A lot has been made about Mitt Romney’s recently released 2011 tax returns. Most of his income comes from investments made in a ‘blind trust’. Some take issue with whether or not the trust is truly ‘blind’. Others have taken issue with his effective tax rate(it’s lower than what many wage earners pay). I want to discuss, what I see as a much larger problem. Let us assume for a moment that Mitt Romney’s blind trust really is ‘blind’. How is it that a man makes nearly 14 million dollars by doing absolutely no work?
A blind trust is supposed to be where a wealthy politician puts all his financial assets and then has no say in how it is managed. The people who manage it for him earn a small(maybe a large) fee for managing it on Romney’s behalf. By putting money into a blind trust one doesn’t have to do anything with it. They aren’t consulted, bothered, cajoled, nothing. Just a big ol’ check at the end. This means Mitt Romney contributed absolutely zero work to the economy, but still managed to pull nearly 14 million dollars out of the economy for himself. If this Forbes article on Mitt Romney’s Wealth is to be believed, that comes out to a 6% or 7% return on investment.
Let’s review the idealized role that investors play in a capitalist society. Investors serve a very useful function in society. They choose how and where to invest new resources. If they choose wisely, society in general gets richer, and the investor makes money – possibly a lot of money. A win-win. The risk of course is that they choose poorly and lose some or all their money. The money made by an investor is the reward for doing their homework and investing wisely in new enterprises. Losing their money is the punishment for speculating or just investing foolishly.
The problem is, Mitt Romney did none of those things. Did he really do anything worthwhile to earn a 6% return? Six percent is pretty high considering that the average savings account is below half a percent. The only decision he had to make as an “investor” was who to put in charge of his blind trust. Is that one decision really worth 14 million dollars and a six percent return? Maybe it is, but I think it would certainly warrant a review of the current rules of the system.
I am not suggesting as a solution anything radical like a 100% tax on financial income, or a ban on private investment. What I am suggesting is to look at the ways this money is made. The eco-system of laws and institutions behind it. What government rules or agencies may be perpetuating it? Does someone have to be a 200+ millionaire to earn a 6% return by doing nothing? If so, why? And is there a good reason why it is so?
Why is it that a person can state that they made nearly 14 million dollars last year without lifting a finger, and no one in the corporate so much as raises an eyebrow?