Inspired by Mitt Romney’s low tax rate, Matt Yglesias defends the principle of taxing investment income more indulgently than labor income. To make the argument, Yglesias spins a morality tale about two well-paid doctors, one a profligates who eats fancily and travels the globe, the other a prudent sort who builds buildings and hires people to work in them. It’s only fair, concludes our Slate pseudo-contrarian, that the prudent doc deserves a break from the tax code, since he’s doing so many other people favors.
Leaving aside the fact that the profligate supports an army of chefs and flight attendants, this is not how investment works in the world we actually live in. Most investments are in previously existing financial instruments. As Alan Abelson used to say in the old Barron’s ad, someone buys a stock because he thinks it’s going to go up—but the person he buys it from thinks it’s going to go down. Almost all corporate investment in real things like buildings and machinery is financed internally, through profits. For the last few decades, corporations have been generating more money than they know what to do with, so they’ve been shoveling out to shareholders. (See here for more.) In Romney’s case, Bain largely invested in existing corporations—turning some of them around (mostly with other people’s money) and bleeding others dry (at great profit to Bain partners).
Really, Matt, you didn’t know this?