Mitt Romney doesn't want a tax break from Newt Gingrich
You wouldn't expect Mitt Romney, who made a fortune on Wall Street doing leveraged buyouts, to be the one channeling the common man's outrage at a flat-tax proposal. Yet there he was at Monday night's debate in Tampa, Fla., critiquing Newt Gingrich's version as being a gift to, well, the Mitt Romneys of the world.
He's got a point, although not the populist one he apparently was trying to make. Instead, Romney's observation highlights how imprecise tax policy is, and how risky it is to try to do social engineering through the tax code.
The exchange between Romney and Gingrich began after the former House speaker was asked his reaction to the brouhaha over Romney's tax returns. According to a Washington Post transcript, Gingrich replied by touting the changes he wants to make to the tax code:
I have in my tax proposal an alternative flat tax on the Hong Kong model, where you get to choose what you want, and our rate's 15%. So I'm prepared to describe my 15% flat tax as the Mitt Romney flat tax. I'd like to bring everybody else down to Mitt's rate, not try to bring him up to some other rate.
After getting Gingrich to confirm that he would eliminate taxes on capital gains (and, presumably, other forms of investment income), Romney recoiled and said, "Well, under that plan, I'd have paid no taxes in the last two years." He did so with a tone of surprise and disapprobation, by the way, not gratitude.
Gingrich tried to defend the prospect of cutting Romney's tax bill by several million dollars annually by invoking the thinking of a famous former Federal Reserve Board chairman. "It was Alan Greenspan who first said the best rate -- if you want to create jobs -- for capital gains is zero," Gingrich said. "My No. 1 goal is to create a maximum number of jobs to put the American people back to work. It's a straightforward argument."
Straightforward, but not necessarily correct. Although the research isn't conclusive, one recent study found that reducing the capital gains tax rate has little or no effect on the amount of money invested. And the benefits of the lower rate accrue overwhelmingly to the wealthy, mainly because they have spare resources to invest.
That's the problem, generally, with trying to use the tax code to influence people's behavior. One rule of thumb in tax policy is that taxing something induces people to do less of it. But there's no way to tell that Romney would invest more of his money if he didn't have to pay taxes on the dividends, interest and capital gains he collected. Would he choose to spend more time investing and less time pursuing some other income source, such as writing op-eds or taking a gig on Fox News? Would he invest more and spend less on himself, his family or his charities? Or would the Gingrich plan simply provide a windfall that Romney and his peers don't need?
That's the implication of Romney's reaction at Monday's debate. If Gingrich wants to end taxes on capital gains, dividends and interest, he'll have to offer a more persuasive argument than Greenspan's dicta. He'll need to come up with evidence that lowering rates creates jobs, or at least makes it easier for businesses to raise capital. And at this point, the data don't make a compelling case in his favor.
-- Jon Healey
Photo: GOP presidential candidates Mitt Romney, left, and Newt Gingrich. Credit: Charles Dharapa / Getty Images