Why Mitt Romney Should Pay a Lower Tax Rate Than the Rest of Us

Slate: Why Mitt Romney's Effective Tax Rate Is So Low And Why It Probably Should Be, by Matthew Yglesias:

The main reason Romney's effective rate is so low is that the
American tax code contains a lot of preferences for investment income
over labor income. That's something that strikes many people as unfair
on its face, and particularly unfair since it often means very low rates
for extremely rich people like Rommey. … But this is definitely an issue where the conservative position is in
line with what most experts think is the right course, and Democrats
are outside the mainstream.

The reasoning is basically this. You imagine two prosperous but not
outrageously so working people living somewhere—two doctors, say, living
in nearby small towns. They're both pulling in incomes in the low six
figures. One doctor chooses to spend basically 100 percent of his income
on expensive non-durables. He goes on annual vacations to expensive
cities and eats in a lot of fancy restaurants. The other doctor is much
more frugal, not traveling much and eating modestly. Instead, he spends a
lot of his money on hiring people to build buildings around town. Those
buildings become houses, offices, retail stores, factories, etc. In
other words, they're capital. And capital earns a return, so over time
the second doctor comes to have a much higher income than the first
doctor.

So then there are too different scenarios:

— In the world where investment income isn't taxed, the
second doctor says to the first doctor "all those fancy vacations may be
fun, but I'm being much more prudent. By saving for the future, I'll be
comfortable when it comes time to retire and will have plenty left over
to give to my kids."

— In the world where investment income is taxed like labor income, the first doctor says to the second "man
you're a sucker—not only are you deferring enjoyment of the fruits of
your labor (boring) but when the money you've saved comes back to you, it gets taxed all over again. Live in the now."

And the thinking is that world number one where people with valuable
skills take a large share of their labor income and transform it into
capital goods is ultimately a richer world than the world in which such
people just go out to a lot of fancy dinners.

That's the theory, at any rate. It's a pretty solid theory, it's in
most of the textbooks I've seen, and it shapes public policy in
basically every country I'm familiar with.