Investment Income and Fairness

Monday, April 16th, 2012 and is filed under Blog, Taxes

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As Democrats begin debate on tax increases today, they will continue to pursue tax policy based upon their socialist view of fairness.  Of course, they will never tell you if they believe it is fair that the top 1% pay 36.7% of income taxes or that the bottom half of wage earners pretty much pay nothing.  Take a look at this chart from the Tax Foundation detailing how much different income-earners pay in taxes relative to their Gross Adjusted Income:

Tax Foundation

Remember that these numbers account for all the so-called loopholes and deductions that the rich enjoy.  Even after the effective rate is factored in, they still pay most of the federal income taxes.

But what about some of the super duper rich who supposedly have a slightly lower effective tax rate, you might ask?  Well, let’s first say that even if they have a lower effective tax rate, it is only slightly lower than the income groups directly below them, which are also part of the ‘top 1%.’  Any attempt to say that the average millionaire has a higher effective tax rate than someone earning $50,000 is bogus.  Their effective federal income tax rate might be as low as 3.5%, much lower than the 18-25% rate of the super-duper rich.

Also, let’s remember that many of these low-middle income earners pay most or all of their taxes through payroll taxes.  Over the past two years, the payroll tax rate has been cut by almost 1/3, dramatically reducing their overall tax liability.  People also forget that the bottom 30% of tax units often enjoy negative tax liabilities due to the refundable tax credits.  These tax credits often zero out even their payroll tax liability.  According to the Tax Foundation, $105 billion in refundable credits were paid out to filers who paid no income tax, including 26 million filers took the refundable earned income tax credit and 21 million who took the refundable portion of the child credit.

Finally, let’s discuss the super rich in the context of “fairness.”  Nobody who earned all of their income from wages will pay a lower tax rate than those earning less.  Period.  To the extent that there are very wealthy people who pay a lower effective tax rate, it is because they earn most of their income from investments and long-term capital gains.  While the highest income tax bracket is 35%, the Capital Gains tax on investments is 15%.

So here’s the question: do liberals believe that it is fair to tax capital gains at the same rate as income, even though investors risk their life earnings in order to make that money?  Investments represent the lifeblood of our economy, and if we told investors that we will confiscate a third of their earnings if they succeed, why would they invest?  Moreover, most people who are earning so much money from capital gains had to have initially earned other income some time in their life.  Either that individual or his/her parent earned the money, paid through the roof in taxes on that money, and deserves the right to invest it and contribute to vital economic growth – without having to worry about pernicious double taxation.

That is real fairness.