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Tuesday, September 20, 2011

Governor Romney and Taxes on Capital

Republican presidential candidate Mitt Romney is sending mixed signals on capital gains taxes.

Many of us realize Mr. Romney's troubles on the issue of health care. Specifically, RomneyCare passed while governor of Massachusetts, which included an individual mandate, a state insurance exchange, expanded government and higher costs.

But it's not just the health care issue that presents problems for Romney. Capital gains taxes are another challenge.

On the corporate side, Romney's recently released economic plan calls for cutting the corporate income tax rate to 25 percent. That's a positive step in making the U.S. corporate tax code more competitive internationally. And since the same rate applies, the corporate capital gains tax rate also would fall to 25 percent.

In terms of the individual income tax, which is paid by most businesses (for example, as sole proprietorships, partnerships, S Corps and LLCs), the Romney plan pledges to leave the current tax rates in effect, but only offers a vague promise of tax reform some time in the future. That means most businesses would not experience tax increases as proposed by President Obama. But the Romney plan also offers nothing in terms of income tax relief for small firms.

As for individual capital gains, the Romney economic plan says: "Mitt Romney will seek to make permanent the lower tax rates for investment income put in place by President Bush. Another step in the right direction would be a Middle-Class Tax Savings Plan that would enable most Americans to save more for retirement. As president, Romney will seek to eliminate taxation on capital gains, dividends, and interest for any taxpayer with an adjusted gross income of under $200,000, helping Americans to prepare for retirement and enjoy the freedom that accompanies financial security. This would encourage more Americans to save and to invest for the long-term, which would in turn free up capital for investment flowing back into the economy and helping to facilitate economic growth."

The Romney plan gets it right in that eliminating taxes on capital would boost incentives saving and investment. He should have added that it would be a big plus for entrepreneurship.

But there's a glaring question here: Why does the Romney plan only eliminate taxes on capital gains, dividends and interest for those earning under $200,000?

After all, it makes economic sense to eliminate such levies on upper-income earners as well, given that they would have expanded resources and incentives to take the risks - i.e., starting up, building and investing in businesses - that drive innovation, economic growth and job creation. There's no getting around the reality that these upper-income earners have the greatest ability to invest and aid the economy.

Of course, one could always say that at least his current plan is far better than what he favored during his losing 1994 Senate race against Ted Kennedy. In an October 28, 1994, story ("The 1994 Campaign: Massachusetts") covering a debate between Romney and Kennedy, New York Times reporter Adam Clymer noted: "Mr. Romney shifted on one issue tonight, saying he now opposed longstanding Republican proposals to reduce the Federal tax on capital gains."

At that time, the top individual capital gains tax rate stood at 28 percent, which was 87 percent higher than today's rate of 15 percent.

Let's hope that Romney has truly left that kind of thinking behind on capital gains taxes. He now wants to make permanent the top capital gains tax rate of 15 percent, as opposed to President Obama, for example, who wants to hike the top rate on upper-income earners to 20 percent - though he, too, has toyed with the idea of pushing the rate up to 28 percent.

The President, of course, is known for playing the class warfare game with tax policy. While clearly an improvement over what the President wants, by calling for eliminating capital gains, dividends and interest taxes on certain levels of income but not for those earning more than $200,000, Mr. Romney is flirting with, and in a real sense validating, class warfare tax policy. After all, sound economics, again, dictates that the biggest impact on the economy would come by eliminating all capital gains taxes, thereby making the U.S. a global magnet for attracting innovation-driving, economic-growth-enhancing and employment-boosting capital. The only reason to maintain destructive taxes on higher incomes, while eliminating such levels for everyone else, is all about politics.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

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