A little earlier I worked out a math problem to try and make a point, but that point may not have been as clear as I would have liked, so I will try again.

Making money, real money, doesn't come from doing a lot of work. One significant mechanism comes from taking existing wealth (yours or someone else's) and using the "magic" of exponential growth, aka, compound interest, to make more money at an ever increasing rate.

The idea of "compount interest" is simple. The person loaning the money (or property, etc) gets paid based on the total amount outstanding. The winnings from one loan can be put to work lent to yet more people while the original still accumulate at the same rate. One becomes two, each of which leads to two more (four total), which then lead to eight, and then 16, etc. We get income coming in at exponentially increasing rate since while the rate gained per loan might be the same, the amount of loans can multiply exponentially.

For the same work, and in a world where the government keeps the total amount of money in the system at a stable (slowly increasing) level, having a lot of money makes it easier to make more money.

Wealth begets wealth. Money is put to work to make more money.

The behavior of this growth is what in engineering might be described as a feed-forward system (positive feedback system). The further you are ahead, the easier it is to get more ahead... at least until some sort of saturation is hit (nothing scales perfectly and there is a maximum amount of money in the system, but note that one of the barriers to full saturation of one person controlling "everything" is the government limiting mergers and many sorts of anti-competitive deals). And since the value of money is preserved because the near constant total amount, the result is that one's very fast and significant gain comes at a loss to many others. In this last vein, we can think of the growing US debt as an aggregate debt by those comprising "the public", such that the more negative that public debt gets the more positive gets the wealth of a few others so that the net amount is sort of constant or at least growing at a modest pace related to how fast humans add value to society (a rate which is certainly slower than exponential. Growth (net equity) is limited by the rate of productive humans working day in and out, but the debt/credit can grow much faster (the asset and liability individual halves of the ledger), with the gains by the creditors matched by losses from the debtors as the sum stays relatively stable. [And this is an idealized model of course.]

So we have "a" person making money at an exponential rate, while the total output of society is much slower and the money supply is near constant. This is an untenable condition. Something has to give. [Look at US debt and how it will become more and more difficult to pay off while the beneficiaries will make more and more money for the same constant effort (which is already pretty little since they are just *holding a piece of paper* that says they are owned money).]

Another way of seeing this positive feedback effect is when playing the game of Monopoly (the board game). Many Americans have probably played this game. It becomes clear after playing a few times that the game starts off slow with everyone having a near equal chance, but whenever one player has built up a certain lead it becomes almost impossible for that player to be stopped (assuming the player plays about as well as any other player). And the longer the game goes, the greater the headwind against all the other players and the higher the mountain that must be climbed.

Real life business is not like Monopoly, quite, but it comes close in many ways. So, to repeat the main points above: There are positive feed-forward effects in business. They arise out of mathematics. The amount earned is not based on work put in or contribution to society but on pure mathematics.

Second, I want to emphasize that this result exists only because we have a government that puts total value on a dollar, and whose value is largely preserved (very slight inflation). That dollar has no one's name on it and the government backs it regardless of how you acquired it. That you worked your fingers to the bone for 30 years or that instead you started off with a nice inheritance you multiplied through interest or other investments is not noted on that bill. So despite the contributions to society by these two folks not being that different, or arguably the person working harder and making much much less income contributed more (this is subjective in many ways since opportunities are limited to make contributions as say CEO or investor, even if many people could do a decent job), one clearly makes a whole lot more of these dollar bills and related property (wealth begetting wealth), which the government then secures at all costs to it as an exclusive ownership (more or less) simultaneously denying all 300 million other Americans the ability to utilize such limited resource (whether currency, land, factory, etc). Note that while one person can own factories and lots of land, etc, that person surely didn't build that with his/her hand but simply was granted super profit and control powers by the government to the majority cream off the labor of many others. As the argument here goes, those rights come from paper (contracts), which give much more to one party in many cases, when -- like Monopoly -- that party has significant more leverage or head start than the others.

To recap this last point, the government gives full powers to the winners of business "Monopoly" regardless of their actual contributions to society.

