Saturday, February 25, 2012

A Tale of Two Romneys

After a lively class discussion regarding Wynton Marsalis' "Supercapitalism" and the idea of American society as a construction, I heard a fascinating piece on the radio about current Republican frontrunner Mitt Romney and his father, George, the former governor of Michigan.

While the younger Romney has recently received quite a bit of attention over his current tax rate (13.9%), it's instructive to consider why his rate is what it is, and how our government can often pick winners and losers simply by constructing policies, laws, and regulations that reward some Americans and shortchange others.

For example, although Mitt has publicly released one year of his tax returns, his father, in an effort to be completely transparent, released twelve years of records, giving us an insight on how tax policies change over time. I have to say I was a bit shocked to discover that George Romney paid anywhere from two to three times the tax rate of his son, topping out at 44% (back in 1963).

Why was this the case?

Be patient with me here. One reason is a difference in what is called the "top marginal tax rate". In the 1950s, the tax rate was as high as 91%, while by the Lyndon Johnson 1960s, it had dropped to 70%. By the 1970s, it was 50%, and under Reagan in the 1980s, it was set just under 30%.

Yet another reason has to do with how people earn their income. While most Americans draw their income from a paycheck, far fewer citizens (like Mitt Romney) earn money primarily via investments ("capital gains"). The latter source of income has also seen a major change in how it is taxed by the IRS. At one point in our history, regular income tax rates and capital gains tax rates were equal, but no longer: today, the latter is taxed at just half of the top marginal tax rate (15% vs 30%).

Are you still with me after all of that economic blather? Why does the government construct policies that reward some hard-working Americans over others? Does that seem democratic to you?

9 comments:

Jon said...

After listening to the piece, the only word that could come to mind was "successful." The piece talks about how earlier in the 20th century, most Americans seemed to understand the need for a larger government hand in private interactions and were accepting of tax rates that went as high as NINETY percent of income. This reality would soon subside, but I would make the argument that the reason people were so accepting of it would be because of social projects and their successes after the great depression in the 1920's.

To get back to the idea of success, Mitt continually seems to defend his wealth as though people are attacking him because he has been able to play the system and benefit extremely well from it. He seems to be disregarding, though, a large part of the criticism that is being directed towards him; it is not that he is successful, it is that he is gaming the system, and at such a disparate rate to the majority of Americans that no one can keep up.

It is key to keep in mind what Mr. Bolos and Mr. O'Connor were talking about in class the other day; in order to change the system significantly, only very minor changes (relatively) have to be taken. It is a general view that a recession is caused by under-consumption and over-investment, and in a society that, since Bill Clinton (and magnified by George Bush) has started to heavily favor capital gains for profit, it seems evident that we are setting the stage for another Great Depression-like scenario.

There are flaws in the system that are not based on an individual's success - they are based on the overall disparity between the classes. When Mitt Romney is accused individually for being "too successful" and responds as he does, the major point of the criticism is being disregarded.

It's not about you, Mitt, its about what you represent, and what type of a construction the America you envision is.

Ross W. said...

The lower tax rate on capital gains is supposedly a way to encourage risk taking and entrepreneurship that contributes to our capitalist economy. However, this policy is much more beneficial to the wealthy people (who have the money to invest) than the poor (who typically rely solely on income from their job and don't have as much money to invest). Therefore, I believe this was a policy constructed by wealthy people who have a large influence in the government, and it does not seem democratic to me because it is often used by rich people as a way around having to pay high tax rates, and the poor people can't take as much advantage of this policy.

Hayley B said...

I think that one of the most interesting parts of the marginal tax rate/capital gains debacle (or situation, which ever you prefer) is what I see as the contradiction between a lower capital gains tax and the majority of Republican rhetoric. I typically here constant calls for "free market capitalism," a sort of utopic completely fair system where you get out what you put in and everyone has a chance. And while obviously there are myriad factors that prevent this, arguments for having the rich not pay much more than the poor seem to at least somewhat seem like they make sense. The idea that people shouldn't be punished for doing well, is fairly in line with this rhetoric. But offering lower tax rates on capital gains just seems like unfair government meddling and an even more confusing tax system, which requires more government. So I wonder if there is any argument for these lower capital gains rates that jives more with the republican rhetoric. I so far have encountered the argument which Ross spoke of, the encouraging risk taking, but it doesn't quite satisfy me. I also know that the motivations behind the lower rate are most likely a lot less ideological and a lot more pocket-book orienting, but I am wondering how it has been framed.

David K. said...

I think that the capital gains tax should be the same as the income tax. Ideally, I'd like to get rid of both of them (and cut government drastically), but in the system that we have today, I do think that capital gains should be taxed at the same rate.

I would like to address the comment that Jon made though. Although taxes were at ninety percent for the top income bracket at one point, NOBODY paid those kinds of taxes. There were many more loopholes and deductions than we have today. I mean, could you imagine somebody working for 10 cents of every dollar? Nobody would do that. And as the history of tax revenues has proven, even at times of higher taxes, the overall revenue has stayed about the same (at approximately 18-20%), so I don't see any reason to disincentivize economic growth if the overall revenue will remain stagnant.

