Saturday, January 21, 2012

Investment income

The attention that Mitt Romney is getting because he pays a 15% rate on most of his income illustrates a common problem we have in this country. It is called envy. Another way of putting it: Why should he pay less than I pay?

Unearned income is taxed at a lower rate than earned income. In the distant past, it was not taxed at all. This was because the economic system that we have here in the United States needs capital in order to finance organizations that are the means of production. The idea is that taxes had already been paid on the earnings that had been saved. It was ‘after tax’ and any income generated was payment for the risk assumed by the investor. Even interest earned from a basic savings account is taxed at a 15% rate.

Savings are the product of your ability to spend less than what you make. This is basically what profit is, the difference between what a business spends and what it takes in. In other words, this is where the CAPITAL in capitalism originates. A high savings rate is not just a good thing for our economic system. Saving (profit) is the very lifeblood of the system. Taxing this is fraught with danger in that the system requires a certain level of re-investment just to maintain itself. Otherwise, it begins to shrink and becomes less effective as capital becomes more expensive.

On the other hand, not taxing this allows the system to build upon itself, which is EXACTLY what the United States did for well over the first century of our existence. Capitalism works by the slow accumulation of wealth through the re-investment of savings or profit. This is how the United States built the most powerful economic engine ever devised by man. Taxes are withdrawals from this system. You can do it, but you pay a long-term cost. And if you over withdraw, you can damage the structure to the point of bankruptcy. And we are doing this because some of us are jealous that others have accumulated more than we have. This is class warfare.

I am pleased that Mitt Romney is able to generate enough income that he does not have to work for a living. I wish that I could do the same. I have unearned income that helps my position. I gave up a lot in my past in order to accomplish this. I am also very proud of this. (I have always believed in multiple sources of income) Why should I be envious of others who have more than I? Why should I be jealous if I have to pay a higher percentage on my earned income? And most importantly, why should my interest or unearned income be taxed at the same rate as my earned income? In fact, why is it taxed at all?

I paid tax on the accumulated savings already. And I have assumed risk in the investment that is generating this ‘unearned’ income. I have had numerous failures where I lost my entire investment. Where was our government? I did not see any refund for ANY of my losses. In some cases, I was able to offset some of my losses against other income, but I still lost. That is the chance that I took. Which is why I receive money in the cases where I am successful. And this should be taxed at the same rate as ordinary income where someone else takes the risk and the only risk I assume is my time and labor? No wonder our economy is in such trouble. We have only our envy and jealousy to blame. This is the basis of class warfare.

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