Is Mitt Romney Overtaxed?

January 18, 2012 3:18 pm ET — Walid Zafar

Mitt Romney

It's hard to believe, but there are actually people out there who think millionaire GOP presidential frontrunner Mitt Romney should pay no taxes on his income. For instance, the American Enterprise Institute's James Pethokoukis complains that if you are concerned about high unemployment and the lack of growth, "you should be outraged that Romney is paying any income taxes at all." He writes:

It's real simple: If you think the biggest problem facing the United States today is income inequality, then you should be outraged that Mitt Romney's income tax rate isn't higher. But if you instead think America's biggest problem is high unemployment and a lack of economic growth, then you should be outraged that Romney is paying any income taxes at all. Really.

See, most of Romney's income is capital income-income from investments. And in the United States, capital gains generally are taxed at 15 percent vs. a top marginal income tax rate of 35 percent on ordinary wages for those making around $400,000 a year or more. But even folks with taxable income as low as $35,000 in 2011 will pay a much higher marginal rate, 25 percent.

Pethokoukis goes on to justify his position by explaining that Romney's effective rate is higher than the average, that half of all taxpayers end up not paying federal income taxes because of credits, and that capital gains taxes are a form of double taxation (although that's not entirely true).

But that's all really a distraction from his main point. The reason you want to eliminate capital gains taxes, Pethokoukis explains, is to expand economic growth and create jobs.

We're used to hearing these arguments, especially from the millionaires in Congress who have been successfully lowering capital gains tax rates for decades now. But do all wealthy individuals create jobs or invest in expanding the economy when the tax on their capital gains is cut? The short answer is no.

Just look at Mitt Romney and the capital gains tax cut he saw under Bush administration. What jobs has he created with that extra income? People like Romney don't hire additional workers for their businesses or expand their factories because their investment income doesn't come from growing businesses. The economic benefits of a lower capital gains rate are only realized when the extra income goes to those in a position to create jobs. That's why tax cuts for hiring workers encourage economic growth and make a lot of sense and why tax cuts for people like Mitt Romney don't. As a recent Congressional Research Service report concluded, capital gains are also the greatest force behind widening economic inequality.

Pethokoukis complains that "the main reason people want to keep taxing capital — or even tax it more heavily — is one of theology rather than sound economics." But what he's proposing — a situation where a hedge fund manager pays lower taxes than the manager of a fast food restaurant — is far from sound economics. After all, trickle-down and anti-regulation nonsense that is to blame for the financial crisis we are still very much in.