The Tax Rate Scandal

By Mark W. Hendrickson
Thursday, January 26, 2012

When Republican presidential candidate Mitt Romney casually estimated that his effective tax rate is around 15 percent, progressives immediately pounced on the issue. To this ideological minority with its Ahab-like obsession on class warfare, a rich American paying an effective tax rate of “only” 15 percent is, a priori, a scandal of the first order.

Yes, this story is a scandal (actually, a series of scandals) but not the one that progressives think it is.

It is scandalous that so many journalists and commentators have gotten their basic facts wrong. They have conflated average “effective” tax rates with statutory rates. Under our complex and convoluted tax code, no American pays an effective rate that is as high as his top marginal rate (the statutory rate on the last dollar of income). As it turns out, Romney’s effective tax rate of 15 percent is higher than the effective tax rate of approximately 97 percent of taxpayers.

An even greater scandal is that Romney’s tax rate is as high as it is. Most of Romney’s income comes from his investments, i.e., from capital. Of course, those still influenced by the defunct labor theory of value and Marxian class envy think that taxing capital makes sense. They deride investment income as “unearned” income, as if capital doesn’t contribute anything of value to economic production, when, in fact, we owe our wealth almost entirely to capital.

Capital, far from being the cruel exploiter of labor, is labor’s major benefactor. Human labor and natural resources are found around the world, but the rich countries are the ones in which the productivity of human labor (and therefore wages and standards of living) have been multiplied by capital.

Americans’ relatively high standard of living exists because, according to the opponents of capitalism, greedy capitalists have “exploited” us more than people in poor countries. Well, we should be thankful for this type of so-called “exploitation.” Taxing capital diminishes its supply, thereby crimping labor’s productivity and lowering workers’ standards of living. Any tax on capital above zero percent is scandalously stupid and perversely anti-labor.

A third scandalous aspect of the Romney tax-rate story is that the very people making the tired, tedious complaints that America’s income tax code is “unfair” are those who are primarily responsible for the unfairness. Fairness, or justice, means equal treatment before the law. In taxation, that presents two options: Either tax everyone the same amount or tax everyone at the same percentage rate. There is no principle that defines the “right” degree of progressivity in tax rates; such rates are essentially arbitrary, determined by who holds political power—a “might makes right” calculus devoid of ethical content.

Finally, the most egregious scandal in the story about Mitt Romney’s tax rate is that the discussion about taxation is distracting us from what is, by far, the major problem our elected officials in Washington need to address: out-of-control federal spending. Granted, a flat tax, if not a consumption tax, would be a huge improvement over the current monstrosity that is our 72,000-plus-page tax code. However, we can survive our flawed tax code for decades, whereas runaway federal spending threatens our country’s financial viability in the short run.

Uncle Sam is racing toward a fiscal train wreck that requires a massive cutback of the 75-percent increase in federal spending that has been added over the past dozen years, but neither party is talking along those lines. The Republicans are willing to trim around the edges, whereas the Democrats are digging in their heels against even those token cuts.

Here’s an experiment you can try: Ask any candidate running for federal office this year how he or she would cut $1 trillion in spending. They won’t have a clue. That’s the real scandal of Election Year 2012.