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I have been a somewhat casual observer of this year's election.

I lived in MA when Mitt was governor.  I thought Mitt did well to address some of the corruption in the Big Dig project -- and I give him credit for that.  But -- I give more credit to Obama -- for nationally expanding Romney's implementation of The Heritage Foundation's Healthcare Plan.  Today I am proud that none of my children nor their children will find themselves without access to healthcare (well, heath insurance, anyway).

Listening to debate #2 -- something Romney said caught my ear.  Something I hadn't heard before or least that I hadn't fully digested:

"I have a plan to cut taxes for middle-income tax payers," Romney said. "My plan does this. There'll be no tax on interest, dividends, or capital gains for middle-income families in America."

Mulling this over for a bit -- I realized I didn't like it for two reasons:

First of all -- we already have vehicles that allow us to side-step considerable amounts of taxes on investments:  the 401k and The Roth IRA.  But if taxes on interest, dividends, and capital gains are eliminated, the incentive to use these vehicles is reduced.  I am certain that Romney dreams of creating an "Ownership Society" -- but in reality, he would be changing the rules in a way to discourage retirement savings.

My second problem has to do with property taxes.  A lot of local governments finance projects in one form or another though the issuance of municipal bonds, or "munis" as they are more commonly known.

One of the great advantages of munis is that they are often tax exempt.

This means that to be competitive with corporate bonds of similar default risk, a muni (with it's tax exemption) need not pay out as much the corporate bond.

For example, an investor who might demand a 4.5% yield from a corporate bond might only require 3% yield from a municipal bond -- depending on her tax bracket.

What does that mean?  That means that local governments get to save that extra 1.5% in financing cost.  

The taxable-equivalent-yield tells an investor how much yield they'd need from a taxable bond to get the same revenues as they would get from the tax-exempt munis.

If Romney eliminates all taxes on interest, dividends, and capital gains: then the advantage of the munis is reduced or eliminated. Investors would expect local governments to pay the same incentives that companies do.  Local governments' financing costs will go up.

Even worse, some have projected that many local governments are on the brink of default already!  One can easily imagine a family who is just making ends meet, when suddenly there is a call from the bank that their mortgage is going up 1.5%:  That 1.5% can have dire consequences for the family.  But it doesn't stop there -- other lenders may sense their peril and downgrade their credit score, prompting further rate hikes.  The same goes for local governments as they will risk being downgraded by rating agencies.  Our national "fiscal cliff" may soon be replicated in every state.

Local governments will undoubtedly be forced to raise taxes and/or cut benefits. One can only guess where those cuts might be sought: education, pensions, police and other services; a property tax increase could force more homeowners into foreclosure: the spiral continues.

But:  Romney is a finance expert -- certainly he knows what would happen.  He knows he would discourage retirement savings and knows that he would create new burdens on local governments.  And I agree.

We don't need radical "solutions" -- that trade long term stability for short-term effervescent "gains".  We need solutions that work for the long run.

Originally posted to Zipf on Fri Oct 19, 2012 at 07:49 PM PDT.

Also republished by The Democratic Wing of the Democratic Party.

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