Obama is Right: Mitt Romney's Tax Rate Isn't Fair

It's way too high.

This isn't quite going to be a "burn the mathwitch!" post, but it may be a little dense.  I'll try to keep it as accessible as possible.

Before we can get into the specifics of Mitt Romney's tax rate (by the way, as an absolute number, he paid more than something like 90% of taxpayers), we need to review a couple of concepts.  First, what is "money?"  Second, what is "income?"  Third, what is "time-value?"  Fourth, What is "taxation?"

Money is not real.  Money, on its own, is a worthless abstraction.  Whether we're talking about coin money, bullion, paper money, or ones and zeros in a computer, money doesn't mean anything on its own.  Despite its ephemeral nature, money is vital to our economy.

What money "is" is an abstraction of barter.  If you want to think of it in these terms, our entire economy is an abstraction of previous barter-based economies.  Instead of carrying around all that bread we baked, or the eggs our hens laid, and having to trade them separately for the things we want, we can take them and sell them all at one location for money, and then use that money to buy the things we want.  In either case, it's the baked bread or laid eggs which are being "traded," the money just abstracts that away.

And it is a powerful abstraction.  Because of the concept of money, we can have a service-based economy where instead of selling bread or eggs, I can sell my labor.  In fact, wasn't it my labor I was "selling" when I was trading bread or eggs?  It wasn't the bread that sold, it was the convenience of the person to whom I traded it of not having to bake it themselves.  Because I used my labor to bake the bread, or raise the hens and gather the eggs, someone else had time, instead, to weave cloth, or make nails, or whatever.

In short, money is an abstraction of the value of our time and labor to create something (whether a good or service) to sell.

Income is money you earn.  It is different from "capital gains" for a couple of reasons (we'll get to "time-value of money" in a bit), but among those is this one: capital gains are interest on investments (capital), whereas "income" or "earned income" is wages paid for work.  Those are both over-simplifications, but they'll do for our purposes.  That is, income is as much a process as a thing. 

When I bake bread and sell it, or gather eggs and sell them, the money I get in return is income.

Time-value means, literally, the value of something over time.  When applied to money, it is the concept that a dollar today is worth more than that same dollar would be tomorrow.  If I earn a dollar, and then immediately use it, it provides its full value.  Maybe I used it to buy groceries.  Maybe I put it in a mutual fund or other investment.  In either case, I got its full value because I exploited its utility immediately.  The same dollar, tomorrow, will be worth less.  It will have the same purchasing power, but it would have given up a day's worth of interest, or a day's worth of use of whatever I'd purchased.  Additionally, it required resources on my part to keep it- a wallet, or a safe, or whatever.

Now, when we're talking one day and one dollar, the time-value is so infinitesimal as to be not worth noting.  When we're talking a lot of money, or a lot of time, it can be significant.

One of the effects of the time-value of money is interest.  This applies both on investments (interest earned) and on credit (interest paid/owed).  When I invest my money, I'm letting you use it.  If you were to return it to me in a year, that same money (because I wasn't able to use it) would be worth less to me.  So you pay me interest, or dividends, or whatever.  You are not actually paying me more than I lent you (even though you are paying more than you borrowed), you're replacing the actual value of the money you borrowed and used.

Taxation is removal of money from the economy.  It's that simple.  When the government takes money away from me, they have taken something of value and they have not replaced it.  Now, I may get some value from the use of that dollar- in the case of roads, or national defense, or what have you, but I may not either, if it's used for welfare or "studies" determining if a watched pot really doesn't boil.  In either case the dollar has been removed from the economy, in practical terms.  Any benefit I receive is purely coincidental.

So, when Mitt Romney was asked if it was "fair" that people "like him" who made millions of dollars paid less in taxes than poorer people, he said, "Yes."  However, he was wrong.  It wasn't fair.  He's paying too much.

Let's take a look again- the interest (capital gains) he "earned" on his investments were not an increase in value, they were a replacement of value he had provided, a "making good" if you will.  He had already been taxed- at the much higher "income" percentage- on the income he then used to make those investments.  The difference in the 5, 10, or 20% interest he earned and the 1.025% you're earning on your money-market account is due to several factors, but among those is that his money had provided greater value to those to whom he loaned it.

When viewed properly, taxing earned interest is a double-dip taxation.  It's taxing the value of money which had already been taxed.

In last night's debate, Mitt Romney mentioned doing away with capital gains taxes on middle-income earners.  The reason that works is that the money has already been taxed.  Actually, much of it would then never be taxed, as it comes out "pre-tax" on people's paychecks.  I don't think that goes far enough, though.  I simply think the capital gains tax should be eliminated at all levels.

I am not a rich man.  I'm one of those "middle income earners" who, I guess, is supposed to be outraged that Mitt Romney is rich.  I'm not, because I understand why he pays a (theoretically) lower tax rate than I do.  And I want to be able to enjoy that when I'm rich some day, too.