Dems distort taxes
July 18, 2012
The Aspen Times published a front-page article on July 16 about the release of politicians’ tax returns. The article contained quotations from Colorado Democratic leaders reflecting ignorance of how our tax system works.
The Democrats were quoted in the article claiming:
1) “When you have overseas money, you may not be paying tax on its earnings.”
2) “People are making a lot of money overseas that’s untaxed, and they (want to be able to bring it to the U.S.) at like 5 percent.”
3) “We don’t know if that’s going on with Romney, but it’s kind of an issue.”
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4) “Mitt Romney only pays taxes on 15 percent of his income – there may be income that doesn’t have to be reported, and that’s pretty unfair.”
In these few sentences, one can see the politicians’ trick of assassination by innuendo fueled by ignorance. Read the statements: “We don’t know,” “There may be,” “People are making a lot of money … that’s untaxed.” All statements based on speculation and ignorance. Speculation because the speaker had no information so he made speculative assertions. Why ignorance? Well, for one, all of Romney’s income is subject to tax, and he pays approximately 15 percent of it in U.S. federal income taxes (about right for someone whose income is from capital gains and dividends); he isn’t taxed on only 15 percent of his income. But more fundamentally, because the U.S. tax system doesn’t work the way the speaker assumed.
All the income of a U.S. citizen is subject to federal income tax, regardless of where it is earned. So is the income of U.S. corporations. Sure, our tax code grants lots of exemptions, deductions and credits (e.g., credits for taxes paid to other countries on income earned there, so U.S. citizens or companies don’t pay twice on the same income). But all the income is subject to tax unless there is an exemption or credit granted by Congress.
So a high-earning American can stash all the money he wants in Bermuda, Switzerland, the Cayman Islands or the Grand Duchy of Fenwick. But any income earned on the money is taxable here immediately.
Why would an American want to stash money in one of those places if he wouldn’t avoid taxes doing so? Maybe because the banking regulation is less onerous there or the corporate law is friendlier. Maybe because he can earn a higher interest rate there. Maybe because he is investing jointly with citizens of other countries who want a neutral location in which to base their investments. All legitimate reasons.
But the Democrats said, “People are making a lot of money overseas that’s untaxed and they (want to be able to bring it to the U.S.) at like 5 percent.” Wrong. U.S. people can’t legally earn foreign income and not subject it to U.S. tax immediately. The speaker seems to be confusing the taxation of foreign corporations by the U.S. with taxation of U.S. citizens and corporations. A U.S. person or company might own stock in a foreign corporation (think PepsiCo owning Pepsi France). If Pepsi France’s income is from a commercial activity like manufacturing or distributing products, or if the income is taxed in the foreign country at a high rate, its income is taxed at first only where it is earned (usually in other countries). When a dividend is paid to Pepsico, it is taxed in the U.S. like any other dividend earned by a U.S. taxpayer. But if Pepsi France’s income is from so-called passive investments (interest, dividends, royalties) that income is taxed in the U.S. right away.
What is true for Pepsico is true for Mitt Romney. He can’t avoid U.S. tax on his foreign earnings. The timing of that taxation depends on the type of income and the amount of foreign taxes paid on it. The Dems insinuate that Romney might be getting away with something, but there is not a whiff of reason to suspect that he is doing anything that other wealthy investors don’t do, in full compliance with U.S. law.
So why can’t we just peek at Romney’s tax returns for 12 years to prove he’s going by the book? Because they are not like Mick Ireland’s simple returns. They are more like the returns of a big corporation, possibly 800 pages per year. The Dems don’t care whether Romney is going by the book. They want to make up more nasty innuendoes and want thousands of incomprehensible pages of gobbledygook to help them.