Friday, September 27, 2013

Taxes: How Congress Lets the Rich Pay Less

(* Editors Note: Please note the date of this post, because some of the information tends to become outdated, such as the wealth rankings on the Forbes 400 list.)

President Obama once proposed the Buffett Rule, named after Warren Buffett (currently the 2nd richest man in America with an estimated net worth of $52.5 billion). The tax bill would have taxed anyone earning over $1 million a year at 30%. But that's still less than someone with a taxable income over $183,250 to $398,350 --- and as the tax code is written now, the top one percent still pays less as a percentage of their income than someone else with a taxable income between $36,250 and $87,850.

That's why capital gains should be taxed as "regular wages" (not as "unearned income") using the current progressive marginal tax rates. Why should a billionaire, earning millions of dollars every year, pay a lower tax rate than a cocktail waitress in Las Vegas?

Bloomberg: "Calculations by the Office of Management and Budget suggest that taxing capital gains and dividend income at the same rate as ordinary income could bring in roughly $1 trillion over the next 10 years. Another $700 billion could be raised if capital gains weren’t "zeroed out at death", requiring heirs to pay taxes on any gains that occurred before they inherited stocks, real estate or other assets."

Thomas Piketty of the Paris School of Economics and Emmanuel Saez of the University of California, Berkeley built a model and estimated that the optimal tax rate on capital (including bequests, corporate profits and investment income) would be as much as 60 percent."

The skewed tax code (as it's written now) is not only the major driver of income inequality, but it also contributes to a lack of much needed revenue that's necessary to match our government spending:

In the late 70's the capital gains tax rate was much higher than it is today (close to 40% back then). From there it gradually went down. Bill Clinton lowered them to 28%, then later to 20%. In 2003 George W. Bush lowered them again to 15%.

But this past January the capital gains tax rate went up from 15% to 23.8% with the expiration of the Bush tax cuts --- including a 3.8% surtax for Medicaid that was added with the Affordable Care Act.

But even still, the top 1% earns most of their income from capital gains with stocks, and the tax rate for these high-income earners is lower than someone who earns an hourly middle-class wage (25% on taxable income over $36,250 to $87,850).

The very slight increase in the capital gains tax (3.8%) was one of the primary reasons why the Republicans are so adamant about repealing and defunding Obamacare (to protect the rich).

Also since the late 70's, the "effective" corporate tax rates are much lower as a percent of GDP than they were 35 years ago. The reduced taxes that are paid on corporate profits --- profits being the engine that drives capital gains through the investments in stocks (realized by corporate executives with stock-options). This also brings in much less needed revenue that's necessary to fund our government.

On their personal income, the wealthiest people in America pays the 3rd lowest tax rate out of 8 tax brackets (see below for 2013 rates). The capital gains tax rate for investment income (unearned income) is inserted among the marginal tax rates for those who earn regular hourly wages or salaries (earned income).

Bill Maher:

Conservatives who love to brag about American exceptionalism must come here to California. Everything conservatives claim will unravel the fabric of our society --- universal healthcare, higher taxes on the rich, gay marriage, medical marijuana --- has only made California stronger. Without a Republican governor and without a legislature being cock-blocked by Republicans, a $27 billion deficit was turned into a surplus, continuing the proud American tradition of the Republicans blowing a huge hole in the budget and then the Democrats coming in and cleaning it up. How was Governor Moonbeam able to do this? It's amazing, really. We did something economists call "cutting spending AND raising taxes."

Rate Income Bracket Notes
10% On taxable income from $0 to $8,925 Includes those drawing an unemployment check.
15% On taxable income over $8,925 to $36,250 Includes Social Security and disability benefits if income is over $25,000 --- 50% of all wage earners take home $27,000 or LESS, and pays Social Security taxes on 100% of their earnings.
23.8% On realized long-term capital gains earned with stocks, real estate, art, gold, etc. (see SWAG investments) No Social Security taxes are paid on capital gains...whether they earn one dollar or $100 million in any given year. The Waltons (the Walmart heirs) earn $1 million every single DAY in stock dividends. Tax attorneys can better tell you how they legally avoid paying taxes (eg. using offshore banking, etc) and many times they don't even pay this very low tax rate. (Also see estate taxes and gift taxes)
25% On taxable income over $36,250 to $87,850 Pays Social Security tax on 100% of their income. This might be considered a "middle-class" income
28% On taxable income over $87,850 to $183,250 Social Security taxes are capped at $113,700. Congressional salaries are $174,000 a year, so they also enjoy the cap.
33% On taxable income over $183,250 to $398,350 About what a small business owner or a neurosurgeon might average.
35% On taxable income over $398,350 to $400,000 Trial lawyers, Washington lobbyists and corporate tax attorneys?
39.6% On taxable income over $400,000 Regular wages in this income category might be base salaries for the CEOs of large corporations, and represents a lesser part of their total annual salaries if they receive stock-options, which are driven by higher stock prices, helped by low "effective" corporate tax rates (if they pay any corporate taxes at all.)

1 comment:

  1. The CEO (and board of directors) of a corporation determines how to use their company's profits. If they can write off taxes for employee and executive compensation, like Facebook does, they can pay themselves whatever they want (so long as their shareholders don't revolt). But if they are awarding themselves stock-options as "incentive pay" (and paying only 23.8% for federal taxes on realized capital gains after they exercise their options), wouldn't it make more sense for the government to tax capital gains at a higher percentage than the 35% "statutory" rate for corporate taxes?