LRWF_Blog

How many times should your money be taxed? One time? Two times? Three times? Four? Sounds like a ridiculous proposition, but that’s the true story of capital gains taxes in America, and it’s one that’s not being told in the continuing debate over Governor Mitt Romney’s taxes.

For more than a week, the media has focused on the subject of just how much Romney pays in taxes. On Tuesday, the governor released his tax returns indicating that he paid about 15 percent in taxes last year. At first blush, that sounds like a low rate, especially considering that Romney is admittedly worth millions. But as with all things in politics, there is more to the story.

As most Americans know, marginal individual income tax rates in America range between 15 and 35 percent. However, Americans making money from investments typically earn dividends. They face a lower rate to reduce the tax barrier to investing and growing businesses. For Americans in the lowest two income brackets, the tax rate on dividends is zero. For all the rest, the dividend tax rate is 15 percent — hence Romney’s rate.

Why do dividends face lower rates than wages or interest income? Because dividends have already faced one full level of tax at the corporate level.

But that’s income tax. Americans making money from investments also typically pay a capital gains tax at the same lower rate as for dividends. Income and capital gains are very different. Income is what is generated from using resources, as wage income is generated by providing labor services, whereas a capital gain results from an increase in an asset price. Capital gains face a lower rate to reduce the tax barrier to investing, especially in high-risk, high-return, job-creating, business-growing investments.

So right off the bat, Romney is paying what is legally required of him — and even when compared to the average federal income tax burden in America of 9.3 percent, he’s paying more. There’s still more to the story, though.

When Romney pays 15 percent to Uncle Sam, that’s not the first time that money was taxed. J.D. Foster, the Norman B. Ture Senior Fellow in the Economics of Fiscal Policy at The Heritage Foundation, explains that Romney’s money has likely gone through four levels of taxation, meaning that the level of taxation was at 50 percent and likely much higher:

At the very least, he paid nearly 45 percent, but a chunk of this tax was collected before he even saw the remainder. Income from capital gains and dividends means the income was first earned by businesses, most likely corporations which paid tax at 35 percent. So Romney paid his 15 percent only after the government had taken its 35 percent cut. That leaves Romney with a combined tax of 45 cents on the dollar of corporate earnings.

So that’s two levels of taxation — the corporate rate and the capital gains rate. But there’s more. Foster explains that Romney’s cash was likely subject to taxes on capital income repeatedly in the past. Few investments are one and done; rather, most are earned taxed dividends and capital gains over extended periods that are reinvested and taxed again and again. This is a third “level” of taxation. And then Romney was also taxed at the individual rate as wage or salary income–a fourth level. And that’s how you get above 50 percent in taxes. (And don’t forget that Romney contributes 15 percent of his income to charity–money that might not be available if the capital gains tax were raised as many liberals propose.)

Are four levels of taxation, topping out at 50 percent “fair” enough for the left? Unfortunately, the truth about capital gains taxes don’t fit as neatly into a headline as ‘Millionaire Only Pays 15% Tax Rate,’ but Americans deserve to know the truth — and they also deserve to be able to save, invest, spend, and contribute the money they have earned without it being confiscated by progressive politicians seeking a “fair” redistribution of wealth ushered in by a growing federal government.

Instead of eating the rich and burning down their mansions, Congress should find ways to make it easier for Americans to keep their money, invest it, and become more prosperous. In a new paper, Heritage’s Curtis Dubay enumerates ways that Washington can focus on growth and set the economy free, among them: prevent tax hikes, extend the payroll tax holiday or replace it with a more pro-growth policy, make permanent the tax cuts that expire at the end of the year, avoid raising taxes after cutting taxes, repeal the Patient Protection and Affordable Care Act and the tax hikes that go with it, and switch to the New Flat Tax, which would tax individuals on what they spend each year rather than what they earn.

In politics, it’s easy to demonize the rich and engage in class warfare, but tearing people down instead of building others up is no way to govern a country. If Washington politicians truly want to turn America around, they should focus on ways to raise the bar and help individuals succeed–not knock down real success stories in order to become populist heroes.

Last night’s nail-biter in Iowa marked the beginning of election year 2012. And with Americans heading to the polls — next in New Hampshire, then South Carolina and beyond — they will hope to rely on the integrity of the election system to ensure that every legitimate vote counts and that fraud is not the deciding factor on the local, state or national level.

Unfortunately, despite all the technological advances in our modern democracy, voter fraud still occurs, and yet there is still resistance to one very simple tool that could help eradicate it — voter ID. Some, like The New York Times, say that voting fraud is a myth, that “there is almost no voting fraud in America.” But as Heritage senior legal fellow Hans von Spakovsky explains, voter fraud is all too common in America today:

The fraud denialists also must have missed the recent news coverage of the double voters in North Carolina and the fraudster in Tunica County, Miss. — a member of the NAACP’s local executive committee — who was sentenced in April to five years in prison for voting in the names of ten voters, including four who were deceased.

