Sunday, March 31, 2013

Lottery Winners Taxed More than CEOs

If you were taking home a $520 paycheck every week and invested $1 a week for a lottery ticket, wouldn't you feel very fortunate if one day you eventually hit the jackpot for $13 million? Wouldn't you still feel grateful if the government took almost a third of it in income taxes? Of course you would, you wouldn't be greedy, you'd be "blessed".

According to the Social Security Administration, 50% of the entire U.S. workforce earns $520 a week or less (which is $27,000 a year) --- that is the "median income" --- and 50% of the workforce earns more than $27,000 a year. (The poverty rate threshold for a family of four is $23,681 a year, and is defined in terms of before-tax cash income.)

A CEO on the S&P 500 earns an average salary of $13 million a year, and they earn these type of annual salaries fairly consistently (year after year) throughout their careers. For them, it's not just a once-in-a-lifetime jackpot, it's an ongoing income.

And most of these CEOs are not taxed at the highest rate on the majority of their annual earnings. The top "marginal" tax rate is 39.6% on earnings over $450,000, but most of these CEOs are taxed at 23.8% for long-term capital gains on their stock-option grants (sometimes called "pay for performance"). Their tax rate is slightly less than someone else who is single and earning $36,250 a year in regular hourly wages, who have a tax rate of 25% (see the chart further below).

House Speaker John Boehner said, "Well, Mr. President, you got your tax increase. It's time to cut spending."

The spending that the Republicans have been mostly focused on has been in Social Security and Medicare. The GOP won't properly fund the IRS to go after tax cheats, or urgently pursue Medicare and healthcare fraudsters, or remove any of the tax loopholes that mostly favor the rich.

But by allowing the Bush tax cuts to expire on just those earning $400-$450,000 a year, it was really only just a symbolic gesture, because the top marginal tax rates only affects about 377,279 Americans -- and it mostly affects regular "wages".

To put this into better perspective: In the United States a neurosurgeon must complete four years of college, four years of medical school, a one year internship, and at least five years of a neurosurgeon residency. The median pay for neurosurgeons in the U.S. is $368,000 a year.

Most people earning over $400,000 a year also receive other forms of income, such as in the form of stock-options and/or deferred interest, and they don't pay the higher marginal tax rate of 39.6%, but pay taxes on long-term capital gains, which only went up from 15% to 23.8% (which includes the newly added 3.8% surtax for ObamaCare® in 2013).

For example: Unlike the neurosurgeon who pays one of the highest top marginal rates (33%-36.9%), the CEO of a hospital or pharmaceutical company can earn millions of dollars every year with stock-options, and pay the much lower capital gains tax rate of 23.8%, which is less than a single person earning $36,250 a year, who pays a 25% marginal tax rate.

The new capital gains tax rate is still lower for CEOs like Mitt Romney than the marginal tax rates are for a single person earning just $36,250 a year --- so Warren Buffett's secretary will still be paying a greater share of her income in federal taxes than her boss. And she will also pay Social Security taxes on 100% of her income, whereas, someone else earning over $113,700 a year (such as Warren Buffett) pays no additional Social Security tax (or no Social Security taxes at all if all his income was only earned from capital gains).

Every single year, about $1 trillion a year in personal income is not taxed at all because of the "cap" on Social Security and because of the special exclusions for Medicare taxes on capital gains.

And those who gain the most from this preferential treatment of capital gains (and the "cap" on Social Security taxes), are the CEOs of those large corporations, the banks and hedge funds --- and it's the banks and the hedge funds who are also the largest shareholders (institutional investors) that primarily invest in the stocks of the largest corporations. They all go full circle with one another.

So by allowing the Bush tax cuts to expire, and raising the limit on marginal tax rates to those earning $400-$450,000 a year, is mostly just a symbolic gesture. Out of a total of 151.4 million Americans in the workforce, 149.9 million earned less than $250,000 a year --- and 1.5 million Americans earned more than $250,000 a year...but only 377,279 Americans earned over $400,000 a year.

That was NOT the deal that the majority of Americans had wanted and voted for last November. Most had wanted something more similar to the Buffett Rule --- like taxing ALL income at 30% over $1 million a year.

Also, 65 percent of Americans wanted to raise taxes on large corporations (such as having them pay the "statutory" tax rate of 35%, rather than an "effective" rate of only 8.1%) by eliminating tax loopholes, but both parties in Congress are heading against what the majority of Americans want.

The new marginal tax rates for 2013 (Source: Forbes)

Rate Single Married /Joint Head of Household
10% $0 to $8,925 $0 to $17,850 $0 to $12,750
15% $8,925 to $36,250 $17,850 to $72,500 $12,750 to $48,600

50% of all U.S. wage earners had a net compensation of less than or equal to $27,000 a year for 2011 (this is Mitt Romney's 47%)

25% $36,250 to $87,850 $72,500 to $146,400 $48,600 to $125,450
28% $87,850 to $183,250 $146,400 to $223,050 $125,450 to $203,150
Out of a total of 151.4 million Americans in the workforce, 149.9 million earned less than $250,000 a year --- and 1.5 million Americans earned more than $250,000 a year...
33% $183,250 to $398,350 $223,050 to $398,350 $203,150 to $398,350
35% $398,350 to $400,000 $398,350 to $450,000 $398,350 to $425,000
39.6% $400,000 and up $450,000 and up $425,000 and up

...but only 377,279 Americans earned over $400,000 a year.

Just 406 Americans earned $20 to $50 million a year (e.g. Mitt Romney, etc.) and paid 15% or less for capital gains taxes last year.

And only 93 Americans (and the wannabe "King Makers", such Las Vegas Sands billionaire Sheldon Adelson) earned over $50 million a year.

The top 1% prefers to reference their earnings as "investment income" (which the IRS classifies as "unearned income"), as though this income was somehow more privileged than ordinary "hourly income", and so therefore, should be taxed less. "We're entitled to be taxed less because we're the job creators." (In China perhaps.)

A forty-four-year-old Passaic New Jersey man (Pedro Quezada) just won $338 million from the Powerball Jackpot after "investing" in a lottery ticket. Pedro came to America 26 years ago from the Dominican Republic and worked in a factory until 2006, when he opened his own small business (a bodega, a convenience store specializing in Hispanic groceries). Pedro claimed a lump-sum payment worth $221 million, netting about $152 million after paying about $69 million in taxes (about 31%).

Apple's CEO, Tim Cook, can cash out that same exact amount ($221 million) from his stock-option grants and owe 23.8% in taxes (20% for capital gains with the 3.8% ObamcsCare® surtax) --- and pay about $52 million in taxes (netting about $168 million after taxes).

I'm no tax attorney but, if Pedro Quezada had held on to his winning ticket for one full year before cashing in his $1 "investment", could he have also claimed his $221 million as a "long-term capital gain" and paid much less in taxes?

Lottery winners like Pedro Quezada will make that kind of money only ONCE in their entire life, but some CEOs make these kind of salaries year after year after year after year...

Apple's Tim Cook can keep about $17 million more of his windfall than Pedro Quezada can, because of special tax breaks for capital gains (personal income acquired through the sale of stocks, gold, real estate, fine art, deferred interest, etc.)

"Don't talk back Aunt Maggie! He likes to fire people --- and then keep their pensions!"

* This was also posted at the Daily Kos

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