Harvard MBA Degree Earns Romney ‘C-’ on Tax Plan: Caroline Baum

Jan. 20 (Bloomberg) -- Conventional wisdom holds that presidential candidates, once they secure their party’s nomination, tack to the center for the general election. Having appeased the more extreme elements that come out to vote in primary elections, a candidate can drop the pretense of being a far right- or left-winger and don the mantle of reasonable centrist in order to garner the ever-growing share of the independent vote.

Not so for Mitt Romney. With the inevitability of his candidacy increasing with each passing primary, the founder of Bain Capital is going to have to demonstrate his conservative bona fides, especially in the area of tax policy, if he wants to convince the public he represents a clear break with the past. (“Governor of Massachusetts” on the resume just doesn’t cut it.)

Reducing the corporate income-tax rate to 25 percent from its current 35 percent, one of Romney’s five bills for Day One, is pretty standard fare. Even President Barack Obama talks about lowering the corporate tax rate to make the U.S. more competitive globally.

What about eliminating the corporate income tax altogether?

“There’s a consensus among economists that we shouldn’t tax corporate income,” which is taxed a second time when it’s paid out in the form of dividends, says Bob Litan, vice president of research and policy at the Kauffman Foundation in Kansas City, Missouri.

Gaming the System

We haven’t heard “boo” from Romney on the subject of double taxation, no doubt an attempt to avoid getting snared in Obama’s class-warfare net. Yes, Romney would eliminate the estate tax, and he makes passing references to overhauling the tax system to lower and flatten rates and broaden the base. But the man with an MBA and law degree from Harvard has offered no sweeping alternative to the current regimen, no support for a simpler system that would, for example, tax all income once, at the same rate and as close to the source as possible.

That’s the premise underlying “The Flat Tax,” first published in 1985 by Robert Hall and Alvin Rabushka, senior fellows at the Hoover Institution.

“Whenever different forms of income are taxed at different rates or different taxpayers face different rates, the public figures out how to take advantage of the differential,” the economists wrote.

You betcha! That’s why executives prefer their compensation in the form of stock options, which will be taxed at the lower capital-gains rate, rather than in salary.

Instead of radical tax reform, Romney, in his 59-point, 160-page economic plan, proposes eliminating the capital-gains tax on those earning less than $200,000 a year, an “arbitrary nod to progressivity” that “would do nothing to incent investment,” according to the Tax Foundation, a policy-research organization in Washington.

The think tank analyzed each candidate’s tax plan on the basis of fairness, neutrality, complexity and the impact on competitiveness, economic growth and tax revenues. Romney earned a “C-,” one step above the class dunce, presidential hopeful Rick Santorum, who scored a “D+.”

Under increasing pressure from his Republican rivals to release his tax returns, Romney revealed this week that his effective tax rate is 15 percent. Why, that’s lower than the rate paid by Warren Buffett’s secretary! And it’s all perfectly legit. The bulk of Romney’s income comes from investments, which are taxed at a top rate of 15 percent.

Much of the income earned in his years as chief executive of Bain Capital is believed to have been in the form of “carried interest” income that’s taxed at the more favorable capital-gains rate. If Americans want to be outraged about something, it shouldn’t be the rough-and-tumble form of capitalism practiced by private-equity firms, which may, or may not, cost jobs. Rather, as the editors at Bloomberg View argued in a Jan. 18 editorial, the object of their ire should be the tax code’s preferential treatment of debt, which is tax-deductible, and carried interest.

Improve the GPA

Opinion polls suggest Americans want the rich to pay higher taxes (at least until they become rich themselves), but I sense more outrage at the unfairness of the system. By unfair, I mean not marginal tax rates per se, which currently top out at 35 percent for individuals, but the gaping loopholes in the tax code that allow and encourage avoidance. Large corporations, with their hordes of lobbyists, buy influence with politicians who reciprocate by crafting tax breaks and exemptions most of us can only imagine. Such preferences breed inefficiency.

The only solution to this pay-to-play is a radical change in the tax code. If a candidate doesn’t espouse bold ideas on the campaign trail, where promises are easy, what’s the chance of reform when he’s faced with the politics of governing?

Now comes the point where I say that, despite his wishy-washy tax plan, Romney is the only candidate with a chance of beating Obama in November. From everything that’s been written about him, he sounds like a good businessman, a hard worker, a problem solver and someone you can trust. (OK, we’re talking politicians here.)

And he still has time to improve. Should he become the Republican nominee and face Obama in November, Romney will need to sharpen his debating skills, figure out how to own his enviable record at Bain, rethink his protectionist trade policy with China, and raise his grade-point average on tax policy.

If not, Republicans and independents will have to swallow hard and remember that we go to the polls with the candidate we have, not the candidate we might want.

(Caroline Baum, author of “Just What I Said,” is a Bloomberg View columnist. The opinions expressed are her own.)

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To contact the writer of this article: Caroline Baum in New York at cabaum@bloomberg.net.

To contact the editor responsible for this article: James Greiff at jgreiff@bloomberg.net

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