And the story of the former deputy chief of staff for Washington mayor Vincent Gray, who was forced to resign after news broke that she had voted illegally in the District of Columbia even though she was a Maryland resident. Perhaps they would like a copy of an order from a federal immigration court in Florida on a Cuban immigrant who came to the U.S. in April 2004 and promptly registered and voted in the November election.

Even former liberal Supreme Court Justice John Paul Stevens agrees. Stevens wrote in a 6-3 majority opinion upholding an Indiana voter ID law: “That flagrant examples of [voter] fraud…have been documented throughout this Nation’s history by respected historians and journalists…demonstrate[s] that not only is the risk of voter fraud real but that it could affect the outcome of a close election.”

Given the incidence of voter fraud — and the simplicity of requiring voters to present a valid ID in order to be able to vote — it’s not surprising that 70 percent of likely U.S. voters believe that voters “should be required to show photo identification such as a driver’s license before being allowed to cast their ballot,” according to a recent Rasmussen poll. Meanwhile, only 22 percent of Americans are opposed to the requirement.

Despite the fraud — and the support for voter ID measures — Attorney General Eric Holder intends to examine new state voter ID laws for potential racial bias. Von Spakovsky writesthat the allegations of bias are baseless, and there is evidence to prove it. In Georgia, which enacted a photo ID law before the 2008 election, the number of African American votersincreased after the new law went into effect. “According to Census Bureau surveys,” von Spakovsky writes, “65 percent of the black voting-age population voted in the 2008 election, compared with only 54.4 percent in 2004, an increase of more than ten percentage points.”

On top of all that, the number of people who don’t already have a photo ID is incredibly small. An American University surveyin Maryland, Indiana, and Mississippi found that less than one-half of 1 percent of registered voters lacked a government-issued ID, and a 2006 survey of more than 36,000 voters found that only “23 people in the entire sample–less than one-tenth of one percent of reported voters” were unable to vote because of an ID requirement. What about those who don’t have photo IDs? Von Spakovsky notes that “every state that has passed a voter ID law has also ensured that the very small percentage of individuals who do not have a photo ID can easily obtain one for free if they cannot afford one.”

The American people value the integrity of their elections, and they overwhelmingly support voter ID requirements to make sure that Election Day is as fair, honest, and legal as possible. Still, though, there is resistance and predictions of massive disenfranchisement if voter ID laws continue to be implemented. The evidence, however, proves otherwise.

Consider it an illegal fringe benefit for illegal immigrants. Today, 12 states allow individuals who are in the United States illegally to pay the same in-state tuition rates as legal residents of the state without providing the same rates to others in the country who are here legally. And those states are doing it in direct contravention of federal law.
In a new paper, Heritage’s Hans von Spakovsky and Charles Stimson explain that in 1996, Congress passed–and President Bill Clinton signed into law–the Illegal Immigration Reform and Immigrant Responsibility Act. Under Section 1623 of the law, state colleges and universities are prohibited from providing in-state tuition rates to illegal aliens “on the basis of residence within the State” unless the same in-state rates are offered to all citizens of the United States.

“By circumventing the requirements of § 1623 these states are violating federal law, and the legal arguments offered to justify such actions are untenable, no matter what other policy arguments are offered in their defense,” von Spakovsky and Stimson write. Which states are on the list? The offenders include California, Texas, New York, Utah, Washington, Oklahoma, Illinois, Kansas, New Mexico, Nebraska, Maryland, and Connecticut.

Despite these violations, the federal government is doing nothing about it, all while the Justice Department has brought action against Arizona and Alabama for assisting in the enforcement of federal immigration law. Meanwhile, President Obama’s U.S. Immigration and Customs Enforcement department announced over the summer relaxed standards for pursuing and dismissing immigration cases.

Apart from being illegal, granting in-state tuition to illegal aliens isn’t at all popular with the American people, either. Apoll conducted in August shows that 81 percent of voters oppose providing in-state tuition rates to illegal aliens–and with good reason. For starters, the cost of doing so is breaking an already strained bank. In 2005, the cost of providing in-state tuition in California was between $222.6 million and $289.3 million; in Texas, it was estimated between $80.2 million and $104.4 million. Von Spakovsky and Stimson note that the policy has other serious flaws, as well:

Granting financial preference to illegal aliens also discriminates against otherwise qualified citizen students from outside the state. Furthermore, states that offer in-state tuition to illegal aliens act as a magnet for more illegal aliens to come to the state. Arguments to the contrary are unpersuasive, and not supported by the facts.

