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Romney’s Tax Fairness Garbage

Answering a direct question on “60 Minutes” last Sunday, Mitt Romney said it was fair for him to pay a lower tax on $20 million in capital gains than a worker pays on $50,000 in wages “because capital has already been taxed once at the corporate level, as high as 35 percent.”

Romney was echoing a claim contained in an Ernst & Young study purporting to calculate “integrated” tax rates on capital gains and dividends by (listen up, now) combining taxes paid at the corporate and individual levels. The study mixes apples, oranges and tomatoes too, in a crazy right-wing stew.

He delivered his answer with a straight face, to a national television audience, as if it were the gosh-honest truth. In the real world it’s gosh-awful garbage.

The same study was used by the chairman of the House Ways and Means Committee, Rep. Dave Camp (R-MI), in his opening statement to a hearing last week on tax reform and the tax treatment of capital gains. Here’s an eye-opening sample:

“As we consider the economic impact of the tax burden associated with capital gains, it is critical that we focus on the total integrated rate, which is nearly 45 percent, not just the statutory rate of 15 percent. The capital gains tax is often, though not always, a double layer of taxation. For example, in the case of shares of stock, a company’s income is first taxed at the corporate rate. Then, when shareholders of the company later decide to sell their stock, they are subject to capital gains tax on the sale. But the value of the stock they sell has already been reduced by the fact that the corporation previously paid out a portions of its earnings as taxes. So, even if we make current low-tax policies permanent, the top integrated rate on capital gains is actually 44.75 percent – a 35 percent first layer of tax and a 15 percent capital gains tax. If we allow current low-tax policies to expire, the top integrated rate on capital gains will exceed 50 percent.”

Ernst & Young is saying, and expects you to agree, that a tax on a corporation’s income is really a “35 percent first layer of tax” on an individual’s stock market gain. Is it? Let’s see.

Let’s start by noting that a capital gain, by definition, is the difference between the basis price (the price paid for the stock in the first place) and the proceeds, the amount realized when the stock is sold. By definition, the capital gains never existed before; by definition, the capital gains were never taxed before; lastly and also by definition, “double taxation” of capital gains is a complete and total fiction.

Let’s also note that any claimed relationship between a corporation’s money and an individual’s stock market capital gain is essentially non-existent; to “integrate” these monies, and to pronounce a tax on one the same as a tax on the other, is rubbish.

Finally, let’s note that the 35 percent tax rate cited by Ernst & Young (and echoed by Romney) is mighty misleading. It’s the top corporate rate all right, but it’s paid by few U.S. companies. Many major U.S. corporations are members, in fact, of Romney’s moocher class: via various loopholes and tax dodges (which Romney knows a thing or two about), they pay no federal income tax at all.

The last paragraph of Camp’s opening statement refers to “compelling arguments for providing a preferential tax treatment for capital gains.” Those “compelling arguments” were rejected in late 2011 by President Obama’s Simpson-Bowles fiscal commission, which called for equal taxes on all income: the same tax rates on capital gains and dividends as the tax rates on wages.

Mitt Romney may think it’s fair that capital gains and dividends get taxed at a lower rate than wages. Simpson-Bowles didn’t think so, nor did the Bipartisan Policy Center in Washington in a second blue-ribbon deficit reduction report issued shortly afterward. That report, the so-called Rivlin-Domenici report, also called for equal taxes on all income.

So too, long ago, did GOP icon Ronald Reagan. One of the centerpieces of Reagan’s signature Tax Reform Act of 1986 was equal taxes on income from wealth and income from work.

Gerald E. Scorse helped pass the bill requiring basis reporting of capital gains. He writes articles on taxes.

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