This story has been in the news for awhile. People are debating Mitt Romney’s tax returns. Romney says “I made the minimum legally required disclosure.” Other people are saying “He didn’t release his tax returns. Therefore, it contains something embarrassing.” In 2010, Romney paid a tax rate of 13.9%. He may have paid an even lower rate in earlier years.
The debate is completely missing the point. People are arguing about Romney’s tax returns. They should be arguing “WTF is wrong with the taxation system? An average worker pays income taxes of more than 40%, and billionaires get away with paying a negligible amount.”
When I work, I pay a Federal income tax rate of 25%, I pay a 15.3% Social Security and Medicare tax (7.65% times 2). I pay a NY state income tax rate of 6.85%. I pay a NYC income tax rate of 3.65%. If you add them all up, that’s a taxation rate of 50.8%.
A pro-State troll says “FSK, you’re wrong. The Social Security and Medicare tax is only 7.65% and not 15.3%. Your employer pays 7.65%.” That statement shows complete ignorance of economics. Because my employer pays the 7.65% tax, that comes from the money otherwise available for salaries. If my employer did not owe that tax, my salary would be 7.65% higher. That’s a clever obfuscation trick. By making employers pay the tax, that makes it seem lower. That fools clueless people, because they think explicit payroll deductions are the only income tax they pay. To be accurate, I should have also added the unemployment insurance tax.
I also should add all the other taxes. If you add sales tax, inflation tax, property tax, corporate taxes, regulatory compliance tax, etc., then my total taxation rate is much more than 50%.
A pro-State troll says “Corporate taxes are paid by the corporation, not by people.” If a corporation owes tax, then that tax is passed on to customers via higher prices.
Another pro-State troll says “FSK, you should look at your average taxation rate and not your marginal rate.” Again, that is wrong. For example, I quit my abusive job in March. When deciding whether to stay or not, my marginal rate is what matters and not my total rate. Also, if I work harder and get a better job or a promotion, it’s my marginal rate that matters and not my total rate. When making any economic decision, I should consider my marginal taxation rate and not my total rate.
When you earn income by working as a wage slave, you pay a tax of more than 50%. When you work as a CEO or bankster, your tax rate is much lower, because most of your income is in capital gains.
When a CEO pays himself, he usually gets share grants and option grants, rather than W-2 wages. That avoids the Social Security and Medicare tax. The tax rate for capital gains is much lower than the tax rate for ordinary wage slave income.
As a bankster and hedge fund manager, Romney exploited the carried interest tax loophole. As a hedge fund manager, he took his management fee in the form of new shares of the fund. That causes his income to be capital gains instead of regular income.
It’s even worse than that. The CEOs and banksters don’t need to cash out their shares right away. They can wait, let the shares appreciate, and they don’t owe tax until they sell. That makes their effective tax rate even lower, because they don’t have to pay tax until they actually sell the shares.
They also can use trusts to completely dodge taxes, like Warren Buffett and Bill Gates. Warren Buffett lobbies for high taxes and high estate taxes, but he’s using trusts to shield his wealth from taxation.
Suppose I want to buy shares of a corporation. I have to pay a tax of 50% on my income. I have to pay tax again on the capital gains. The CEO gives himself shares, and only owes the capital gains when he sells.
Also, when I invest in a corporation, the CEO dilutes my ownership by issuing himself new shares. That reduces my return. That’s one big reason that the stock market underperforms true inflation. A pro-State troll says “Compared to gold, stocks have earnings.” However, there’s also the corruption and waste and fraud associated with a large corporation. The cost of the theft is greater than the value of the earnings.
Why does Bain make money buying corporations and loading them up with debt? The answer is negative real interest rates. The Fed Funds Rate is 0%-0.25%. Bain borrows for slightly more than that. True inflation is 20%-30% or more. It is profitable for Bain to load up on debt for a leveraged buyout. They are borrowing at a couple of percent and investing in assets that should appreciate by much more. That gain is due to inflation, and not because Bain brilliantly managed the business after the LBO.
If a leveraged buyout investment turns out well, the hedge fund keeps the profit. It it doesn’t turn out well, the corporation declares bankruptcy. Each deal is a separate corporation. The bad investments declare bankruptcy while the profitable ones are sold. Bain also benefits from limited liability incorporation, allowing them to default when a deal doesn’t work out.
Why do hedge funds make money? They exploit negative real interest rates, borrowing cheaply from the Federal Reserve and banks, and buying tangible assets.
The hedge fund manager takes a huge management fee, typically 2/20. (2% fee plus 20% of profits.) By managing other people’s money, the fund manager scalps a nice percentage for himself.
Also, a lot of hedge fund investments are “stupid money”. Some of the biggest hedge fund investors are State pension funds. The pension fund manager’s main goal is CYA and graft, rather than making the best investment. The pension fund manager may get kickbacks, in exchange for investing in the hedge fund.
Warren Buffett had excellent political connections; his father was a Congressman. Romney had excellent political connections; his father was a government. They used their political connections. This helped them get early investors in their fund.
As a hedge fund manager, Romney did not provide any useful goods and services. He was exploiting his political connections and abusing defects in the financial system. Romney profited via the Federal Reserve and negative real interest rates. Romney used his connections to get investors in his fund, enabling him to skim a management fee off the fund. Most hedge fund investments are State pension funds. That money is controlled by people who don’t actually own it, facilitating corruption via the Principal-Agent problem.
Romney’s actual taxation rate is irrelevant. He is a negative taxpayer. All his wealth was stolen via the State. His actual taxation rate is meaningless.
The debate regarding Romney’s tax returns misses the point. The real blame lies with the corrupt system. People who do real work pay a much higher taxation rate than insiders. Insiders’ income is mostly capital gains, which are taxed much more leniently than wages. With the carried interest tax loophole and trusts, insiders can nearly completely dodge taxes. Romney earned a huge salary while providing no useful goods and services. He is a negative taxpayer, making his taxation rate irrelevant. For insiders, the amount they steal via the State is greater than the taxes they pay.
The correct answer for any tax debate is “All taxation is theft!” It is embarrassing that insiders pay negligible taxes while regular workers pay a much higher rate. Insiders are negative taxpayers. Technically, they aren’t paying any taxes at all. The State subsidies they receive are greater than any taxes they pay.