Crossposted at Nontrivial Pursuits
Last night, during a 60 Minutes interview, Mitt Romney was asked if he thought it was fair that he only paid a 14% tax rate on his $20 million income while a guy earning $50,000 paid taxes at a higher rate.
Romney replied,
Yeah, I think it's the right way to encourage economic growth, to get people to invest, to start businesses, to put people to work.
He was acknowledging the fact that most of his income was taxed at the lower 14% rate that is applied to income defined as
capital gains. Romney is just one of a long line of Wall Street apologists who has exploited the impreciseness of the word
investment to champion tax policies that
sound as though they are beneficial to the economy, but actually are not.
There is no better example of their talents at obfuscation than the famous Capital Gains Tax Rate, promoted by Republican Myth Makers for generations as a great way to stimulate “investment.”
To understand why Republican claims re: the Capital Gains Tax Rate are so patently false, voters need to understand the difference between Financial Investments and Economic Investments. They are not the same thing.
ECONOMIC INVESTMENTS are the kind of investments that actually end up "growing the size of the pie." They occur when money is spent on capital goods or other economic resources [like humans] that are then used to produce more capital goods or more of the final goods that consumers find desirable. In other words, economic investments either increase output or expand the supply-side's productive capacity.
That is what happens whenever firms purchase machinery/equipment to improve productive efficiency or when they spend money on the construction of new stores or factories or on the salaries of new employees. However, not all firm expenditures are economic investments. (e.g., money spent by firms on advertising that either (a) misleads consumers or (b) does nothing to help them with their purchasing decisions.)
FINANCIAL INVESTMENTS are purchases or commitments of money that provide the "investor" with an income stream. Saving money is a financial investment because it provides interest income; purchases of assets can be financial investments if they eventually provide a capital gain.
Economic investments made by firms are usually also financial investments because they generate income that exceeds their cost. The economic investments made by governments that improve infrastructure or human capital are not financial investments because they do not provide the government with an income stream.
Some financial investments are also economic investments, but many of them are not. The purchase of a piece of land, for example, is a financial investment if it appreciates in value over time, but it is not an economic investment if it just sits there, undeveloped.
Purchases of stocks in secondary markets (e.g., NYSE, NASDAQ) are clearly financial investments if the stocks appreciate in value, but they are not economic investments because they involve nothing more than exchanges of titles of ownership of already existing assets. One financial investor hands money over to another financial investor for a piece of paper.
These transactions do not typically put any money into the hands of firm managers that could be used for economic investments. That normally happens only when stocks are first sold by companies to underwriters, prior to an initial public offering. New stock issues are rare for companies trying to raise capital, especially when interest rates are at historical lows.
With a clearer understanding of the difference between Economic Investments and Financial Investments, it is easier to recognize the obfuscation game that Wall Streets executives, like Romney, are always trying to sell to the American public.
Romney said that a lower capital gains tax rate encourages 'economic growth', that it gets people to 'invest', to 'start businesses', to 'put people to work.' But if you follow the money, it becomes clear that a lower capital gains tax rate does nothing of the kind.
The only 'investment' it encourages is increased financial investment in assets---e.g., stocks and real estate---creating unhealthy asset bubbles, like the real estate bubble which crashed the economy the last time the Republicans (1) held the White House and (2) cut capital gains tax rates.
With respect to the incentives that Romney said a lower capital gains tax rate provides, he is simply blubbering some of his fondest wishful thinking. In truth, setting a lower capital gains tax rate is one of the worst ways to use government money to try to stimulate real, private sector economic investments.
When do firms need special incentives to motivate them to invest in new capital goods? The answer is never. In modern market economies, competition provides firm managers with the most powerful motivation to continually invest that they will ever need: fear. They ultimately face both the fear of bankruptcy and the fear of lost opportunity.
If your competition lowers its costs by investing in new equipment, or improves the appeal of its products by incorporating new innovations, then you’d better do the same or you will soon find yourself driven out of business. With only a few exceptions, additional government-provided financial incentives are nothing more than an unnecessary waste of tax dollars.
Aspiring entrepreneurs do not need special additional incentives provided by the government to encourage them to assume the risks of creating a new business.
True risk takers believe that their ideas will succeed in the market and have so much of their identities invested in them, they really don’t care if they receive any return at all on their invested time and money, sometimes for several years, as long as they have hope of eventual success.
The problem for entrepreneurs is not that they lack motivation; it's that they can't find someone who is willing to provide them with a loan that banks, venture capitalists, and angel investors find too risky.
In confronting this situation, Congress has a couple of options. It can choose to do nothing and simply allow the marketplace to reward firms-that-make-wise-investments with the market share of firms-that-do-not.
The other option would be for lawmakers to help entrepreneurs [and already-established firms that are judged by banks to be 'too-risky'] to obtain the funding they need in the hope that they might end up becoming competitive with better established firms.
The rational way to do this would be to provide these marginal firms with targeted investment tax credits or perhaps with government guarantees on private loans.
These kinds of initiatives would put the money directly into the hands of those who will be economically investing the money. Compare this to the insane idea of throwing hundreds of billions of extra disposable dollars at wealthy savers in the hope that some small fraction of their extra savings might somehow make their way into the hands of true economic investors.
What are the chances of that happening to an aspiring entrepreneur---following a CG tax cut---after private banks have already rejected his/her borrowing plans as too risky. Very little, if any, of those billions of dollars that the government would be giving up would actually end up helping needy entrepreneurs and firm managers.
As per usual, the Republican economic agenda is to throw money at already rich people because they are so sure that it would make all kinds of wonderful things happen to the economy. But the experiment was tried by George Bush and it failed...weaker than normal job growth and catastrophic bubble-bursting consequences of throwing all that money at rich people.
Why would we want to repeat that failed experiment?