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As pointed out in another diary, Ann Romney is ordering her husband's faithful flock to 'dig deep' like never before. Considering that many of the 53% are still suffering the ravages of the Bush Recession, one wonders how much deeper they can dig the hole left them by Republicans during the past 30 years. That, however, is another tale for another day, as this diary focuses instead on one of those Big Lies frequently told by conservatives.

I'm sure you've heard this one before. Mitt Romney merely repeated one of the standard talking points of the right when he told Scott Pelley the following during their interview on Sunday:

And one of the reasons why the capital gains tax rate is lower is because capital has already been taxed once at the corporate level, as high as 35 percent.
Yes, you've probably heard that one before. But did you know that it is a bald-faced lie? Here's why: Capital is not taxed. Read that statement again if you were too busy spitting out a mouthful of coffee for it to register. What I'm saying is that capital is not taxed in the way Mitt claimed, not at the corporate level, not at 35 percent, not at any percent.

In its simplest form, capital is defined as "financial resources available for use". From a business perspective, this generally refers to cash on hand and the factories, machinery and equipment owned by the business. That capital is used to generate something that IS taxed: Profits.

Income, in other words. Corporate profits (i.e. total earnings less expenses) are taxed because, plain and simple, they are income. Note the distinction. Capital is NOT taxed. Profit IS taxed.

So why did Mitt Romney say capital is taxed? Because he's lying. And also because of a long-standing Republican determination to make business profits untaxable.

Ok, EdG, you're saying. We all know that stocks are capital investments, and stocks are taxed even though you say capital is not taxed. Well, think about that for a minute. When are stocks taxed? Stocks are taxed when they are sold at a PROFIT. In other words, if you're a good investor who buys low and sells high, the income from your stock sale is taxed, although it is taxed at a lower rate (the capital gains rate) than most other types of income.

Let's put this in Mitt Romney terms. Mitt, or his "blind trust", goes to the stock exchange and buys 10,000 shares of Apple Computer at $600 per share, which is an investment of $6,000,000. This six million dollars is NOT taxed, because it is capital. A year later, Mitt sells the stock for $650 per share, realizing a profit of $500,000 less expenses. This five hundred thousand dollars IS taxed, because it is profit. Simple, right? Capital: Not taxed. Profit: Taxed.

Let's look at it another way. Suppose that Apple Computer sells 10,000 shares of stock at $600 each. That is $6,000,000 coming into Apple's hot little hands. Is it taxable? No. It is not taxable because it is not profit. People who purchase Apple shares directly from Apple are essentially loaning money to Apple, in hopes that Apple will invest the money in new products that generate profits (taxable!) that Apple shares with investors through dividend payouts.

On the other hand, Apple Computer does not benefit directly from Mitt Romney type transactions. Shares that are traded on a stock exchange are a sale from one private party to another private party. As noted earlier, any capital gain on that sale is taxable because it is profit to the seller. Apple cannot use that money to invest in products and it has little control over the price of shares sold on the open market.

So where do we stand? Capital is not taxable while profit is. Mitt Romney's income is taxable because it is profit. It has not been taxed at the corporate level, instead it is taxed at the personal capital gains rate paid by Mr. Romney.

And that, of course, raises the question of why Mitt Romney's income is taxed at a lower rate than your income or my income. It is taxed at a lower rate because rich people like Mr. Romney have convinced Congress to treat it as though it is better than your income. Bottom line, though, is that Mitt Romney's income was never "taxed once at the corporate level", so his whole premise is a lie.

Now, I will point out as I conclude this diary that this is a simplified explanation of corporate earnings, capital, stock, Mitt Romney's income, and the other topics discussed herein. I also glossed over stock dividends, which are another matter altogether and can, to some extent, be considered as doubly taxed. But in summary, capital is not taxed while profits are taxed. And anyone who claims otherwise is lying.

Originally posted to edg on Mon Sep 24, 2012 at 12:56 PM PDT.

Also republished by Community Manifesto Initiative and Community Spotlight.

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Comment Preferences

  •  edg - there were two other diaries on this topic (6+ / 0-)

    earlier today. You would find the comments interesting.