Now, lastly, we can now return to the mathematical example I did earlier to wrap up. What that showed was how powerful compound interest is, and how something as simply as being a creditor first and a debtor afterward or vice-versa, for otherwise the same amount of work, can mathematically lead to huge/gargantuan differences in your state of wealth.

So, our government gives huge value to the winner of these wealth games that arguably are a bit arbitrary based on the head start of a party (head start also generalized beyond money to education and insider knowledge/ skills) and grow very lopsidedly to favor one participant over others.

Now, let's talk more about taxes.

For something that is so arbitrary in many ways and so lopsided (based on solid math), fairness and smartness might dictates that we should either not allow government to restrict so many in order to give so much exclusive control to one (there is a real opportunity cost to everyone who cannot use some land or money to improve themselves or some aspect of society) or we should recognize this inherent unfairness and make sure the tax rates on wealth-begets-wealth easy-money is significantly more than earned money and grows the larger that amount is.

At the end of the day, no one has to be that wealthy for investments to be made. Everything boils down to someone that is capable being entrusted to make certain decisions, and they can put themselves in this position without needing a zillion dollars. In Monopoly and virtually every other game, we restart the games -- reset -- to allow another chance for fresh ideas and skills to have a fair shot to shine through and win. If a person is more skillful than the rest, that person will have many opportunities to win and will. We want to recognize that no one else would ever win if we kept giving the last winner the same thing they had before. The math goes crazy and divorces contribution to society from winner and loser.

Now, I am not asking for resets exactly, but taxes are a form of reset. They can also be seen as the mechanism by which government tries to recognize contributions of citizens and fairness and fair playing fields and so requires that to keep recognizing ownership status that the "chips be returned back to the house" to some degree to allow more rounds of games under fair conditions. One other way to look at this is to consider that all citizens should be stockholders of the riches of this nation and be given a dividend whether they lose or win at the table. [a profit from the houses winnings, where the "house" is the aggregate of the entire economy, work contributed, government, and other social benefits that each member enjoys if/whenever allowed to play the game]. We can consider progressive tax rules to be the price to participate in a great nation and society with lots of access and gains for everyone. We can even separate out "basic dollars" from "disposable dollars" and have the former be an entitlement of every stockholder and the latter the left over winnings at prior games (after taxes have been paid to support the basic dollar dividend redistribution).

Criticisms against these observations/thoughts might be that people are getting money "without earning it", but that only assumes a stockholder in the nation doesn't earn it while a fat cat sitting back with lots of levers and wealth and math on their side does. Note, that there is plenty of room for earned income to separate those who contribute and earn less from those who contribute and earn more, but investment income can be very lopsided and should be taxed differently to account for the sort of anomaly described here (and other powers that wealth buys you so that wealth will tend to beget wealth in many scenarios.. for the same work and skill). Another criticism might try to invoke "welfare mentality", but that ignores that most people with lots of wealth or skill have had a lot of welfare, probably via the government's biased roles as mentioned here and also simply by being part of a strong society, and also from family and friends. Being allowed to learn key know-how and make mistakes yet still be given access is something that clearly not every child gets. I mean it's pure welfare whenever a kid or any age is taught, fed, housed, and given and not tossed out into the street for not "holding up their own". So, as the mathematics can show, the start in a persons' life (including work habits and expectations, and opportunity, etc) can potentially mean the different between making very good money investing/saving or otherwise not developing net positive wealth at all and growing a mountain of debt you can't work your way out of... under current government rules (although bankruptcy is allowed, so that the situation is not this bad but it doesn't remove the inherent biases that keep coming back over and over).

..yea, sure, that was clear.

Here is a mathematical experiment which suggests some questions on tax fairness (and indicates the high value that comes with wealth, a leverage that exists thanks to our government). See if you can guess before looking at the answer, what A followed by B yields vs what B followed by A yields.

A: For 20 years, your earned income falls short $100 monthly on your monthly costs, so you borrow that amount on credit cards (with no need to pay a minimum since you can't) at a rate of 2%/mo of total amount borrowed to date.

B: For 20 years, your earned income exceeds your monthly costs by $100 month, so you use the extra money to earn interest at 1%/mo of total amount saved to date or else to pay back down your debt.

