Mitt Romney's Tax Amnesia

Mitt Romney cracks me up. He's branded himself as the ace businessman, the guy who has restructured, run, and deconstructed companies, yet he has problems remembering how much he pays in taxes. He thinks -- it's just an estimate though -- that it might be 15%.

Why can't he remember exactly? Did he lose his tax return? Forgot to write the number down on his hand? Has he become estranged from his accountant? What's the deal?

I can guarantee you that Mitt Romney knows exactly what his tax rate is, possibly to the third decimal place. He's terrified of going public with all the details, because he knows it looks bad. You can't tell Americans you are ready to reform tax policy -- and then neglect to level with them about the fact you are probably paying a lower tax rate than anyone.

This is going to be a huge problem for Republicans during the 2012 election. They are playing right into Obama's hand. Now, personally, I like low taxes. And I also really don't like Obama's class warfare rhetoric. But as a political strategy, it will probably work in this election, especially if the economy continues to marginally improve. (Disclosure: I currently have no party affiliation, and I don't yet know whom I'll vote for.)

The unemployed Michigan autoworker or the waitress in Chicago is not going to have a lot of sympathy for the flashy businessman on television crying that you can't tax the wealthy any higher -- as he discloses that he believes he may have filed a 15% tax return.

Now, the policy wonks will go on and on about Laffer's Curve and carried interest and the cost of capital, yada yada yada. But I'm into common sense. For the average American, the policy arguments just won't matter. They will see it as: Mitt Romney's paying a lot less tax than me, and he is building a 12,000 sq. ft. vacation home in La Jolla, Calif..

For whatever reason, tax policy brings out the most heated ideological arguments, but here is a fact that is undeniable: Tax rates are currently low. Yes, we all hate taxes so much that they could always be lower! But unfortunately, at some point, logic has to set it -- the reason we have taxes is that we pay for stuff. Like roads. And Social Security. And schools. And computer-guided drones that blow up potential terrorists -- and sometimes wedding parties -- in foreign countries.

You see, all that stuff is expensive, when it comes down to it. And people seem to forget the basic political struggle: You can pay for it, or you can eliminate it. Make up your mind. But you certainly can't have it all!

Tax rates are only part of the equation. They are lower than they've been since the early 1990s, and they are at some of the lowest levels since 1917. They're lower than when Ronald Reagan was in office. In fact, during the Eisenhower administration, the top marginal tax rate was as high as 91%. If you don't believe me, the data is right here at the Tax Policy Center.

You see, getting hysterical about high taxes -- right now -- is just wrong. They're low. They're especially low considering we are running $1 trillion+ deficits. Even if the Bush tax cuts are rolled back, we will still be at the lower range of marginal tax rates in the last 50 years.

Here's the problem: We've been cutting taxes for years now, and it hasn't helped. The economy is worse. That is because 1) we have pursued high-spending policies, including massive wars, at the same time that we cut taxes; and 2) our economic problems stem from the creation of debt, and undisciplined fiscal and monetary policy, not taxes.

Let's take a look at a chart plotting tax rates versus GDP growth:

Tumbling Taxes

Tax rates have been falling for nearly 50 years, but it's hard to make any conclusions about cause-and-effect.

It's pretty clear from the chart above that there are two distinct trends: The long-term trend on tax rates is... down. The long-term trend in GDP growth is... not great. You can't make a correlation here, any way. There are too many variables. But it's clear to me that taxes have not been the driving influence of the economy -- other things have.

The economy stinks because we are in a balance-sheet recession. Banks, consumers, and sovereign nations are all de-leveraging debt. That means there's less money to spend, because credit and debt is being reduced.

But it doesn't matter. The politicians are going to continue to debate taxes right up until November 6. Hermain Cain had 9-9-9. Mitt Romney has his 15%. Obama has the ace in his pocket -- with gridlock in full bloom, barring a huge political change in the election, tax rates will probably end up rolling back to Clinton-era levels at the end of 2012, when the Bush tax cuts are set to expire.

Will it be the end of the world? I doubt it. We'll all pay a few more percentage points on taxes. We'll be paying for our sins, because somewhere along the line we all forgot to balance the budget. Whose fault is that? Everyone's. It's pretty clear from the political record of the last 12 years that no single president or party had the magic solution to the economy, or even figured out how to balance the budget, no matter who was voted into office.