The Romney Tax Rate Scandal

When Republican presidential candidate Mitt Romney casually estimated that his effective tax rate is around 15 percent, progressives immediately pounced on the issue. To this ideological minority with its Ahab-like obsession on class warfare, a rich American paying an effective tax rate of “only” 15 percent is, a priori, a scandal of the first order.

Yes, this story is a scandal (actually, a series of scandals) but not the one that progressives think it is.

It is scandalous that so many journalists and commentators have gotten their basic facts wrong. They have conflated average “effective” tax rates with statutory rates. Under our complex and convoluted tax code, no American pays an effective rate that is as high as his top marginal rate (the statutory rate on the last dollar of income). As it turns out, Romney’s effective tax rate of 15 percent is higher than the effective tax rate of approximately 97 percent of taxpayers.

An even greater scandal is that Romney’s tax rate is as high as it is. Most of Romney’s income comes from his investments, i.e., from capital. Of course, those still influenced by the defunct labor theory of value and Marxian class envy think that taxing capital makes sense. They deride investment income as “unearned” income, as if capital doesn’t contribute anything of value to economic production, when, in fact, we owe our wealth almost entirely to capital.

Capital, far from being the cruel exploiter of labor, is labor’s major benefactor. Human labor and natural resources are found around the world, but the rich countries are the ones in which the productivity of human labor (and therefore wages and standards of living) have been multiplied by capital.

Americans’ relatively high standard of living exists because, according to the opponents of capitalism, greedy capitalists have “exploited” us more than people in poor countries. Well, we should be thankful for this type of so-called “exploitation.” Taxing capital diminishes its supply, thereby crimping labor’s productivity and lowering workers’ standards of living. Any tax on capital above zero percent is scandalously stupid and perversely anti-labor.

A third scandalous aspect of the Romney tax-rate story is that the very people making the tired, tedious complaints that America’s income tax code is “unfair” are those who are primarily responsible for the unfairness. Fairness, or justice, means equal treatment before the law. In taxation, that presents two options: Either tax everyone the same amount or tax everyone at the same percentage rate. There is no principle that defines the “right” degree of progressivity in tax rates; such rates are essentially arbitrary, determined by who holds political power—a “might makes right” calculus devoid of ethical content.

Finally, the most egregious scandal in the story about Mitt Romney’s tax rate is that the discussion about taxation is distracting us from what is, by far, the major problem our elected officials in Washington need to address: out-of-control federal spending. Granted, a flat tax, if not a consumption tax, would be a huge improvement over the current monstrosity that is our 72,000-plus-page tax code. However, we can survive our flawed tax code for decades, whereas runaway federal spending threatens our country’s financial viability in the short run.

Uncle Sam is racing toward a fiscal train wreck that requires a massive cutback of the 75-percent increase in federal spending that has been added over the past dozen years, but neither party is talking along those lines. The Republicans are willing to trim around the edges, whereas the Democrats are digging in their heels against even those token cuts.

Here’s an experiment you can try: Ask any candidate running for federal office this year how he or she would cut $1 trillion in spending. They won’t have a clue. That’s the real scandal of Election Year 2012.

 

Mark W. Hendrickson

By

Dr. Mark W. Hendrickson is an adjunct faculty member, economist, and fellow for economic and social policy with The Center for Vision & Values at Grove City College.

  • pammie

    “Here’s an experiment you can try: Ask any candidate running for federal office this year how he or she would cut $1 trillion in spending”

    Ask “zany” Ron Paul. He’s had the numbers and possesses the character to do it and he is a candidate. He hasnt been bought out by special interests and he’s never been a lobbyist himself. I can see why our elites dont want him.

  • Sarto

    A flat tax would be a tremendous boon to the richest among us. The Republican Catholic (in that order) Magazine checks in again.

  • Cord Hamrick

    Sarto:

    A flat tax (coupled with a stable currency and balanced budgets) would be an even bigger boon to the poorest among us.

    The conservative (I know nothing about “Republican”; I can never tell what political philosophy that party follows) and libertarian observation about political economics — and it is a true observation — is that incentives matter, even perverse ones.

    The progressive taxation system and the welfare state as they currently exist create perverse incentives which alter marginal human behavior in a fashion which creates and perpetuates poverty.

    To put it more bluntly: Had the New Deal and the Great Society programs never happened, and had America been governed in a constitutional and economically liberal (in the original sense of the word) fashion instead, the poorest 1/3rd of Americans would currently have a much more secure and prosperous lifestyle than they do now. They would especially have more savings, better education, more upward mobility.

    That is why a Catholic who believes in the obligation of a Christian to help the poor should never vote for leftists. The Preferential Option For The Poor makes such an opposition unthinkable: A Christian ought never to stab his poor neighbors (or himself, if he is poor) in the back that way.

  • Cord Hamrick

    Addendum:

    This reality (described above) is also relevant to the charitable giving habits of Americans.

    The more conservative a person is, the more his actions tend to exhibit care for the poor. This is measurable statistical fact: Conservatives in the U.S. give more of their annual income (both in actual dollars, and as a percentage) to the poor every year than left/progressives do. In fact, folks who lean right give about double what folks who lean left give. This is true at every income level, from the lowest-income quintile to the highest-income quintile. They also volunteer their time more, give blood more often, and are more likely to serve in low-paid community-serving occupations such as firefighter, policeman, emergency medical technician, or in the armed forces.

    In short, they care more.

    There are, of course exceptions. If I work hard enough at it, can track down a conservative who never gave a dime, and a left-liberal who sold all they had and gave it all to the poor.

    But society wide, that’s not the norm. The norm is that if you’re needy, and you have two equally well-heeled neighbors whom you plan to hit up for assistance, and one voted for Gore, Kerry, and Obama, and the other for Bush, Bush, and…okay, that’s maybe not a good test of conservatism. Let’s say one of them’s favorite Supreme Court Justice is Ginsberg, and the other is Thomas. The statistical norm is that the Ginsberg-lover will give you half what the Thomas lover will.

    Why, then, are conservatives painted as hating the poor, when all the evidence shows otherwise?

    Easy: For the same reason the Nazis depicted the Jews as subhuman. It’s nice to have a big political advantage, and sometimes the bigger the lie, the more people you can get to believe it.

  • Carl

    In case some people need a visual:

     

    45,000 Secretary Gross income

    -5,000 IRA, 401k, other tax shelter deduction

    -11,100 Exemptions for family of three

    -11,600 Standard Deduction Married

    17,300 Taxable income

    17,300 X 15% Marginal rate

    2,595 actual tax paid

    2,595 / 45,000 = 5.7% Effective tax rate

    Less than half of Romney’s Effective tax rate

     

    The average middle class pay about 8% Effective tax rate—
    a little more than half of Evil Rich Romney’s rate!

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