Amateur Hour: Taxes And Capitalism

On 60 minutes, Romney defended the tax rates he pays:

"[T]he 60 Minutes interviewer, Scott Pelley stated that Mr. Romney “paid fourteen percent in federal taxes,” the capital gains rate, and asked “is that fair to the guy who makes fifty thousand dollars and paid a higher rate than you did?”

Mr. Romney answered “Yeah I think it’s the right way to encourage economic growth, to get people to invest, to start business, to put people to work.”

Never mind that Mr. Romney would have paid even less in taxes if he hadn’t kept his rate artificially high by declining to count $1.8 million in charitable contributions. (He can always revisit his deductions in a future year.) The important fact here is that there’s little evidence supporting the idea that lower capital gains rates will lead to more investment and more growth, or vice versa."

Let me preface what follows by saying that I'm not sure we need to jack up the capital gains tax rate. Our tax system should reward saving to some extent. (Though see Noah Millman from The American Conservative on the non-specialness of capital gains and this from the Century Foundation.) My main problem is that the way our tax system is set up supports a barrier to entry into the marketplace. This is not because taxes are too high on individuals or small businesses as many conservatives would argue, but because they are too low and there are too many exemptions for rich people and corporations.



If effective tax rates are too low on the rich, one of two things has to happen. (Conservatives like Milton Freidman used to understand this). Either the non-rich lose public benefits or must have their tax burdens rise to service the debt. Either way, those who do not have much in the way of existing capital, will come to have even less.

But this situation is antithetical to free market capitalism. The promise of capitalism is that there is equal opportunity for everybody as long as one works hard, has a good idea, a little bit of luck, etc. The meme that rich people deserve tax breaks since they are the "job creators" misses the point that free market capitalism should allow anyone to become a job creator regardless of how they start off. Rich people don't deserve tax breaks because they are already rich; they only deserve them if the breaks works as an incentive to create even more jobs. (Pop quiz: how many jobs has Romney created in the last ten years?) But someone who is not already rich can create many jobs on the way to becoming rich. This should be encouraged by the tax system. A society where the rich stay rich and the poor stay poor is a step toward feudalism and the absence of economic freedom for the many.

Low capital gains taxes benefit the rich almost exclusively. Capitalism is not the doctrine that rich people deserve to stay rich. It's supposed to be the system where anybody can join the ranks of the rich. Capitalism thrives on competition; the more people participating in the market will ensure that innovation wins the day. People who would otherwise be able to invest in and accumulate capital cannot start due to high health care bills, tuition payments, higher taxes, etc. In effect, this is a barrier to entry, or at least a handicap in comparison to favorable conditions to the already rich, into the marketplace and therefore contrary to the spirit of free market capitalism.