Press friends, if there’s one thing that shows how our system is set up to favor capital over labor, wealth over work, it’s the capital gains tax.
The tax rate on (held more than a year) investment income is 15 percent, which is just the fifth-highest tax rate on work income (out of six brackets), which tops out at 35 percent.
The Washington Post has a long, excellent look at the issue above the fold on page one of yesterday’s paper. Call the U.S. a plutocracy, and they’ll say you’re shrill. But do we even blink anymore when we read facts like these (emphasis mine)?
As a result of a pair of rate cuts, first under President Bill Clinton and then under Bush, most of the richest Americans pay lower overall tax rates than middle-class Americans do. And this is one reason the gap between the wealthy and the rest of the country is widening dramatically.
Most Americans depend on wages and salaries for their income, which is subject to a graduated tax so the big earners pay higher percentages. The capital gains tax turns that idea on its head, capping the rate at 15 percent for long-term investments. As a result, anyone making more than $34,500 a year in wages and salary is taxed at a higher rate than a billionaire is taxed on untold millions in capital gains.
What a country! What kind of logical gymnastics does it take to defend that kind of thing? More on that in a minute.
This particular piece is part of a Post series called Breakaway Wealth that explores what’s causing our growing inequality. In June, the paper kicked off the series with a good story showing how executive compensation is a leading contributor to the phenomenon.
Today’s piece is kind of a bookend to that. Not only are executives grossing far more pay on the front end, through things like stock options, but they’re also paying a far lower percentage out in taxes on that same income. That drives their net pay up exponentially, while median household income has fallen over the last thirteen years.
The 400 richest taxpayers in 2008 counted 60 percent of their income in the form of capital gains and 8 percent from salary and wages. The rest of the country reported 5 percent in capital gains and 72 percent in salary.
Daniel Indiviglio at The Atlantic says the Post gives “no credible evidence that” capital gains taxes contribute to inequality.
I don’t have any idea what he’s talking about. John Paulson made $5 billion in one year a while back, as much as 143,000 single people who made $35,000 each. If those poor saps get taxed more than a guy who makes 143,000 times as much as they do, that contributes to inequality, no?
Another way to put it: 13 percent of all capital gains went to the top .000001 percent of the population in 2008. These top 400 earners in the U.S. in 2008, the latest data available, made an average $270 million that year and paid an average federal income-tax rate of 18.1 percent.
Indiviglio rationalizes it this way:
But why have a relatively low capital gains tax rate? Doing so encourages investment. Obviously, the poor, along with everybody else, would benefit from investment and the growth that follows. If capital gains taxes are very high, then wealthy people would prefer to spend more of their money instead of investing it.
I’m sorry, but I just don’t accept that rich people are going to invest significantly less because of higher capital-gains taxes. When you’re rich, investing is what you do. You have way more than you can spend, so you sock it away so you can get even richer. If you invest a billion dollars and make another billion, you’ve still got $720 million more than you had to begin with, even with a hypothetical 28 percent (Reagan-Bush era) capital gains rate. And besides, if low capital gains taxes are supposed to spur investment (and job creation), where the hell has it been in the thirteen years since Clinton and Bush started slashing rates? No, Miami condo towers circa 2007 don’t count.
If we’re going to use Indiviglio’s logic, isn’t it plausible that a higher tax rate would cause some people to invest more, since it would take more capital to get similar returns?
Even if higher taxes caused them to blow their money rather than accumulate capital, that would help the economy. All those mansions in Aspen and Palm Beach don’t build themselves, you know, and they just might accumulate capital gains.
Did rich folks really spend more and invest less when Reagan was president than they do now?
Indiviglio piles on the plutocrat-friendly thinking here:
Taxing worker income doesn’t run into this problem: people have no choice but to work, unless they intend to rely on the welfare system. But those with extra capital always have a choice about how to use it: enjoy the money now through consumption or invest it to have more money to spend in the future. For this reason, the decision to generate income through investment should be more sensitive to tax rates than the decision to generate income from work.
Of course, we always hear about how higher income tax rates will discourage the rich from working. I guess that’s not true now. Does this mean Indiviglio thinks it would be cool to go back to the 70 percent top income-tax rate inherited by Reagan?
This is too clever by half. If the wealthy are taxed a higher rate, more money goes to the Treasury, the public’s common fund, which in theory as well as in practice provides tangible benefits to everyone. And if the issue is income inequality and job creation, if capital gains taxes are higher, then wage taxes can be lowered or benefits can be raised, giving workers more to spend, creating more demand in the economy and more pressure on wage rates. Greater demand would also create incentives for rich people to invest, no matter what the tax rate. And believe it or not, the government can invest too, in things like education and infrastructure that have long-term benefits that may just outweigh giving Groupon’s founders some cash-out capital
You’d think these ideas—tax billionaires less than secretaries, in Buffett’s formulation—would be politically untouchable, but the Post does a nice job showing how they came to be policy. It lays much of the blame at the feet of Alan Greenspan, though Bill Clinton and George W. Bush get a healthy dose, too, as do the Democrats in Congress, which is supposedly our labor party.
It’s hardly surprising when a millionaire’s club votes to favor millionaires, as the Post notes in its kicker, quoting Jacob Hacker:
“The amount of lobbying that takes place on tax policy from the deep-pocketed interests that have the most at stake is enormous,” Hacker said. “There’s very little representation on the other side.”
“Don’t forget,” he added, “that members of Congress themselves, particularly senators, are well off and they’re more likely to be sympathetic to the argument for low capital gains.”
This is important stuff, well played by the Post.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.