The Country Thinker

There ain’t much left when the tax man is done…

Thoughts on Economics

Last week my blog­ging col­league John Galt at Rob­bing Amer­ica Chron­i­cle pub­lished the out­stand­ing piece below that I have repub­lished with his per­mis­sion. I say it is out­stand­ing because it reflects a far more nuanced and sophis­ti­cated under­stand­ing of tax­a­tion in Amer­ica than the paper-​​thin under­stand­ing of the likes of Newt Gin­grich and Barack Obama. (See my arti­cle from Mon­day on the absurd pro­posed “Buf­fett Rule” leg­is­la­tion or my piece where I show how the aver­age Ohio fam­ily has an effec­tive tax rate of 70–80%.) Until we start think­ing about tax­a­tion like adults we won’t have adult-​​level dis­cus­sions about taxes and their role in our soci­ety. Given that our nation is effec­tively bank­rupt, that’s a seri­ous problem.

Any­how, here’s John Galt’s article:

Much is being made of the announced tax rate paid by Repub­li­can can­di­date Mitt Rom­ney. The lib­eral attack, as well as the Repub­li­can pop­ulist attack of Newt Gin­grich, is hyp­o­crit­i­cal to the extreme. First, they know very well that this rate of 15% can­not be com­pared to earned income rates sim­ply because Mr. Rom­ney had no earned income. This is a rate paid on invest­ment income. Sec­ond, they know that this invest­ment income already paid taxes when it was earned, and that the tax rate in the cor­po­ra­tions that earned it was 35% (by the way, the high­est in the world tied with Japan). Be aware that this cap­i­tal is being taxed twice. Let us repeat it—all together Mr. Gingrich—“Mr. Romney’s earned cap­i­tal is being taxed two times.” Yes, as in twice.

We cal­cu­late that the total tax­a­tion rate of Mr. Rom­ney, includ­ing the orig­i­nal tax paid when the income was earned, plus the present tax­a­tion on invest­ment income, plus his per­sonal State income tax and sales tax, was a total of a lit­tle over 56%. And that is not count­ing myr­iad other hid­den taxes along the route.

This kind of incom­pre­hen­sion about the Amer­i­can tax sys­tem and its manip­u­la­tion for polit­i­cal pur­poses is the main obsta­cle stand­ing on the way for cre­at­ing eco­nomic growth. Now should be a great oppor­tu­nity to shine the light of tax reform pro­pos­als, includ­ing spe­cially those that sug­gest a sim­pli­fied flat tax in replace­ment of the con­vo­luted sys­tem we have now, and one that will allow more Amer­i­cans to par­tic­i­pate in pay­ing taxes, regard­less of how lit­tle they would pay. The real prob­lem of the Amer­i­can tax sys­tem is not whether some­body like Mr. Rom­ney paid enough taxes—even though he actu­ally paid more than his “fair” share—but whether it is “fair” that 50% of Amer­i­cans pay no taxes at all.

End Note:

The last asser­tion that 50% of Amer­i­cans pay no taxes at all is both true and false. No Amer­i­cans pay “no taxes.” But, nearly 50% of Amer­i­cans receive more in direct ben­e­fits than they pay out, so on net they do not pay taxes. Many are neg­a­tive tax­pay­ers, receiv­ing cash from the gov­ern­ment (tax cred­its in the form of an annual check), as well as goods and ser­vices includ­ing food, hous­ing, and med­ical care. Indeed, for those truly liv­ing on the dole, their effec­tive tax rate approaches –100%, if you can com­pre­hend such an abstract concept.

Once you cross the thresh­old into payer sta­tus, how­ever, the tax­man cometh and he cometh on strong. Hence a “mid­dle class” Ohio fam­ily ends up pay­ing the effec­tive tax rate of 70–80% that I eluded to above.