A tale of two tax rates allows special privileges for the wealthy
KAREN SEAL STEWART | 5/5/2019, noon
One year on from the Tax Cuts and Jobs Act, the majority of Americans are seeing paltry benefits from Trump’s tax cuts, if any at all, while the wealthiest among us are living like kings. That’s because our tax code is so skewed in favor of the rich that there may as well be two different tax rates entirely: one for the top 1%, and another for everyone else. The fact is that it’s not far from the truth.
As a wealthy investor, I pay a far lower rate on what I earn than most working Americans. If you make your money off investments, as most rich people do, our laws tax that kind of income at about half the average American’s earned income from salary and wages. What’s worse, the tax code also lets an investor keep their first $78,750 in income completely tax-free, while someone who works a 9 to 5 job for a living is taxed on their very first dollar.
But wait – it gets even worse! Investment income, unlike regular income, also isn’t subject to Social Security or Medicare taxes.
Let’s take an example. Imagine a married couple that happened to be living off a couple different kinds of investment income, either qualified dividends or long-term capital gains, which basically means they turned a profit on some investments, like real estate or stocks. Together, they make $103,150 a year.
This couple can already keep $78,750 of that money tax-free under our capital gains exemptions, leaving them with $24,400. But wait! Because they’re filing jointly, $24,400 is the standard deduction for a married couple, and that money is exempt from taxes too. So this couple pays absolutely zero in income tax. And, since they don’t have to pay into Social Security or Medicare on their investment income, they keep even more of their money. That’s $8,600 they bring home each month, completely tax-free.
Then there’s a second married couple, which each work regular, salaried jobs for a living. Together, they also make $103,150 a year, but they don’t get that first $78,750 exempted from their taxes like the investor couple does. So while they deduct the standard $24,400 for married couples, they pay around $9,000 in federal income taxes, and another $8,000 in Social Security and Medicare taxes. That doesn’t even take into account state income taxes.
The investor couple, who are almost certainly already rich if they’re living off investments alone instead of working for a living, gets a $17,000 discount just for being rich. That’s it. The working couple meanwhile, work a combined 80 hours a week and take home only about $83,000 compared to the investors, who keep every cent they “earn.”
This is only one example, but as the numbers go up in investment income, the inequality only gets worse. Even a person making hundreds of millions of dollars a year through capital gains will pay a maximum rate of just 20% on their income – that’s less than the top tax rate for someone making $40,000 a year.
When wealthy people are able to receive $78,750 of income tax-free, while working people and most retirees pay income taxes on their very first dollar – and at rates approximately double what investors pay – something’s got to give.
The U.S. taxes the rich entirely differently than it does the middle and working class, and that injustice is so obvious and egregious that even a rich person like myself feels compelled to speak out against it.
Tax policy may seem intimidating, but this isn’t complicated. Rich people should not get special treatment just for being rich. We need a tax code that acknowledges this simple, if inconvenient for some, truth: Income is income, no matter where it comes from, and it should all be taxed the same.
Dr. Karen Seal Stewart is a former certified financial planner and member of the Patriotic Millionaires.