Why should Lady Gaga pay a lower tax rate than Mitt Romney?

Published in The News Tribune, February 14, 2012

In my last column (TNT 2-1) I contended that Mitt Romney and others like him should pay more taxes, and that capital gains should be taxed at the same rate as income from work.

Many readers took issue with these claims.  Given the topic’s controversial and divisive nature — and more importantly the extent to which readers objected — I’m devoting this column to a more extended discussion of the subject.

A number of readers wrote in support of low taxes on capital gains on the grounds that lower tax rates are fair.

Readers supported this claim in two different ways.  First, paraphrasing slightly, several asserted that “we all have an equal chance to succeed.  And so, we all can benefit from ‘loopholes’ on capital gains income.  Why vilify some who earn what we all have a chance to earn?”

This boils down to asserting that each individual’s income is the result of a fair process.  Sure some win and others lose, but that doesn’t make the outcomes unfair or imply we should penalize winners.  Because he viewed equal taxation of capital and labor income as penalizing winners, one reader even argued that this practice would be un-American.

I’ll leave it to readers to consider for themselves whether America genuinely provides equal opportunity.  But my argument is simply that whether from labor or capital, income should be treated the same.  This is not penalizing “winners.”  Rather, it says that all “winners”—everyone in a given income class—should be treated the same, regardless of how they make their income.  I can’t see how taxing Lady Gaga at a higher rate than Mitt Romney simply because she works for a living, could be considered fair.

A second way readers argued that low capital gains taxes are fair was by pointing out the large tax burden already paid by the rich.  Wrote one:  “Let’s look at the overall tax burden of the rich; 1 percent pay 30 percent of taxes.”

The rich indeed pay a lot.  But it’s no mystery why:  that’s where the money is.  This same 1 percent averages $2 million in income, and collectively account for 20 percent of our nation’s income.

Now it might be that the rich indeed are unfairly overtaxed.  That’s a contentious proposition that most proponents of low capital gains taxes shy away from.  While I suspect it is the heart of their support, most justify these low taxes by the premise that they promote economic growth – even though supporting evidence is weak.

But even if it’s true the wealthy pay too much in taxes, this wouldn’t justify taxing the rich Mitt Romneys of the world at a lower rate than the rich Lady Gagas (or for that matter taxing middle class day-traders at a lower rate than middle class Joe Plumbers). It’s hard to see any grounds for arguing that taxing capital gains income at a lower rate than other income is fair.

Several readers had insightful comments about the overall tax code. For example, Bob Neilson of Puyallup argued that “the tax code should encourage savings because saving is a healthier attitude than consumption.”  Bob’s right.  The biggest shortcoming of our income tax is that it taxes – well, income. Whether spent or saved, in theory your income is taxed the same.

Too much of our national debt is owed to China; too many citizens live without a buffer between them and a turn of hard luck; and too much of the domestic investment that drives economic growth relies on foreigners’ savings.  These are but some of the consequences of our nation’s low savings rate.  Encouraging saving by exempting it from taxation would be a step in the right direction.

But this doesn’t imply we should forgo taxing capital gains.  Low taxes on capital income gives tax breaks based on how income is earned.  Exempting savings gives preferences based on how income is used.  These aren’t the same.

Readers made many other wide-ranging arguments supporting low taxes on capital income.  But maybe it’s time to shift the discussion from our preoccupation over how citizens earn money, to a focus on how we use it.  Unlike the former, whether citizens save or spend affects us all.