Obama knocked it out of the park last night...and Romney swung and whiffed a few times. Notably, the media is focusing on how Romney struck out on Libya, women binders, and women's health. For me, Romney may have made an even bigger potential mistake in finally discussing some of the details of his tax plans.
I've been waiting for Obama to take apart Romney's tax cut plan because it won't create the jobs Romney claims it will. I guess I was a little disappointed that Obama still hasn't done that, but Romney really stepped in it by fully setting out what he plans to do for the wealthiest among us.
Romney said he'll get rid of the capital gains tax*, the tax on dividend and interest income*, and the estate tax. He had the chutzpah to say he was going to do that to help the middle class. These ideas have been on the Republican agenda for the last 20-30 years or more, but they've never pretended this was going to seriously benefit the middle class.
I wish Obama had taken the time to explain what this means to the American people who aren't versed in tax law -- but, here's my take, below the orange symbol of elegance and luxury:
As Fitzgerald wrote:
"Let me tell you about the very rich. They are different from you and me."
There is a class of people who get the vast bulk of their income from investments -- in the form of capital gains when their investments grow in value and in the form of dividends issued by corporations and other companies they hold stock or have ownership stakes in.
Many Americans are familiar with dividend checks. They might get a few dollars from a few companies each year. But, they don't own hundreds and thousands of shares in high-revenue companies. So, they don't really get how much money some investors get each year in dividends.
The same is true of capital gains -- they aren't holding lots of investment property and they don't sell off large tranches of stock.
Who are these people? CEOs get handsome salaries, but many get even more income eventually from very generous stock options they also get. Some actually take money thy've earned -- and paid taxes on -- but make even more money with investments in the markets. And, still others have "old money" -- inheritances which, when invested well, produce enough income to live lives of great comfort.
I've put asterisks in the introduction because, as Phoebe Looseinhouse notes in her excellent diary, appearing on the Rec List now as I revise this diary, Gov. Romney said he'd make these changes for those earning $200,000 or less:
"And that is every middle-income taxpayer no longer will pay any tax on interest, dividends or capital gains, no tax on your savings.
That makes life a lot easier. If you’re getting interest from a bank, if you’re getting a statement from a mutual fund or any other kind of investments you have, you don’t have to worry about filing taxes on that, because there will be no taxes for anybody making $200,000 a year and less on your interest, dividends and capital gains."
Of course, dividend and interest income, as well as capital gains income, aren't generally very significant for those whose income is less than $200,000 -- at least, not in comparison to those in the investor class. Unless of course, Romney is playing a semantic game, which would allow those who have small "earned" incomes (wages, tips, etc.), but vast amounts of unearned income, to be eligible for this tax break. In which case, even Romney himself would probably qualify for the tax break, depending upon how much money he earns sitting as a director on various corporate boards.
If we conduct a political reality check on Romney's proposal, we would have to conclude there's no way that these changes would be limited only to those with incomes less than $200,000. Democrats tried mightily to to renew only those Bush-era income tax cuts for those earning less than $250,000, but the Republicans successfully fought to extend the tax cuts for all levels of income-earners.
Conservatives have been working towards eliminating dividend taxes and capital gains taxes for years, and they have never before proposed limiting the change to exclude the benefits for those in the highest income tax brackets. Romeny's proposal in this regard, must be, as Phoebe Looseinhouse, characterized it in her diary, a "trojan horse." The GOP will get their foot in the door by generating some support for the tax changes at lower income levels, and then insist on tax parity for all.
If anyone doubts that the Romney tax plan is intended to significantly lower the tax burden on the wealthiest Americans, they need only look at his proposal to eliminate the estate tax entirely. Right now, that tax doesn't even apply to estates under $5,000,000. The number of estates that are even impacted by the federal estate tax at its current level is tiny -- less than three-tenths of one percent....and most of those still pay only 20% or less thanks to the credit shelter and trust arrangements. Only a small fraction of the richest estates -- less than one-tenth of one percent will really benefit from this change.
No doubt, the GOP is planning to extend to the wealthiest Americans the same dividend, interest and capital gains tax breaks that Romney says he's offering for those making under $200,000.
So -- here's the major elements of Romney's trojan horse plan (extended to all income-earners, as the GOP plans to do):
1) Cut taxes on corporations, so they won't pay much tax on their earnings.
