Over the last two weeks, we have witnessed a deep discussion around the rich. The wealthy Mitt Romney, in a debate, seemed hesitant to discuss the release of his tax returns. Afterwards, he said he is probably taxed around 15%. In the meantime, President Obama prepped his annual State of the Union (SOTU) speech by inviting Warren Buffet’s secretary (TOC will also note that she is almost never addressed by name by Obama and that as an individual, her importance seems nonexistent) to sit in the House Chamber as a special guest of the President. At about the same time, ABC News began asking the question, “What could we do with Romney’s $21.7M income?” Romney would later say that he “is not worried about the very poor.” Romney was trying to say that we have systems for ensuring that the poor have their needs met but inadequate focus on ensuring the middle class does not continue to shrink, the sound-bite made him sound insensitive and was leveraged by many media opportunists.
There is a lot of “anti-rich” sentiment, and Romney has appeared hesitant to “defend his richness.” TOC will attempt to defend Romney by asking some critical questions.
First, many people feel that the rich do not pay enough taxes. Obama gave his SOTU speech which included the argument that some of the ultra-rich (like Warren Buffet) pay less tax than most of the general public (like Warren Buffet’s Secretary). A book can be written about the flaws in this argument, but below are some of the more critical points. Buffet pays far more than his secretary in absolute dollars. Indeed, Buffet’s $7 million tax bill is a larger amount paid in taxes than his secretary’s payment, although Buffet’s tax rate may be lower. Plus, we need not forget that Buffet’s secretary is not like most secretaries. Obama’s argument is supposed to have you focus on the word secretary, but as Paul Gregory argues in a Forbes article, Buffet’s secretary probably makes over $200,000 – hardly the salary of a typical secretary. Most of Buffet’s income came from investment income. The capital gains tax rate determines the taxation rate for investment gains. What’s interesting about the capital gains tax rate is that, generally, an increase in the capital gains tax rate decreases the tax revenue realized (see the CBO study on revenue outlook and a debate in 2008 in which Obama was asked about this concept). Quoting Obama himself, it would be fair to raise capital gains tax rates (most of the ultra rich get income from investments – as they have accumulated enough wealth to have their money work for them), but that may mean the government would collect less revenue with such a change. Is the goal to be fair even if that means less tax revenue? While it may or may not be fair for the ultra-rich to collect income on their “money that is working for them” (investment income) while the general public has to pay higher rates on their “hard-earned salaries,” the rich generally had to pay even higher taxes than those “normal” Americans. Many rich individuals had to build their accumulated wealth; their salary income was taxed at much higher rates than most Americans – thanks to the graduated salary income tax structure in the US.
The savvy person may counter-argue that there are rich people who find loopholes in the tax structure to pay less in salary income tax rates than “their fair share.” A favorite target is the so-called “carried-interest” provision that allowed Mitt Romney and hedge fund managers to have salary income taxed like investment income. TOC agrees, removing this provision is fair and increases revenue. Why no mention of this in the SOTU? Taxes make the heads of many spin if you go more in depth than “rich man pays lower tax rate than not-rich man.” If Obama cannot score political points with a change in the tax code (regardless of whether that change is sound policy) he will not pursue it. The so-called “Buffet Rule” may or may not bring in more revenue to the federal government, but it is easily digested by the public and gives Obama political points.
More questions to consider are why are we not celebrating Romney’s success and what can we learn from that success? Per Rick Newman of USNews, Bain Capital made some key turnarounds while Romney was lead, saving companies like Staples, Pizza Hut, Dominos Pizza and the Sports Authority. Some investments did not work, but that is not because healthy companies were turned sour to raid the assets. A PE firm maximizes returns by turning around distressed companies, not killing healthy ones. Would we not at least want to discuss how his experience could help in Washington?
There are more questions. Why do we vilify rich financiers and bankers and not entertainers and sportspeople? Prince Fielder just signed a contract with the Detroit Tigers for over $200 million to play baseball with no major backlash. Which role creates jobs? Which role can teach us something about economic growth? Entertainers and sports athletes make money, but what roles create more value than a PE manager saving Pizza Hut or Goldman Sachs creating an investment group focused on sustainable investing?
Plus, why are we not angrier when members of Congress get rich from insider trading based on legislation they influence? According to Peter Schweizer’s Throw Them All Out, members of Congress can profit from insider information, causing potential conflicts of interest and compromising the creation of policy based on value to society.
In closing, we go back to ABC. In another blog post, TOC looked at the power of the media. Couple that power with a President that wants to appear fair in order to get your vote (using emotion, not objectivity) and you see the trap created by vilifying success. TOC would just challenge you to question before you take the bait . . .