John Cochrane deflates some of the media nonsense. Short excerpt:
(…) Yes, from an economic perspective, interest, dividends and capital gains are not “income.” Romney should pay taxes, and at least at the same rate as everyone else. He should pay taxes on hisconsumption, not the returns on his investments.
A central proposition in the economics of optimal taxation is that the tax rate on capital should be zero or close to it. Like anything else in economics, there is a huge literature of ifs ands and buts, yet the result seems fairly robust. (Google “optimal taxation of capital.” This is not a political statement, there are thousands of pages of equations behind it. There is a separate “optimal taxation” literature on “optimal redistribution,” with some equally surprising results that I’ll write about some other day.)
Intuitively, this is related to the theorem that you shouldn’t tax intermediate goods, or have tariffs for moving goods around the country. Romney’s income was taxed once, when he made it. It’s not efficient to tax it again, because he chose to save it rather than spend it immediately on an orgy of houses, private jets, and a big vacation for his extended family.
If you made money in dollars, paid taxes, then went to Canada and got $1.20 Canadian, it would make no sense to say “you made 20 cents of income, we’ll tax it.” It makes no more sense to pay taxes again on money that is moved over time. We decry that Americans don’t save enough, the Chinese, the trade deficit and so on. Well, if you want people to save more, stop taxing it.
Megan McArdle posted a lengthy analysis:
So the story-of-the-week seems to be Mitt Romney’s off-shore investments. I am deeply confused by the reporting. Either that, or the reporters are.
It isn’t Megan that is confused. Read the whole thing »