Allegedly, they will use this money to hire workers, but will they? Companies base hiring decisions not on how much cash they have on hand, but on need and productivity. If they can make more money by hiring workers, they will. Cutting taxes actually takes away some incentive to hire workers because business expenses will have less tax benefit. Moreover, the rest of Romney's plan actually provides new incentives to do something else with the tax cut savings -- to distribute the tax cut savings to shareholders. See Step 2;
2) Eliminate the dividend and interest tax, so the big shareholders pay no tax on those dividend distributions.
If shareholders won't even be taxed on dividends, they will put even more pressure on corporations to issue ever larger dividends, rather than investing in the company's future. Step 3 brings even more good news -- for those shareholders who decide to sell some of their holdings -- see Step 3:
3) Eliminate the capital gains tax
The last 40 years have seen a debate about whether there is any reason to treat capital gains income differently than regular income -- whether preferential treatment might increase investment in capital markets. Taking the dividend and capital gains rates to 0% could have the opposite effect.
As we've seen above, powerful, large shareholders (including pension plans and mutual funds, but also wealthy investors) will pressure the corporations to issue large dividends, to take advantage of the tax-free distributions that Romney will create. Companies that pay large dividends will also see their stock prices rise. This will create incentives to sell shares to reap huge profits that will suddenly be tax-free capital gains. THis cycle will put even more pressure on CEOs and Boards of Directors to focus on dividends and share price, rather than the long-term value of the companies they run.
Apparently, this isn't a big concern for Gov. Romney, who is focused more in funneling more money to the wealthiest Americans. Finally, his plan completes the loop by making sure, in Step 4, that these dividend and capital gains earnings will never be taxed! See Step 4;
4) Eliminate the estate tax, so the money and the investments can be passed on to succeeding generations without ever being taxed.
Tax policy has always been a vehicle to raise revenue, obviously - but, it has also been employed to level the playing field, to make our society a teeny bit more equitable. The income tax was set with progressive marginal rates, so that the those earning the most paid at higher rates.
Besides taxing income, the government put in an estate tax which serves to tax the largest estates, also at progressive rates. The idea, beyond raising revenue, was to limit how much money could be passed from one generation to the next, so we could look a little less like old Europe, which relied on inherited nobility. The logic was to make our society somewhat more equitable, but also to put some pressure on the next generation to go out and work hard to earn more money.
When the dividend, income and capital gains rates were decoupled from ordinary income, the income tax suddenly became a lot less progressive. The richest among us, who had exponentially more income from investments, became a lot richer, and our society become more stratified with ever-increasing income inequality. However, so long as there was an estate tax, there was some limitation on the effect on succeeding generations.
Of course, even the estate tax had a relief valve to limit the hit on the heirs. When a rich person dies holding investment property, the heirs acquire the property with a new capital basis -- so, when they eventually sell the investment, they would pay tax only on the gains since the time they acquired the property rather than including all the gain that was built-in to the property value at the time of death. If you get rid of the capital gains tax, there is no reason to have the stepped-up basis. Throw in the end of the estate tax, and all those earnings will never be taxed.
Romney says he's trying to fix the problem of double taxation -- the taxing of the same earnings at the corporate level and then at the personal level, when the dividends are issued. His fix is to virtually eliminate ever taxing those earnings.
Even worse, the tax cuts he proposes won't create jobs or long-term investment in our economy. They will, in fact, skew the incentives in the other direction.
So, that's the Romney tax plan -- to reduce his tax rate -- and tax rates of the other one-percenters -- to as close to 0% as possible.
Should we just bring back the feudal system?
It would be more equitable to have landed royalty. At least, in old Europe, nobles had to pay taxes and tributes to King and Crown to support their regal regime. Romney is proposing a plan that would lock in a similar social hierarchy, but with greater inequity.
Instead of landed gentry -- royals and nobles -- ruling over commoners, the Romney economy would be based on the rich, a financial oligarchy who would pay little or no tax on their earnings, and the working class serfs who would literally bear the tax burden to support the system which oppresses them.
That's what is now at stake -- Based on the tax plan that Romney sketched in the 2nd debate, the choice will be between the President's plan to have the wealthiest pay a little more in taxes...and Romney's plan, which would exempt the rich from ever paying taxes on the largest parts of their income (and inheritance).
When Obama says that Romney's plan would force the middle class to pay about $2,000 more in taxes, he's surely underselling the ultimate impact. That's just to pay for the 20% income tax cut (and defense hikes). If we get rid of the dividend, capital gains and estate tax, we will reach a point where the wealthiest will evade almost all taxation. Those earning salaries will have to shoulder nearly 100% of the tax burden, which will be a lot more than $2,000 a person.