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Capital Gains, Income, And Taxes

[ Posted Thursday, October 25th, 2007 – 16:24 UTC ]

If you want to know why the rich keep getting richer and nothing ever seems to change in Washington, look no further than this extremely depressing article in Salon, written by Robert Reich, who was President Clinton's Secretary of Labor.

I'm a fan of Reich, as he seems to be one of the few people who actually understand how "the little guy" in America -- the hardworking middle class -- always seems to get screwed, no matter who is in charge. I quoted him in my book and in my very first blog post ever on his ideas for a mandatory three-week paid vacation for everyone who works in America, for instance.

But while this article is no fun to read because of the subject matter, it really is mandatory reading for anyone who thinks our tax system is seriously in need of an overhaul.

Reich correctly points out that the top income tax rate has fallen from over 90% to 70% and now down to the current 35%. But while it can be argued that the top rate should be raised for the uber-wealthy (say a new "millionaires tax rate" which only kicks in after your first million dollars in income each year), there is a more fundamental unfairness about the tax system which should be addressed as well: capital gains.

For those of you unfamiliar with the term, "capital gains" are gains (profit) on capital (money). In plain terms, this is taking money and making more money with it. Selling something for more money than you bought it for, in essence. Making a profit on something. There two most common ways to do this are selling real estate (your house) for a profit, or selling securities (stocks, bonds, etc.) for a profit.

It's not that hard a concept, but calling it "capital gains" makes it sound more impressive, I guess.

Now, when you fill out your taxes at the end of the year, you fill in all your income first. This income can come from anywhere -- an employee's salary, profit made as a self-employed businessperson, farm income, royalties, pension income, wherever. Virtually any way for you to make money is counted as income, and added up. After deductions, this is what you are taxed on.

The system is supposed to be "progressive" -- not in the political sense of the word, but in the fact that the more money you make, the higher tax rate you are supposed to pay. Because of deductions, the people making the least amount of money pay no income taxes. People making slightly more pay 10%, and so on, up to the top bracket of 35%.

This is all fine and good except for one thing -- capital gains. For some unknown reason, any money you make from stocks or real estate is taxed a much lower rate than any other type of income. This makes even less sense when you consider what it means: people who are already rich to begin with, who make their money doing nothing but investing actually pay a lower tax rate than everybody else. Unlike income, capital gains taxes top out at 15% instead of 35%.

This is why you see CEOs taking one dollar a year in "salary" and then getting massive stock options worth millions -- because they pay less taxes by doing so. If you make a million (or even a billion) dollars a year on the stock market, the most you will pay in taxes on that profit (or what should be "income") is 15%.

This is monstrously unfair to the middle class, or working class, who are subsidizing the rich by having to pay more taxes than they do. There is absolutely no reason not to tax capital gains at exactly the same rate as all other income is taxed, other than "Wah! We're rich, and we don't want to pay taxes!" (which I don't consider a valid reason). Income is income, no matter how you make it. I would be willing to bet that most Americans would agree with that statement.

But the truly depressing thing is that this system is not about to change any time soon. From Reich's article:

At the very least, you might think that Democrats would do something about the anomaly in the tax code that treats the earnings of private-equity and hedge-fund managers as capital gains rather than ordinary income, and thereby taxes them at 15 percent -- lower than the tax rate faced by many middle-class Americans. But Senate Democrats recently backed off a proposal to do just that. Why? It turns out that Democrats are getting more campaign contributions these days from hedge-fund and private-equity partners than Republicans are getting. In the run-up to the 2006 election, donations from hedge-fund employees were running better than 2-to-1 Democratic. The party doesn't want to bite the hands that feed.

As The Who stated many years ago: "Meet the new boss / same as the old boss...."


-- Chris Weigant


One Comment on “Capital Gains, Income, And Taxes”

  1. [1] 
    fstanley wrote:

    I agree that it is not fair how the tax system favors the wealthy. However, I am not surprised that things are not going to change any time soon. This country and many others seems to have things backwards. The rich don't need anymore money it is the poor and middle class that need help yet because wealth is power and power is influence the rich just keep getting richer. For example: It is this kind of thinking that rewards sucesss and penalizes failure that has defunded the poorest schools under the No Child Left Behind program. The failing schools are the ones who need it the most.
    Anyway - thoughtful (if depressing) post.

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