    "let's talk about that"

    by VClib on Mon Sep 24, 2012 at 12:58:44 PM PDT

  •  Thanks very much, this was clear enough (7+ / 0-)

    even for me.

    "I'll be more enthusiastic about encouraging thinking outside the box when there's evidence of any thinking going on inside it." Terry Pratchett

    by kiwiheart on Mon Sep 24, 2012 at 06:06:06 PM PDT

  •  hard to differentiate (9+ / 0-)

    It gets real hard to tell the difference between capital gains and income.  We had that problem here in Canada before.  

    Say for example you buy and sell houses.  Are you an investor or buying and selling for income?  Here it came to be determined if you held it a long time and or if you were doing it as a trade. The classic definition was capital gain was made from a long term investment - owning an income property for 20 years, say.

    The reasons why the GOP keeps crying for no tax on capital gain is it would mean there would be very little business tax.

    Have a profit? Declare it as capital gain.  Try to push the money around the world or divisions so it ends up as being called capital.

    The best solution is to tax everything the same.  Income or capital gains would be at the same level.

    "The only person sure of himself is the man who wishes to leave things as they are, and he dreams of an impossibility" -George M. Wrong.

    by statsone on Mon Sep 24, 2012 at 06:15:41 PM PDT

    •  statsone -- some answers (0+ / 0-)

      If you buy a house for your personal principal residence here in the US, you can deduct the first $250,000 gain on its sale ($500,000 for a couple), and you pay tax on the excess gain over the amount deducted, if any.  You can do this for each house you buy, but you have to claim it as your principal residence for 2 of the last 5 years before the sale.

      If you buy the property as an investor, there is no $250,000 deduction.  However, you can engage in what is called a 1031 transaction, in which case you can postpone paying any tax on gains as long as the money stays invested.

      Actually, there are valid reasons for capitals gains taxes, but there needs to be better enforcement, and better laws to prevent chicanery or misapplication of capital gains.

      "The battle, sir, is not to the strong alone; it is to the vigilant, the active, the brave." -- Patrick Henry November 6, 2012 MA-4 I am voting for my friends Barry, Liz and Joe (Obama, Warren and Kennedy)

      by BornDuringWWII on Tue Sep 25, 2012 at 01:02:02 PM PDT

      [ Parent ]

  •  Don't Tax Me Bro! (3+ / 0-)
    Recommended by:
    TX Freethinker, kurt, bontemps2012

    Please provide some proof that the capital gains that Mitt and his family live on, regardless of the tax rate he pays, are building a business, or creating jobs.

  •  I also think (3+ / 0-)
    Recommended by:
    bontemps2012, Inland, jrooth

    That Romney is conflating (whether deliberately or because he doesn't know, the first being more likely) capital gains with dividends. For a while (President Bush 43 expressed this and probably did not start with him) it has been called double taxation that profits are taxed and then the company gives out dividends which are taxed again.

  •  Wow. (2+ / 0-)
    Recommended by:
    susanWAstate, bontemps2012

    Never got that before.  I can't believe they get away with saying it.

    The "invisible hand" doesn't regulate the market - it wanks it. -- SantaFeMarie

    by Dinclusin on Mon Sep 24, 2012 at 07:49:21 PM PDT

  •  These people don't think they should pay any taxes (2+ / 0-)
    Recommended by:
    kurt, bontemps2012

    ... At all, ever.

  •  Couldn't Agree More (4+ / 0-)
    Recommended by:
    kurt, ybruti, shypuffadder, deweyrose

    A State divided into a small number of rich and a large number of poor will always develop a government manipulated by the rich to protect the amenities represented by their property.” Harold Laski, British political theorist (1893-1950).

    Amenities, like car elevators and offshore bank accounts and tax dodging loopholes.

  •  Actually, it isn't that simple... (3+ / 0-)
    Recommended by:
    Sylv, robizio, jrooth

    There are two ways that the value of a company can go up and down...

    1.  The company makes a profit.  When this happens, the income is taxed and the profit is either distributed as dividends or retained in the company as "retained earnings".   When retained, it increases the value of the company.  Thus, an increase in value due to accumulated profits HAS been taxed at the corporate level.  However, if I earn money and pay my tax on it, then transfer the money to a local retailer, they have to pay a tax on it as their income.   In other words, money gets taxed coming and going all the time.  

