s better than the president’s.

Some on the left will criticize the 15 percent rate I have paid, due in large part to retirement earnings from my time working in private equity. They’ll say it’s unfair that investment managers can sometimes qualify to pay the relatively low capital gains tax rate on their compensation through a loophole called “carried interest.” To those critics, I say: I agree.

This area of tax policy, like many others, demands reform. When investment managers are paid based on the return earned on capital invested by clients, rather than themselves, then that compensation should be taxed as regular income. This would raise my tax rate much closer to the top income bracket of 35 percent.

Eliminating the carried interest exemption won’t have any detrimental effects on economic growth. Careers in private equity will still be plenty attractive. Best of all, it won’t in the least deter Americans from investing in jobs or good ideas.

A more important pillar of my position on taxes relates to other forms of capital gains. Low rates on such income do encourage investment. That’s why I would leave the current rates in place for wealthier Americans. But I would eliminate the tax entirely for everybody else.

This wrinkle makes my policy more appealing than President Obama’s. He wants to raise your taxes broadly in a misguided attempt to grow our government. Instead, it will inhibit businesses big and small from investing in new machinery and hiring more employees.

Allowing the middle class to keep more of their investment income will have the opposite effect. And eliminating the carried interest exemption would raise taxes on only those privileged enough to have created enormous wealth by investing in this great country of ours.

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Low taxes on capital gains do not encourage investments. Reagan proved that with the 1986 Act when it equalized the tax rates for capital gains and ordinary income. The real justification for taxing investment income at lower rates than other forms of income is that those earning it contribute generously to campaigns.

The most common form of capital gain for the bottom 99% is from selling their house. The first $500,000 of gain already is exempt from tax. Few of the bottom 99% earn capital gains, anyways. FactCheck.org noted that over 80% of capital gains inured to and were realized by those earning $200,000+. See http://www.factcheck.org/2008/04/impact- of-capital-gains-tax-on-the-middle-class  /. Thus, saying you’ll eliminate capital gains taxes for the bottom 99% is a throwaway line.

And if this were done, it is inevitable that we would immediately see political pressure, backed by massive campaign contributions and “studies” from marketing shops masquerading as “think tanks”, to raise the threshold for taxing capital gains. And President Romney would support it.

Further, to the extent the Internal Revenue Code treatment of income creates incentives or disincentives, then taxing salaries and wages at higher rates than capital gains punishes working for a living. One need not ask whether that is sound policy.

BTW, Warren Buffet once proposed imposing a surcharge on short-term capital gains to discourage speculation. I suspect that short-term for Mr. Buffet is less than 10 years.

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