Also, to address Jon's third paragraph, I'd like to say that although recessions/depressions are in fact generally caused by over investment (along with some over consumption, depending on the situation), the reason we have so much malinvestment can be placed squarely on the Federal Reserve's shoulders. Is it any surprise that such low interest rates spur so much overinvestment? Under a free market, investment is a good thing, and if we are in fact setting the stage for a depression-like scenario as Jon put it, it's not because of low capital gains taxes, but rather artificially low interest rates by the Federal Reserve.

Jon said...

I want to say I love the back and forth here - and if any of you would like to read more of it between David and I - check out my blog posts - pretty much any of them about capitalism #shamelessadvertising

I think that a recent article written by Elliot Spitzer sums up my beliefs on this question pretty well: on the US tax code, he says "Never has so much been done by so many for so few who need so little."

On a philosophical level - I disagree with the idea that the taxes should be the same - in the abstract - but if Capital gains were to be considered "income" and taxed at the same level - I believe a progressive tax rate would be necessary.

The argument that I will make for this is that the aim of society should be to "maximize the well being of the least well off members of society" as my boy John Rawls puts it, and that the progressive tax would only limit itself at the point that its marginal returns started to disincentivize work at the industrial level.

On the economic level - it seems that you have double turned yourself - as history has proven through both times of high and low capital gains rates that it has not been a disincentive to job creation and the "trickle-down" effect to increase the gains rate.

This is proved by the reports that have been done by Citizens for Tax Justice - you should look these up - they are extremely interesting and pretty conclusive on this question.

The last point. There is no counter-evidence to this - that is the problem to your argument, that however righteous you may sound making it, and however persuasive the argument is that government taxation is coercion - it is entirely empirically dis-proven that anything you advocate for in that sense (in the most extreme sense of course) is possible.

Matt R. said...

From what I've heard of the controversy over Mitt Romney's tax returns, my general observations are that I see both sides on this issue, yet I question some of Mitt Romney's defense tactics about this issue and I question our economic system as a result of the controversies that have been brought to light.

I've heard Romney claim that all of the money he made off capital gains was hard-earned and that he deserved every red-cent of his income. Although my knowledge of the stock market is limited, I do not presume that investing in the stock market involves a lot of exhausting labor or really hard work. Perhaps there is more to it than people assume, though, I'm not sure.

No matter how Mitt chooses to defend himself in the hot seat, his critics feel cheated by his wealth off of capital gains, but there doesn't seem to be anything ethically or morally wrong here. Sure, he isn't a blue collar "Joe the Plumber", but what presidential candidate is? It's hard to find nowadays when campaigning costs a legitimate fortune. Therefore, instead of criticizing Romney himself (he's truly just a guy that knows the economic system and utilized to his benefit), it is more logical in my mind to criticize the system itself, like Mr. Bolos touches upon at the end of the post.

I am no economist nor would I even call myself a citizen well-versed in the economy's workings, but it seems wrong that someone like Romney should be SO far ahead of everyone else due to tax policies. Maybe it could be logical to keep a low tax rate on capital gains so that people invest in the economy, but after they make a certain quota of money, their tax rate increases by some amount...If someone who knows more about economics and tax policy would like to either agree or disagree with that proposition, or make their own proposition, that would be an insightful addition to this conversation.

Betsy P said...

Building off of Jon's excellent point, "It's not about you, mitt, its about what you represent"--the criticism surrounding Mitt's tax rate runs much deeper than 13.9%; it's rooted by what these numbers "represent”: a broken system.

A system that has been constructed to allow the "rich get richer" and leave the rest of America behind. A system, according to NPR, has reshaped the US economy, giving finance (not industry) the greatest advantage—and power.

Before our discussion I didn't know much about the American tax code, and although I my thoughts may not express as much depth as some of the earlier comments, I realize it's more important to analyze what the numbers "represent" rather than the numbers themselves.

So in response to the original questions, I believe our current tax code has become the way it is because it has constructed a cycle. Much like how the “prison-industrial complex” developed into a self-perpetuating system of problems, I believe the current tax code has created a cycle of rich individuals with power. Think about it: if the majority of the economic policies are only benefiting the rich, only a small sector of society receives the highest levels of income, education and positions in (political) power. It’s self-perpetuating in that once new positions in power become available, often these positions are taken by the individuals who benefit from the system-–causing the cycle (and government policies) to continue. How do we break this undemocratic (narrowed) cycle of American leaders? By reconstructing the government polices that began this vicious cycle. In regards to WHO can look beyond the numbers and leads this reconstruction--will become clear as the campaigns continue.

David K. said...

Jon - I think I addressed just about all of what you said in the comments section of your blog. However, I do find it astonishing that although you claim to have the "empirical evidence" on your side (which you haven't at all presented), you left out even a single mention of the Federal Reserve in talking about the reason we have booms and busts in the economy. I'd say if you want to get down to it, the empirical evidence is on my side, and the fact that you left out the main point of my comment is perplexing, to say the least.

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