Wednesday, November 23, 2011

Mom Pays More Taxes Than Bankers!

Why does this single mom with two children who is working at a local diner in Oklahoma, and only earning $7.25 an hour ($15,000 a year) pay the same effective tax rate as this CEO of a New York City investment bank who's earning $15 million a year in capital gains from stock options he receives in his executive compensation package?

CEOs and other corporate executives, bankers, private investors, and hedge fund mangers pay 15% in capital gains taxes, and the waitress pay 15% in federal income taxes that's deducted from her paycheck.

Also, because Social Security taxes are capped at $106,800 the waitress pays Social Security taxes on 100% of her wages ($15,000), whereas the CEO only pays 0.07% in Social Security taxes on his $15 million income.

So the Oklahoma waitress is actually paying more in taxes as a percentage of her annual earnings than that of the CEO of a big bank on Wall Street in Manhattan.

In 1977 the capital gains tax rate was once set at 40%. But under Bill Clinton they were lowered to 28%, and then later he lowered them more, to 20%. After George W. Bush took office he lowered them again from 20% to 15% in 2003...the same effective tax rate as those earning between $18,500 and $34,500 a year. Why? Aren't the wealthy supposed to be paying the upper bracket tax rate of 35% on their total annual income, and not just on a small fraction of their base salary?

The wealthy are also paying less as a percentage of their incomes than teachers, police, and firemen who generally earn slightly over $34,000 a year for annual wages, and that puts them in the 25% tax bracket. But CEOs and other corporate executives, bankers, private investors, and hedge fund mangers are only paying 15% for taxes on their capital gains.

Who's waging a "class war" on who? It must be congress, because they are the ones who write and pass the tax laws (and half of them are millionaires themselves).

99% of all Americans have an income level in the first 4 tiers of the income tax brackets. Even most small business owners, doctors, and members of congress fall into this category.

The 5th tier might include trial lawyers, lobbyists, or the owners of very successful mid-size businesses.

The 6th and top most tier would be CEOs and other executives on the board of large corporations, as well as bankers, private investors, and hedge fund mangers. But the majority of their wages rarely reach the $379,150 level and taxed at the maximum rate of 35%. The majority of their pay is from capital gains and taxed at only 15%.

For any tax benefit that an average taxpayer might receive from any deduction, exemptions, deferment, allowance, depreciation, etc., you can bet that someone who's majority of annual earnings is derived from capital gains as their primary income, will benefit massively more...that's why the U.S. tax code is so complicated.

For more information on how the average American taxpayer has been fleeced by this tax preference for the wealthy, see my post You Pay Hidden Entitlements for the Rich to better understand how capital gains taxes benefits the rich at the expense of the middle-class and poor. I also give a brief history of the tax code and a time-line of the changes that were made dating back to 1921...when capital gains were no longer taxed as regular income.

And the only reason corporations and banks can afford to pay their CEOs record bonuses is because they have been making record profits. And the only reason corporations and banks are making record profits is because they haven't been paying enough in taxes true! Read my post: Record Profits + Record Bonuses = Zero Jobs

Raise the capital gains tax rate back to 28% (and on stock dividends too) and eliminate the "cap" on Social Security taxes for wealthy CEOs and other corporate executives, bankers, private investors, and hedge fund mangers. Make them pay this tax on 100% on their total personal income like everybody else must.

Also read: Tax breaks for billionaires: Loopholes for hedge fund managers by the Economic Policy Institute (a non-profit and non-partisan think tank).

  • When Republicans cut our entitlements, they call that "a shared sacrifice".
  • When CEOs rip us off and dodge taxes, they call that "doing business".
  • When we speak up to complain, they call that "class warfare".

Low Corporate Taxes = Excessive CEO Salaries

It doesn't matter what a corporation pays in taxes as compared to GDP, or how it's compared to any other index of measure (to skew the numbers), it's what they actually pay to the U.S. Treasury after loopholes (aka "deductions") that matters most. And for the last 25 years corporations have actually paid historically low taxes.

While today some corporations may have paid the maximum rate of 35% (when it was over 50% in the 1950s), many others paid ZERO, with the average being only 18%.

The same can be said for their CEOs and other high-income earners. While although the top bracket is also almost historically low (at 35%, when it was once over 90%), what they actually pay is nearer to 15% because the majority of their income is earned through capital gains.

And because corporations have been paying a low effective corporate tax rate for decades, that didn't keep them from outsourcing jobs overseas for cheap labor, but rather, it did enable them to pay very excessive CEO salaries...who only mostly pay 15% in federal income taxes on their capital gains.

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  1. The tax brackets and income tax rates could remain the same, just tax all capital gains and dividends as regular income.

    For corporations, the tax bracket could be lower but only if ALL loopholes were eliminated, so they pay the ACTUAL tax rate, and not an "EFFECTIVE RATE".

  2. Bud:
    Excellent series of posts regarding our tax system…I’ve just begun reading through the series so still have more et to read.
    Something you point out in “You pay Hidden Entitlements for the Rich” brought to light something I had not understood before and now comprehend in a more profound way how Buffet can pay less in taxes than in staff:
    Unlike regular working people, the very affluent (the ultra-wealthy) aren't paid a wage or salary, who is then obligated to pay 35% of their earnings in federal income taxes (the highest marginal rate). The ultra-wealthy primarily earn their most of their money with stocks and bonds, and then they pay a capital gains tax of only 15% - - the same exact tax rate as someone who only earns $8,500 a year (which equates to $4.09 an hour if they work 40 hours a week).

    Do you have any stats on the percentage of the ultra-wealthy income structures are set up as you have outlined?


  3. Mitch: You'll find links in my articles and articles with links to other articles; sometimes to reports based on studies, sometimes to the reports and studies themselves (from the Bureau Labor Statistics, U.S. Treasury, IRS, think tanks, tax foundations, etc), They are numerous - and if you Google "capital gains taxes", it brings up almost 12 million results. The topic became especially controversial since the Bush tax cuts and after the recession began.

  4. Thanks Bud...and thanks for continuing with the theme covering the tax subject...

  5. CEOs only “earn” bonuses when their company “performs.” One measure of that performance: “earnings per share,” or company income divided by outstanding shares of stock. Execs have figured out they don't have to boost earnings to hit their per-share targets. They simply reduce the number of company shares — by having their companies “buy back” shares of their own stock off the open market. U.S. corporations overall have so far this year authorized $445 billion worth of buybacks.

  6. Almost 70% of all capital gains taxes are paid by the top 1%

    A week after hinting he may raise the capital gains tax, Jon Huntsman proposed eliminating it altogether.