By JR on Saturday, January 28, 2012
Let’s face it. The two-year-long process leading to the inauguration of an American president has more in common with Madison Avenue and Sunset Boulevard than Pennsylvania Avenue, so we should not be surprised or shocked. But it is downright bizarre to see one Republican candidate tearing into another Republican candidate for not paying enough tax. After all, aren’t these guys supposed to favour a lower tax burden?
Newt is criticising Mitt because he pays only 15% income tax. If Mitt had been caught evading tax, Newt would be onto something, but Mitt is just complying with the tax code created by a Republican president, George W. Bush. If Mitt had paid more, he would be making voluntary contributions to the public purse, which as the late Kerry Packer once said is a mug’s game.
Soon the US media will go into a frenzy over Mitt’s tax affairs because he will have to go through that obligatory ritual for all presidential candidates of making public tax returns for the past few years. (Thank goodness our candidates for high office don’t have to do that.) But there is a perfectly good reason why Mitt’s overall tax rate is low: his income is mainly from capital gains and dividends, which are taxed at 15% in America. Australia prevents double taxation of dividends through the imputation system; the United States mitigates it by taxing dividends at a low rate. But taking into account the 35% company tax rate and the 15% rate on dividends in America, any dividends paid out of taxed profits are in fact taxed at almost 45% in the hands of the shareholder. The 15% rate on capital gains in America is approximately half the top marginal personal rate, as is the case in Australia.
The real issue is not whether Mitt is paying too little but whether the tax system as sketched above is right. There is nothing exceptional about taxing capital income more lightly than labour income. Australia does it to a point, and even the Henry review said we should keep doing it (albeit in different ways). The real worry in America isn’t so much the fate of Newt or Mitt at the hustings but that if the Republican primary campaign can take this bizarre turn, perhaps the populism of Barack Obama, Warren Buffett, and the Occupy crowd is setting the terms of the public debate on tax policy more than anyone realised.