    2.  The value of the company in the stock market changes independently from the profits recorded by the company.  This has nothing whatsoever to do with profits (except to the extent that they influence the way investors see the company and its future potential) and has never been taxed.  

    This is why they get away with the argument.  

    But Mitt's primary argument - that it spurs the economy - has been proven wrong in studies.  You do have to have money available for investment but right now companies are sitting on huge reserves of cash and no amount of tax cuts for the wealthy will have any impact on the economy.  You have to have demand for products and services as well as money for investment and that is what we are lacking in today's economy.  Cuts to lower and middle income classes will increase demand which will then spur investment and use up some of those cash reserves.   There are lots of other factors, of course, but this the the main thing that is wrong with the GOP tax cuts crap.

    •  This is the crux (1+ / 0-)
      Recommended by:
      codairem
      However, if I earn money and pay my tax on it, then transfer the money to a local retailer, they have to pay a tax on it as their income.   In other words, money gets taxed coming and going all the time.  
      Money gets taxed when it changes hands, because the receiver is getting income.  There is no 'double-tax'.  Investors have to pay taxes on their income, same as employees or vendors do.

      While we're at it, we may as well squash the idea that we need to incentivize people to invest their money with lower tax rates than for ordinary income.  If you could:
      1) work for your income or
      2) have your money generate income
      who's choosing 1) if 2) is an option?  Generating income from investments rather than labor is its own incentive.

      If you want a discussion, please stick to arguing the point. If you wanted something else...please exit the vehicle.

      by robizio on Tue Sep 25, 2012 at 09:47:31 AM PDT

      [ Parent ]

      •  I think the question is actually (1+ / 0-)
        Recommended by:
        jrooth

        If you could:
        1.  invest your money and have it earn income or
        2.  do something with it so that it would not earn income (put it in a jar in the back yard)?

        Fact is rich people will invest what they don't spend no matter what their tax rate.

        Re:  double-tax.  If you have a partnership rather than a corporation the profits "flow through without tax" to the partners and are reported on their 1040 as business income and taxed at the same rate as earned income.   People like Romney would argue that the corporation is actually an entity made up of the shareholders (and thus a "person, my friend") so if it pays taxes on income, the shareholders should not have to pay taxes as well.   He is calling all increases in value of stocks "taxed income" and it simply is not.

  •  One Quible: Property and Business Property Taxes (0+ / 0-)

    are levied on real estate and all manner of furnishings, equipment, vehicles, etc., by cities and counties.

    But this is not the kind of "capital" that Mittens and his Wall Street cronies are concerned with.

    Have you noticed?
    Politicians who promise LESS government
    only deliver BAD government.

    by jjohnjj on Tue Sep 25, 2012 at 10:59:11 AM PDT

  •  EdG, You are focusing on the wrong FACTS!! (2+ / 0-)
    Recommended by:
    jrooth, Russycle

    You are correct that a return of capital is not taxed.

    You are correct that a profit on the sale of stock is taxed, but you did not discuss the difference between:

    short term capital gains (a profit on an investment held LESS that one year) which is taxed as straight income (at the same rate as wages) ,
    and
    long term capital gains (a profit on an investment held MORE that one year) which is taxed at capital gains rates (at a lower tax rate than earned income).

    But even that misses the thing R-MONEY is LYING about.

    Mittens gets paid MOST (the VAST majority) of his "earnings" at capital gains rates because it includes what is referred to as "carried interest," the portion of profits that VC firms retain from the total profits in a fund.  Under present tax law, "carried interest" is treated as "long term capital gains" even when the VC PUT UP NO CAPITAL AT ALL, in which case the VC can't even say he is getting a profit on his capital.

    Scott Pelley interviewed Mitt Romney on “60 Minutes” which was broadcast on September 23, 2012.

