Capital Gains Should Be Taxed At Rate Of Earned Income

The United States has two huge economic problems. First, it is the most unequal of all the developed countries when it comes to wealth and income -- and even more inequality than some third world countries. Second, it has an enormous national debt that is now growing at about a trillion dollars a year.

What has caused this? The obvious answer is the economic policy of the Republicans (trickle-down economics). They want you to believe that whatever is good for the richest Americans is good for all Americans, and the answer to every economic problem is just to give more to the rich.

Part of this economic policy is to make sure the rich are not having to pay their fair share of taxes. They just made this worse with the tax reductions of 2017 -- reductions that mainly went to corporations and the richest people. This only made both problems worse -- increasing both the national debt and the country's inequality.

Several Democrats have offered solution. Rep. Ocasio-Cortez proposed a 70% tax on any income over $10 million. Sen. Warren has proposed a wealth tax. And Sen. Sanders is proposing a small tax on stock market trades. These are all good ideas, in my opinion, but there is a simpler idea that would go a long way toward solving both the debt and inequality. Bill Gates, one of the richest men in the world, says the most effective way would be to eliminate the capital gains tax and tax all income at the same rate. I agree.

Currently, the top earned income tax rate is about 39.6%. But most of the rich don't pay that. Instead of the earned income rate, they pay a capital gains tax rate which is much lower (20%), because much of their income is derived from the stock market (investments and dividends). Note in the chart above that the top 1% get more than half of their income from capital gains (51.9%), which means they only pay a 20% tax on that income. And when you consider the top 0.1% (the super rich), that capital gains income goes way up. In essence, they pay a smaller tax rate than many in the middle class.

This is not only unfair, but it makes no sense. All income should be taxed at the same rate -- the earned income rate. It's time to do away with the special capital gains tax rate.

There Are 2 Tax Systems - One For The Rich And One For Us

(Cartoon image is by Dave Granlund at davegranlund.com.)

If you listen to the Republican politicians, you might be convinced that the rich in this country are overtaxed (and need another tax cut). That is not even remotely true. The rich are currently paying less in taxes than at any time since World War II. Part of it is because their income is taxed differently than that of working Americans (taxed at a lower "capital gains" rate, instead of the "earned income" rate paid by most Americans).

But that is just part of the problem. Their ability to hire an army of CPS's and tax lawyers, and the ability to hide money overseas, has resulted in them paying a lower percentage of their income in taxes than most in the middle class must pay. This has created, in effect, a different tax system for the rich than is applicable to ordinary Americans.

The New York Times has written an excellent article on this. I post only a portion of it below, but I urge you to read the whole article. It is quite shocking.

With inequality at its highest levels in nearly a century and public debate rising over whether the government should respond to it through higher taxes on the wealthy, the very richest Americans have financed a sophisticated and astonishingly effective apparatus for shielding their fortunes. Some call it the “income defense industry,” consisting of a high-priced phalanx of lawyers, estate planners, lobbyists and anti-tax activists who exploit and defend a dizzying array of tax maneuvers, virtually none of them available to taxpayers of more modest means. . .

Operating largely out of public view — in tax court, through arcane legislative provisions and in private negotiations with the Internal Revenue Service — the wealthy have used their influence to steadily whittle away at the government’s ability to tax them. The effect has been to create a kind of private tax system, catering to only several thousand Americans.

The impact on their own fortunes has been stark. Two decades ago, when Bill Clinton was elected president, the 400 highest-earning taxpayers in America paid nearly 27 percent of their income in federal taxes, according to I.R.S. data. By 2012, when President Obama was re-elected, that figure had fallen to less than 17 percent. . .

The ultra-wealthy “literally pay millions of dollars for these services,” said Jeffrey A. Winters, a political scientist at Northwestern University who studies economic elites, “and save in the tens or hundreds of millions in taxes.”. . .

While Democrats like Bernie Sanders and Hillary Clinton have pledged to raise taxes on these voters, virtually every Republican has advanced policies that would vastly reduce their tax bills, sometimes to as little as 10 percent of their income.

