Mickelson has a point on taxes 

(CNN) -- Phil Mickelson, aka Lefty, is thinking of leaving California and perhaps America because, according to his own reckoning, he is facing tax rates of 62% or 63%. Mickelson, probably the second-most-famous professional golfer in the world after Tiger Woods, later backed off from his initial comments about making "drastic changes."

Reports suggest that Mickelson earned more than $60 million in 2012. In that sense, he appears to be doing better than the Romneys, and perhaps you are not all that sympathetic to him.

The Romneys (remember them?) paid so little tax. In 2011, Mitt and Ann Romney paid federal taxes of $2 million on reported income of $14 million, for an effective tax rate of 14%, all roughly. The Romneys even had to foreswear taking all of their available charitable deductions to make their tax rate seem so high for appearance's sake.

It does bear noting that Mickelson is doing something to earn his $60 million. Whoever is paying him that much believes that he is worth it. Who are we, really, to argue?

Mickelson's instinctive reactions to high tax rates, even if his math may be a bit muddled, are sound and sensible ones. Tiger Woods certainly agrees with him.

But that is not the problem in the story. Lefty faces such seemingly inescapably high tax rates that he might just pack up his golf bags and leave home. Mitt pays so little tax that he has to ignore the law to pay a higher rate for appearance's sake.

How can this be?
The Mitt-Lefty paradox has a simple explanation: In America, we tax work. And highly. We do not tax capital or wealth much at all. Indeed, if you have wealth already, taxes are essentially optional under what I call tax Planning 101, the simple advice to buy/borrow/die.

In step one, you buy assets that rise in value without producing cash, such as growth stocks or real estate. In step two, you borrow to finance your lifestyle. In step three, you die, and your heirs get your assets, tax free, and with a "stepped up" basis that eliminates all capital gains. That's it.

Romney, with a personal fortune estimated at $250 million (his five kids have another $100 million) has figured this out. When he pays taxes, at all, he does so at the low capital gains rate.
Not so with Lefty.

Not so with Lefty.

He is a wage-earner, albeit a very highly paid one, and he's going to pay over one-half of his income in taxes if he stays in California. We may not be shedding any tears for Lefty any more than we feel for Gerard Depardieu, who recently left France for Russia to escape taxes, or for the Rolling Stones, who many moons ago left England and recorded Exile on Main Street from France.

Yet one fact not making news is that it is still the case that the highest marginal tax rates in America do not fall on the highest incomes, like Lefty, but on certain of the working poor, many of them single parents, who are being taxed at rates approaching 90% as they lose benefits attempting to better themselves.

It's a "poverty trap" that works just like the severe marriage penalties for the lower-income classes. But the working poor do not have the options of going to Canada, Russia or France.
Lefty has a point -- high tax rates create disincentives. If the rates are high enough, people react by moving. This should not surprise us: American companies have been fleeing our shores for years, in droves. Ask Mitt.

But this should worry us, for two reasons.

One, the fact that the high incomers do flee jurisdictions, or flee from the productive activity of working, is a bad thing for the U.S.

Two, the very risk that the rich and famous might leave, aided by the appearance that some do, holds tax reform hostage. We have struggled to raise rates at all on the rich, blocked by the mostly mythical Joe the Plumber as much as by the realities of Mickelson or the Rolling Stones. When we do finally raise rates, as we did at the fiscal cliff, we do so on the wrong rich, in the wrong way. Lefty's taxes went up, Mitt's need not.

The problem -- and it is the same problem as with Mitt's taxes -- is that we are taxing the wrong thing, in the wrong way. In sum, we tax work, not wealth. This is backward.

Capital gains tax is currently, I believe, right around HALF what income tax is. Should be the other way around, if you ask me.

Originally Posted by: Since69 

Capital gains taxation is legalized tax evasion put into law by the puppets of wealthy men.

Originally Posted by: DakotaT 

I've read this 4 times and it still makes no sense. Would it be better if capital gains was not taxed? That being said, I'm all for just tying all (short and long-term) capital gains tax to one's income tax rate and calling it a day.

Originally Posted by: Porforis 

I've read this 4 times and it still makes no sense. Would it be better if capital gains was not taxed? That being said, I'm all for just tying all (short and long-term) capital gains tax to one's income tax rate and calling it a day.

Originally Posted by: Porforis 

For all its popularity, "work v. wealth" is a false dichotomy.

Without wealth, we could not generate income; without income, we cannot increase wealth. Without an increase in wealth, we'll never increase income. Without an increase in income, we cannot .... etc., etc., etc.

It's that damn labor theory of value again.

It's one of those horrible ironies that intellectual history is full of. Because of the the persuasiveness of his popular writing, Karl Marx, more than any other single person in history, is responsible for the deep seated belief in the idea that all value is produced by human "labor". (He wasn't the originator of the idea -- John Stuart Mill and even Adam Smith got this wrong -- but it was the compelling rhetoric that Marx brought to bear through the Manifesto and his other polemical writings that is responsible for its entrenched status in popular consciousness. If you scratch them deep enough, you'll discover that its a notion shared by both the wealthy that libierals want to tax for everything and the wealthy who don't want themselves to be taxed: value is created by the workingman, the farmer with dirt between his fingernails, the man who hits little white balls and the man who tosses big round balls through a hoop.

But it is so wrong it would be laughable if it weren't agreed to by so many.

The amount of value created by that workingman, that farmer, that golfer and that basketball player? That depends critically on the tools and ideas they can bring to bear in their trade. Without his hammer and his computer, the workingman couldnt do much rooting in the shit like a pig. Without his tractor and his combine and his accounting spreadsheet, the farmer would be rooting in the same shit. Without his 9-iron and the machine that makes dimples, the golfer would be wandering around in the woods tossing pinecones. Without the pneumatic engineering technology that makes a basketball inflatable and bouncy, and the basketball player would be limited to tossing the workingman/farmers' shit at the hole made by the golfer's arms.

Wealth doesn't come from labor alone. Wealth comes from the application of previously accumulated wealth [called "capital"] to, and the use of said wealth by, labor. Wealth without labor is valueless, but we haven't had productive labor without wealth since ... ever. Labor without wealth to put to use is the caveman who hasn't got fire or a sharp stone or a club.

Taxing the worker screws up the incentives to work. That's true as far as it goes. And its true whether you're a ditchdigger being taxed or a pro golfer being taxed.

But taxing wealth screws up the incentives to put labor to work more productively. And it screws up the incentives to look for ways to make labor more productive.

There is no such thing as a tax that does not screw up incentives to produce.

Capital and labor are not substitutes. They are not "one or the other". They are not things we add together in different ways, making A bigger and B smaller in order to change the quality of national prosperity.

Capital are complements. They don't operate by addition and subtraction but by multiplication and power laws.

Income = Labor (L) times Capital (K). If taxes on work (L) increase ("income tax"; "consumption tax"; "sales tax"), income falls. If taxes on wealth increase, income falls. Labor is screwed regardless.

[So are the forces of capital, more often known as "the rich." But no one except the rich cares if the rich get screwed.)

There is, IMO, no such thing as a tax that benefits labor.

Spending of tax receipts may. Maybe if we put the money in the hands of the king, the king will do better with it than the rich barons because the king is an entrepreneurial genius and the baron is a wastrel who does nothing but hang out with whores and gamblers. Maybe the government is a brilliant, entrepreneurial king who only needs capital to get those peasants to be happy, productive people. Maybe the barons are all as useless as the third generation of British aristocracy. That's a different disagreement for a different thread.

But the power of taxes is not to create. It is never to create. It is only to destroy.

Originally Posted by: Wade