    Part of that interview was the following:

    Pelley: Now, you made on your investments, personally, about $20 million last year. And you paid 14 percent in federal taxes. That's the capital gains rate. Is that fair to the guy who makes $50,000 and paid a higher rate than you did?
    Romney: It is a low rate. And one of the reasons why the capital gains tax rate is lower is because capital has already been taxed once at the corporate level, as high as 35 percent.
    Pelley: So you think it is fair?
    Romney: Yeah, I think it's the right way to encourage economic growth, to get people to invest, to start businesses, to put people to work.
    Obviously, Mittens "mis-spoke" by saying "capital is taxed" when he meant to say that "profits has already been taxed once at the corporate level, as high as 35 percent."  But even giving Mittens the benefit of THAT blooper, HE IS STILL LYING, and he knows it.

    Money that is treated as capital gains may not be taxed at all "at the corporate level" if the entity that generated it is a pass through entity which pays ZERO tax, such as a partnership, a limited partnership (LP), a limited liability partnership (LLP), and a limited liability company (LLC).
    In particular, in Mitt Romney’s tax return for 2011, it appears that much of his capital gain income came from LLCs and at least one limited partnership.

    Romney is NOT believable. That is a POLITE way of saying that R-MONEY is an F'ing LIAR.

    As far as I can tell, most VC-type organizations do EVERYTHING through LLPs or LLCs, specifically to avoid CORPORATE tax.

    For the record, I run a company that is an LLC, so I understand EXACTLY how profits at the "corporate level" flow through untaxed to the owners of the LLC, of which I am one.

    That is why I can tell you that R-MONEY is an F'ing LIAR and HE KNOWS IT.

    "The battle, sir, is not to the strong alone; it is to the vigilant, the active, the brave." -- Patrick Henry November 6, 2012 MA-4 I am voting for my friends Barry, Liz and Joe (Obama, Warren and Kennedy)

    by BornDuringWWII on Tue Sep 25, 2012 at 12:49:25 PM PDT

    •  This needs a diary of its own (0+ / 0-)

      If you don't have the time, I hope someone else who understands the details of this will do it - I fear this is way outside my field of expertise.

      “What’s the use of having developed a science well enough to make predictions if, in the end, all we’re willing to do is stand around and wait for them to come true?” - Sherwood Rowland

      by jrooth on Tue Sep 25, 2012 at 01:22:03 PM PDT

      [ Parent ]

    •  Wanted to keep it simple. (0+ / 0-)

      Taxation is an amazingly complex subject and I wanted to just hit the highlights about the oft-repeated double taxation claim. The very day I wrote this diary, two guests on The Ed Show on MSNBC misspoke about double taxation, and they were trying to express the liberal viewpoint.

      What's that sound you hear when Mitt Romney walks? Oh, yeah. Flip-flop flip-flop.

      by edg on Thu Sep 27, 2012 at 06:06:13 PM PDT

      [ Parent ]

  •  Ok smart people... (0+ / 0-)

    I am a software engineer.  A public company for which I used to work used to say they needed "capitalize" some of my work.  Specifically, if I was coding an system upgrade (as opposed to supporting a user or fixing a system bug), they would want to know about it because I assumed they could use it to get a better tax rate.  Is that right?  I had just thought about it after reading the diary.

    I never paid attention in economics class because there were pretty girls in both my high school and college classes.  Heck, there were cute girls in all my classes which is why I needed to learn how to hack and change my grades (shhh).  

    •  Actually, the opposite is true (1+ / 0-)
      Recommended by:
      richdpa

      Capital expenses are not deductible in the year incurred, but amortized (for intangible captial assets ) or depreciated (for tangible assets) over the life of the capital asset, which means that the immediate value of the expense, for income tax purposes, is not realized. If I spend $100 to maintain my factory and my company is profitable and in the 35% tax bracket, the ordinary expense deduction is worth $35, but if I have to capitalize that expense because it is not for maintenance but to install a $100  computer with a 5-year useful life, I only get to deduct $20 a year for a $7 per year tax reduction.

      If I am a public company though, I get to add the $100 computer to the capital assets on my balance sheet, which has independent stock market value.

      This in no way helps Romney's double taxation argument, which is 100% 24-carat bullshit.

      For the girls, on this one , you are on your own.

      •  Thank you for the explanation! (0+ / 0-)

        I usually try to stay away from conversations that involve economics but with the kind help of you, the OP and others, I am slowly learning.

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