Question. If I start off life well, making $100 extra per month for the first 20 years, and then relax the next 20, coming up short $100 each month -- just as detailed above -- how much will I have or owe?

Question2. How does this above amount contrast with the other case, where I start off life weak by falling short first and only later making the extra money?

If you get off to a head start, you make lots of money after 40 years. First 20 nets you $99,915. Then you take from that pile to cover your 100 shortfall for the next 20 years. The money left in the pile at the end of each month, continues to grow at 1%/mo: $988,415. Alternatively, you can borrow 100 in the shortfall years (not dipping into the savings account) for a still OK gain of: 1,188,244 - 585,932 = $602,312.

If you get off to a slow start, you owe lots of money after 40 years. First 20, you owe $585,933. Next 20, you gain more by reducing the amount of debt (at the rate of -2%/mo) rather than worry about earning 1% interest, so after 40 your $585,933 keeps growing but at a very slightly net reduced rate (because of the 100 monthly payments) to a grand total of: $67,317,101. If you had opted to put the 100 into 1%/mo trust instead of paying down the debt a little bit each month, you'd instead have a total debt of 67,903,034 - 99,915 = $67,803,119.

Summary. If you start ahead first, you net almost $1 million after 40 years. If you start behind first, you are in debt by over $67 million after 40 years.

Note that I used a higher APR on the credit card borrowed money than the savings rate on the invested money (just like in real life) to account for the fact the money paid by debtors does not go just to pay investors but to pay CEO bonuses and the wages of everyone in there who helps support that system (and taxes????, etc) while also accounting for debt reduction and bankruptcy writeoffs.

Further, this ridiculously lopsided effect is multiplied if the headstart is indeed very large (and not just $100 extra per month). In fact, bankruptcy does exist to solve the case of falling too far behind, but the point remains that the start matters a great deal to how much you will have or owe.

Now the morality/fairness questions:

If we want to recognize that the good start pays more because the work gets done earlier and other people can enjoy it earlier or build upon it faster, we still can ask 2 things. First, does society really gain that much over the 40 years in one case vs the other? Second, if people start off in different positions, is it fair to judge them by the same standard? In particular, this example could argue for taxes to be levied and redistributed in order to fund each child to the same start in life, perhaps arguing in practice also for a very high near 100% estate tax ("death tax"). Alternatively, for fairness' sake, we can recognize that those starting slower (or in practice, those making less) should be taxed very differently and lower than those raking in the bucks.

The calculations were performed using a simple computer program lines. I use Linux+perl (but these can easily be translated to javascript and run right inside the location bar of Firefox web browser). The first line calculates the value I round off and enter into the second line.

A+B, dipping: +$988,415
> perl -e '$a=0; for ($i=0; $i<240; $i++) {$a+=100; $a*=1.01;} print $a;'
> perl -e '$a=99915; for ($i=0; $i<240; $i++) {$a-=100; $a*=1.01;} print $a;'
#the second value is the answer

A+B, separate borrowing: +$602,312
> perl -e '$a=0; for ($i=0; $i<240; $i++) {$a+=100; $a*=1.01;} print $a;'
> perl -e '$a=99915; for ($i=0; $i<240; $i++) {$a+=100; $a*=1.01;} print $a;'
> perl -e '$a=0; for ($i=0; $i<240; $i++) {$a+=100; $a*=1.02;} print $a;'
#the second value minus the third is the answer

B+A pay down: -$67,317,101
> perl -e '$a=0; for ($i=0; $i<240; $i++) {$a+=100; $a*=1.02;} print $a;'
> perl -e '$a=585933; for ($i=0; $i<240; $i++) {$a-=100; $a*=1.02;} print $a;
#the second value is the answer

B+A invest separately: -$67,803,119
> perl -e '$a=0; for ($i=0; $i<240; $i++) {$a+=100; $a*=1.02;} print $a;'
> perl -e '$a=585933; for ($i=0; $i<240; $i++) {$a-=0; $a*=1.02;} print $a;
> perl -e '$a=0; for ($i=0; $i<240; $i++) {$a+=100; $a*=1.01;} print $a;'
#subtract the 3rd value from the second to get the answer.

