Capital Gains - The Unfairest Tax Of All

It is a fact that an American citizen that makes $34,500 (well below the median national income) is taxed at a higher rate than most millionaires and billionaires who make most of their income from "capital gains". That's because the federal government makes a distinction between types of income. Wages and salaries (which makes up the total income of most Americans) is taxed at the regular income tax rate, while income derived from capital gains (investment income which comprises the bulk of the incomes of the rich) are taxed at a special lower rate.

Most Americans think that as a person's income increases, they are taxed at a higher rate. It's called the "progressive" income tax. But that is only true for income from salaries and wages. All income from capital gains is taxed at a flat 15% rate -- regardless of how much of that income is earned ($10 billion or more in capital gains income would be taxed at the same 15% rate as a paltry $100 in capital gains income).

And most capital gains income is earned by the richest Americans -- the Americans who could most afford to pay taxes. In fact, more than 80% of all capital gains income in the past 20 years has been earned by the richest 5% of Americans. And more than half of all capital gains income in the last 20 years has been earned by the richest 0.1% (that's only one tenth of one percent -- or about 315,000 Americans).


And if you look at the dot-chart above (which you can click on to get a larger easier-to-read version), you will see that the average pay for the top 9 hedge fund managers is $1,872,500,000 (or about 25,161 times the income of someone at the 50th percentile). And since all of their income is made from capital gains, it is all taxed at the 15% rate -- a smaller percentage tax rate than someone making only $34,500 would pay. How can that possibly be considered fair?

The Republicans tell us that the incomes of the rich must be taxed at a lower rate because they will use that income to create jobs (the trickle-down theory). That's just not true, and no matter how many times that lie is repeated it is still just a lie. Giving rich people more money does not create jobs. If it did, we would have more jobs than we could fill since the rich are doing better than ever (even in this recession).

There is only one thing that creates jobs -- demand. When the people have money to spend it creates a demand for the products they want to buy. Then capitalists will act to fill that demand and hire the people they need to fill it (by producing and delivering the goods and services demanded). Until the demand exists, the rich will just put the extra money in their bank accounts and no jobs will be created. And right now, with most of the population hurting from the recession, there is not enough money in the economy to create strong demand.

A fairer tax policy that asks the rich to pay their fair share of taxes, in conjunction with increased spending on social programs, would funnel more money to more people and create a demand for goods and services that would spur the growth of new jobs. It's time the government did that. And a good start would be to eliminate the special capital gains tax and tax all income, regardless of its source, at the regular income tax rate -- a progressive rate that gets higher as the income gets larger. Those who get the most should pay the most. That's just common sense.