At the same time, most Republican candidates favor eliminating the inheritance tax, a move that would allow the new rich, and the old, to bequeath their fortunes intact, solidifying the wealth gap far into the future. And several have proposed a substantial reduction — or even elimination — in the already deeply discounted tax rates on investment gains, a foundation of the most lucrative tax strategies. . .

Each of the top 400 earners took home, on average, about $336 million in 2012, the latest year for which data is available. If the bulk of that money had been paid out as salary or wages, as it is for the typical American, the tax obligations of those wealthy taxpayers could have more than doubled.

Instead, much of their income came from convoluted partnerships and high-end investment funds. Other earnings accrued in opaque family trusts and foreign shell corporations, beyond the reach of the tax authorities. . .

Organizing one’s business as a partnership can be lucrative in its own right. Some of the partnerships from which the wealthy derive their income are allowed to sell shares to the public, making it easy to cash out a chunk of the business while retaining control. But unlike publicly traded corporations, they pay no corporate income tax; the partners pay taxes as individuals. And the income taxes are often reduced by large deductions, such as for depreciation. . .

The wealthy can also avail themselves of a range of esoteric and customized tax deductions that go far beyond writing off a home office or dinner with a client. One aggressive strategy is to place income in a type of charitable trust, generating a deduction that offsets the income tax. The trust then purchases what’s known as a private placement life insurance policy, which invests the money on a tax-free basis, frequently in a number of hedge funds. The person’s heirs can inherit, also tax-free, whatever money is left after the trust pays out a percentage each year to charity, often a considerable sum.

Many of these maneuvers are well established, and wealthy taxpayers say they are well within their rights to exploit them. Others exist in a legal gray area, its boundaries defined by the willingness of taxpayers to defend their strategies against the I.R.S. Almost all are outside the price range of the average taxpayer. . .

The combination of cost and complexity has had a profound effect, tax experts said. Whatever tax rates Congress sets, the actual rates paid by the ultra-wealthy tend to fall over time as they exploit their numerous advantages. . .

“We do have two different tax systems, one for normal wage-earners and another for those who can afford sophisticated tax advice,” said Victor Fleischer, a law professor at the University of San Diego who studies the intersection of tax policy and inequality. “At the very top of the income distribution, the effective rate of tax goes down, contrary to the principles of a progressive income tax system.”. . . 

For the ultra-wealthy, “our tax code is like a leaky barrel,” said J. Todd Metcalf, the Democrats’ chief tax counsel on the Senate Finance Committee. ”Unless you plug every hole or get a new barrel, it’s going to leak out.”

The Super Rich Are Not Paying Their Fair Share Of Taxes

(Image is from an excellent post of taxes for the rich at Think Progress.)

The rich and their Republican lackeys are still complaining that the top tax rate is too high, even though after the Bush tax cuts for the rich were repealed, that top rate remains below 40%. That's 50 points lower than the top tax rate was in the 1950's, when it was 90% (and the economy was booming).

But the truth is that while the top tax rate is slightly below 40%, none of the super rich pay anywhere near that. They pay an average real tax rate of slightly over 17% -- less than half of the top tax rate, and only 3 points above the average rate paid by the middle 50% of Americans.

How can they get away with that? The primary reason is because they don't pay the earned income tax rate like working Americans. They have a special capital gains tax rate of 20% (because they make their money by gambling on (manipulating?) the stock market. Then they have a range of loopholes and deductions to lower the rate below that 20%.

Folks, this just ain't right. Income is income, no matter how it is earned -- and it should all be taxed in the same way (at the earned income tax rate). It's time to do away with the special capital gains tax rate for the rich -- and force them to pay their fair share of taxes. That rates destroys the progressively of our income taxes.

It's Time To Eliminate "Capital Gains" Tax

(The image above is by the inimitable DonkeyHotey.)