Reich does well to zoom in on the 13% and its implications. Thanks too to other commenters who supplement these: particularly the fact that most of us ordinary folk find our NON-income taxes significant.

Just one caveat: Just because we now think we have a good idea of Romney's effective taxes does NOT mean that Romney should get off the hook of being the first major candidate to refuse to do what his own dad started doing: providing 12 years of returns. [Thank you commenter Oldhat for your link: I hadn't realized that Romney pretends to tell us about his taxes with just one year of returns. And that his platform - an amazing combination of vagueness and anti-99% sentiment - goes on to tell us that he wants to cut all tax rates (on existing taxpayers) and make that revenue-neutral by increasing the tax base - i.e. by imposing taxes on folk whose low income, etc., now exempt them. ]

I think that many of us are willing to give Romney credit for his charities as charities. We're not looking to find flaws there, or to demonize his religion. The overall 13% issue comes down to this: after all taxes and helpful charities and job-creating and innovation-creating foundations and reasonable set-asides for the family future - how much remains?

In my opinion what is really sad and unacceptable about Romney is his in-our-face failure to live up to the disclosure standard set by his own dad. In an alternative universe that he is free to lead us into, he could disclose all his returns, and given what they reveal could maybe persuade us with a credible combination of good reasons and heartfelt penance.

A recent email from the Obama campaign on this issue gives that campaign no credit on this issue either: they plead with Romney to disclose just 5 years of returns. That's typical of the flawed (and too-often actually immoral) Obama approach: more-than-halfway PRE-compromise on almost all issues - a failure to perceive (or anyhow to act on the perception) that there are vital principles to be defended, not merely the super-principle of compromise at all costs.

Is the tax rate he pays even informative without knowing if it includes his offshore earnings?
The question isn't if he is bad, but if his behavior makes you want to trust him how to fairly set future tax rates. Keep in mind, the only reason to have an income tax instead of a consumption tax is because it can be made progressive to give a higher rate to high income individuals.
I think Romney is the poster child of why we need to raise the marginal rates at the high end and close the loopholes for off shore earnings.

It's very easy to understand:

If I make 30, 000 a year, and I pay 15% in taxes, that leaves me with 25, 500 a year to live on, which is 2125.00 a month.

If I make 20 million a year, and I pay 90% in taxes, that leaves me with 2 million a year 167, 000 dollars a month to live on. (Romney makes 20 million a year.)

No amount of poor mouthing by anyone who can pay 90% in taxes and still have 167K every month to live on will ever convince me that they pay their share in taxes.

Romney says he pays over 20% in taxes, as if that's a lot. Let's say he paid 30% in taxes. That would leave him with 140 million a year to live on. That comes out to 11.7 million a month.

So we're suppose to believe that living on 11.7 million a month is equal in "fair share" to 2100.00 per month?

The humanity and social consciousness of anyone's who thinks they are paying their fair share, given the statistics above, should be cause for seriously alarm.

For me, that sort of thinking presents itself as a serious psychological illness.

Thank you for all your contributions to the political dialogue. It is refreshing they come from a professor, one who has served in government, who represents the best of the elite. You uncover the truth, do it with taste and make us think of the importance of this election. The fact "that 400 of the richest Americans hold more money than the 150 million of us put together" gives us a chance to reflect on the social inequality that the GOP wants to preserve.

At some point in time it may dawn on the ultra rich as well as the ultra poor that we need each other to survive. Right now the ultra poor are dying off, the merely poor are headed downward and the mildly well off are being stripped of their belongings by the corporations run by the ultra rich. I look at it as a flushing toilet with everybody slowly revolving downwards except for the Romneys of the world who are clinging to the sides. In November it will be nice to bring out that toilet brush and scrape them into the vortex.

Jeffrey: Don't forget the drowning of the federal government and the Constitution in the bathtub.

The filthy rich feel so morally superior to the working class that they feel they deserve to pay ZERO taxes and should charge peons for the privilege of basking in the glow of their presence.