Capital Gains, Income Inequality and Fast Food Wages

First, some excerpts from a post at Medium titled The Importance of Taxing Capital [Income]: A proposal to slow down the wealth accumulation of the super-rich (by James Kwak on May 19, 2015)

"... Something the United States has been doing for a century: taxing income from investments ... We call all that stuff (housing, bonds, stocks, paintings, etc.) “capital” because it has the magical property of making money all by itself, without any effort by its owner (what we call “labor”) ... With preferential tax rates for capital — such as the 23.8% maximum rate on capital gains and qualified dividends in the United States — it really doesn’t matter what the top labor tax rate is. The people at the top of the pyramid make almost all of their money from capital, and they laugh at the 43.4% rate on earned income.

Editor's Note: "Capital gains" income (which is normally considered unearned income) is only taxed as "earned income" if it is a "short-term capital gain" — an investment held for LESS than 1 year, and then is sold for a profit (or a "capital gain") — such as an investment in stocks or a home. Earned income is normally wages and salaries, and is taxed at the top "marginal rate" of 39.6% (currently on income over $413,200 for single filers). If income for a single filer also includes income from "short-term capital gains" (which was news to me), it can be taxed at the higher 43.4% rate. But if the capital gain is "realized" after being held for at least one year or longer, it's only taxed at the much lower rate of 23.8% — which is much lower than the "marginal tax rate" of 39.6% for regular wages.

The justification for lower tax rates on capital has generally been that we need to encourage saving in order to fund investments. The main problem with this argument is that it doesn’t work that way in practice: the empirical evidence that higher tax rates reduce saving by the rich is weak to nonexistent ... When we’re talking about the 0.01%, there’s just so much you can consume, and you save everything else.

Editor's Note: Billionaire venture capitalist Nick Hanauer had said in speech at TED University: "Somebody like me makes hundreds or thousands as times much as the median American, but I don't buy hundreds or thousands of times as much stuff. My family owns three cars, not 3,000. I buy a few pairs of pants and shirts a year like most American men. Occasionally we go out to eat with friends. I can't buy enough of anything to make up for the fact that millions of unemployed and under-employed Americans can't buy any new cars, any clothes, or enjoy any meals out. Nor can I make up for the falling consumption of the vast majority of middle-class families that are barely squeaking by."

James Kwak recently wrote a paper examining different tax instruments that might achieve the goal of reducing the rate of return on capital and thereby limiting or reversing the growth of wealth inequality. He says, "Of course, I don’t expect Ted Cruz and Jeb Bush to adopt my proposal. At the end of their day, their campaigns depend on donors who care deeply about tax rates on investment income."

Just the opposite: Republican presidential candidates are again pushing the Flat Tax. The proposed rate could be between 10 percent and 20 percent for individuals and businesses, but exempts all investment income — such as the capital gains that the the super rich make from their stocks, mansions, gold bars, wine collections and rare paintings.

In another post by James Kwak (The Magnitude of Inequality: Wage inequality is just the tip of the iceberg) he also notes:

At $9 per hour, you would have to work full time for more than 1,360 years—that’s with no days off—to make as much as Walmart CEO Doug McMillon made in 2014 ... McMillon has been making millions of dollars for years, and will make tens of millions of dollars for years to come. Since he’s probably investing a lot of that money in the stock market — presumably largely in Walmart stock (which went up a decent 10% in the past year), he should have a healthy and growing stream of investment income to complement his princely compensation package.

The ratio of the CEO’s investment income to that of the lowest-paid employee is easy to calculate: it’s infinite, since many workers have no accumulated savings, no investments, and hence no investment income. When we add investment income to labor income, we get total income inequality, often represented by the 1% income share charts made famous by Emmanuel Saez and Thomas Piketty.

Furthermore, inequality of labor income, or even total income, is dwarfed by inequality of wealth: many people don’t have any assets at all. And wealth inequality is in some ways more pernicious than income inequality ... The idea that people can make money by doing nothing, harvesting the fruits of their past labor—or their grandfather’s past labor—is harder for most people to come to terms with. Wealth inequality also tends to compound itself over time because the rate of return on investments exceeds the rate of growth of the economy as a whole: that’s the central lesson of Piketty’s Capital in the Twenty-First Century.

Editor's Note: But Republicans want to totally eliminate the estate tax, meaning a very wealthy couple can leave over $10 million to their children tax-free, but grandma (who serves food at the local diner) has to pay tax on all her tips that exceeds the minimum wage of $7.25 an hour. Is that fair? Not to mention, grandma already has to pay a higher percentage of her income in taxes than the very rich do.

Imagine all the families in the United States lined up from left to right along the X-axis, from poorest to richest; the red line shows the total value of (almost) everything they own, minus their debts. All household wealth is represented by the area under the red line. The problem with understanding this picture, however, is that the red line is indistinguishable from zero for the vast majority of the population—all the wealth is crammed into the right-hand part of the chart—so it’s hard to get a sense of the relative magnitudes.

If the chart above looks vastly distorted or over-simplified, then watch this short video (with over 16 million views) at YouTube — and you'd be very surprised to see just how accurate that chart is.

Bloomberg: Ending the Minimum-Wage Subsidy (May 20th, 2015): "This week, Los Angeles became the third major West Coast city and the biggest in the U.S. to agree to raise the minimum wage to $15 an hour, an increase that will go into effect by 2020. Los Angeles follows Seattle, which will require employers with 500 workers or more to pay $15 by 2017. San Francisco will require the $15 hourly minimum by 2018 ... Right now, the wealth transfer goes in the wrong direction: from taxpayers to the owners of fast-food outlets. In effect, the public helps restaurants and other lower-wage employers save on labor costs. Raising the minimum wage shifts the wealth transfer from the taxpayers to the restaurant owners. Boosting the minimum wage to $12 or even $15 diminishes or even eliminates this subsidy." (Here's how fast food workers are paid in Europe)

As an aside, from the Economic Policy Institute (May 18, 2015) H-1B Visas Do Not Create Jobs or Improve Conditions for U.S. Workers: "The common wisdom on Capitol Hill, carefully nurtured by corporate lobbyists and campaign cash, is that America needs more high-tech guestworkers, requiring a big increase in the number of H-1B guestworker visas made available each year. A number of senators, including Amy Klobuchar and Orrin Hatch, have introduced legislation to double or triple the number of non-immigrant tech workers who can be imported each year, despite evidence from the U.S. Government Accountability Office, independent researchers, and various media reports that the H-1B is used to lower wages and displace U.S. workers." (An over-saturated labor market also depresses wages.)