Did you ever wonder how it is that Mitt Romney could pay only a 13% tax when he made over $20 million in income? The reason is something called a "capital gains" tax. If Romney had worked for his income, it would have been classified as earned income and he would have had to pay about 36% minus his personal deductions (which was the top tax rate at the time). But since it was investment income (classified as a capital gain), he only owed a 15% tax rate (which was lowered to 13% due to personal deductions).

This is one of the most unfair parts of our tax system -- that the rich get to pay a much smaller tax rate of their income (which is mostly capital gains, or investment income) than the middle class (who actually have to work for their income). It hasn't always been like that, and conservatives haven't always touted the value of a special capital gains tax rate. In fact, conservative icon Ronald Reagan didn't support giving the rich a special and lower tax rate than ordinary Americans. He thought the rich should pay more because they made so much more.

It was only after George Bush became president that the special capital gains tax came into being. Bush fell for the ridiculous Wall Street argument that a lower capital gains tax would spur investment and create jobs, so he lowered the capital gains tax to only 15% (less than half of what that income was being taxed at). Of course it didn't spur investment or create new jobs. The money just went into the bank accounts of the very rich, while the Bush administration presided over one of the worst periods of job creation in our history.

When President Obama raised the top tax rate from about 36% to nearly 39%, he also raised the capital gains tax rate for the very rich from 15% to 20%. That is still only about half of what they should be paying (if their income was taxed as earned income, like it has been in the past, and like the bottom 90% of all Americans have to pay). What should have been done is to eliminate the capital gains tax altogether, and return to taxing all income at the earned income rate.

The Republicans (creators and protectors of the special capital gains tax rate) have been whining that our deficit (and national debt) is too large. But one of the most significant things that could be done to lower the budget deficit (outside of cutting the bloated military budget) would be to raise the capital gains tax rate to equal the earned income rate. This special tax rate for the rich is going to cost our government about $161 billion in revenue this year (and could pour nearly $2 trillion into the government coffers over the next 10 years). That's not pocket change.

This special tax rate for the rich is both unfair to other Americans (who work for their money and pay a higher rate) and is costing the government hundreds of billions in revenue every year. It should never have been created, and it needs to be done away with as quickly as possible. There is simply no legitimate reason for the rich to be taxed at a lower rate than hard-working middle class Americans.

The Rich Have Different Rules

I believe this is a serious problem in the United States -- that in our supposedly "progressive" tax system the rich are taxed at a far smaller rate than middle class workers. The reason this happens is that they have gotten Congress to declare that the type of income they mostly make (investment income or "capital gains") is somehow more important to the welfare of this country than the type of income (earned income) that the middle class mostly makes.

What makes this even more egregiously unfair is the fact that to make earned income requires real (and hard) work, while investment income requires no work at all -- just using money to make more money. Willard Mitt Romney is a good example of this. He didn't work a single day in 2010, and yet he made over $21 million (which was taxed at the lower income rate of investment income). In fact, because he gave money to his church, he didn't even have to pay the 15% tax rate of investment income.

It should make no difference how income is made. Capital gains (investment income) should be taxed at the same rate as earned income -- and those who make larger incomes should be taxed at a larger rate. That was the original idea of our progressive tax system, and we need to return to it.

I know that those of the right, who have bought into the propaganda of the rich, will accuse me of class warfare for promoting such a simple idea of fairness in taxation, or even worse, advocating income redistribution. I don't really care what they think or say. The "class war" has been going on for quite a while now. It was started when the rich, through their Republican puppets, decided they shouldn't have to pay a larger tax rate than other Americans (or even as large a tax rate as working Americans).

As for "income redistribution", income is always being redistributed in every society and every economic system. Our system has been tilted to favor the rich, so that far too much of our national income goes into their pockets, while the rest of America must fight for the crumbs left over. We used to have a fairer system, where all Americans could get a share of the economic pie. The rich still got rich, but other Americans also shared in the bounty this country had to offer. We need to return to that. It is a simple matter of fairness.