The core issue, though, is the Constitution and the rule of law. And while the United States welcomes immigrants, it is also a country of laws, and there are limits imposed on those who seek citizenship. States cannot cast aside those laws where they see fit, as von Spakovsky and Stimson explain:

Americans take pride in their heritage and this country’s generous policies regarding legal immigration. Yet, as citizens of a sovereign nation, Americans retain the right to decide who can and cannot enter this country—and what terms immigrants and visitors must accept as a condition of residing in the United States. As mandated by the U.S. Constitution, Congress sets America’s immigration policy. State officials have considerable influence in Congress over the crafting of immigration laws, and they may take steps to help enforce federal law. However, state officials cannot act contrary to a congressional statute.

The Supreme Court has held that “The states have no power, by taxation or otherwise, to retard, impede, burden, or in any manner control, the operations of the constitutional laws enacted by Congress to carry into execution the powers vested in the general government.” Unfortunately, in offering illegal aliens in-state tuition in violation of federal law, that is exactly what these states are doing. Now it is up to the President and the Attorney General to enforce that law and take action against these 12 states.

After months upon months of unemployment stuck at or above 9 percent, the American people may finally see a sliver of relief in today’s jobs report from the Department of Labor. The report suggests the month of November saw 120,000 net new jobs created and the unemployment rate drop to 8.6 percent–driven in part by the 315,000 people who have given up looking for work and were no longer counted as unemployed. That news is cold comfort to the 13.3 million Americans who are still out of work and the 402,000 workers who filed for unemployment last week.
The question is whether this improvement is real and enduring or a fluke. The economy is growing, but there’s little evidence of the real strength the report suggests, and there’s a lot in the report to suggest something’s amiss with the numbers–something likely to be corrected in the next report. For example, is it likely the labor market strengthened as much as the job number suggests at the same time so many people abandoned the workforce? And this is only one of the anomalies in the report.

The White House would therefore be wise to trumpet today’s news with soft notes. The fact remains that under President Barack Obama’s watch, the U.S. unemployment rate remains high because America just isn’t creating enough new jobs. And if the only way the Obama Administration can get the unemployment rate to drop is by convincing people to quit looking for work, that’s bad news for the American economy. Or to quote liberal blogger Matt Yglesias, ”Decreasing unemployment by shrinking the labor force is not exactly winning the future.”

It goes without saying that if the U.S. economy loses more jobs than it creates, the unemployment rate goes up. If job losses are low but few new jobs are created, then the unemployment rate treads water and remains high, with occasional dips and rises–and that’s what we’re seeing today.

As Heritage’s James Sherk writes, in the last quarter of 2007, private employers created 7.6 million jobs and shed 7.4 million jobs. That was enough net new jobs to keep unemployment steady as new workers entered the labor force. During the recession, job losses increased, hitting 8.5 million jobs lost in the first quarter of 2009. The good news is that today, job losses are well below their pre-recession rates, hitting a record low in the first quarter of 2011. The bad news is that few new jobs are being created, leaving America in the economic doldrums. Sherk explains:

Unemployment remains high because job creation has fallen. From the recession’s onset to the first quarter of 2009, private job creation fell by 24 percent to 5.8 million jobs. That was the lowest quarterly job creation on record. Since then, job creation has only slightly recovered. In the first quarter of 2011, employers created just 6.3 million new jobs–1.3 million fewer jobs than in the quarters before the recession began.

Fewer existing businesses are expanding, while fewer entrepreneurs are starting new businesses. In the first quarter of 2011, the number of workers hired in new business establishments fell to just 660,000, 27 percent fewer than when the recession began. This is the lowest number of workers hired at new businesses that the [Bureau of Labor Statistics] has ever recorded–lower even than the worst points of the recession.

To underscore just how important private-sector job creation is to getting America back on track, Sherk studied what would happen if hiring had returned to pre-recession levels when the recession ended in 2009. The result: By this year, net employment would have fully recovered. Unfortunately, that alternate reality is not our reality, and we’re living in an America where jobs are not being created at a fast enough rate. And the root of that problem is, in part, a White House that believes it knows best when it comes to job creation.

It’s small businesses, entrepreneurs, and investors, though, who create new jobs, and the best that Washington can do is create an environment where their enterprises can flourish. The way to do that is not by growing government, raising taxes on job creators, and imposing unnecessary regulations that overburden businesses. Instead, the government should pursue lower taxation, fiscal responsibility, and entitlement reform to increase the return and reduce the risks of starting or expanding an enterprise.

It’s always good news when new jobs are created and when the unemployment rate goes down, but when more than 13 million Americans remain out of work, there is no cause for celebration, especially when Washington is threatening policies that will keep the economy moving at a snail’s pace.