How the Capital Gains Tax Helps the Wealthy and Hurts the Rest of Us

The Rich Get Tax Breaks for Destroying Jobs? How the Capital Gains Tax Helps the Wealthy and Hurts the Rest of Us

Why are "capital gains" taxes so much lower than taxes on other income?

September 12, 2011  |  

 

 

 

 

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Why are "capital gains" taxes so much lower than taxes on other income? The reason capital gains taxes are lower is because most of the income of the rich is from capital gains. And the reason most of the income of the rich is from capital gains is because capital gains taxes are lower.

Our System

"Capital gains" are the gains, or profits, made from the investment of capital -- the big pools of money that a few of us have the great responsibility and burden of being stuck with. The theory is that the few among us who have bundles of money (capital) use that money to start businesses or buy stocks or property (or race horses) and thereby "create jobs." (For more on how businesses and the wealthy "create jobs," click here and then click here.)

If the value of the business or property (or race horses) goes up those wealthy few make even more money (gains). This ability to obtain these huge gains is a benefit offered to those who have lots of money in the first place. Thus the term "capital gains." These gains are differentiated from the gains the rest of us make from ...working ... because the rest of us do not have the intelligence and wisdom of having those huge pools of money to invest.

Incentives

In our system the income gained from these investments by these wealthy few is therefore taxed at a special very, very low rate, because they have the wisdom and intelligence to have large sums of money available to invest, and the rest of us do not. This low rate is considered an "incentive" to those who have these large accumulations of money, to try to persuade them to make these huge profits. They require these "incentives" to make huge profits, because otherwise they might not be interested in making the huge profits that can result from owning most of the property and stock and race horses (and yachts and private jets and multiple homes and million-dollar cars.) So that is why they must be given the incentive of these very special low tax rates - to persuade them to make investments that reap huge profits that they otherwise would not want to make.

Government Interference

Of course, the wealthy usually complain when government gets involved in creating "incentives" and "picking winners and losers" in ways that help We, the People, saying government interference distorts decision-making. But when the "incentive" is special low tax rates to persuade the wealthy to invest and make huge profits, that's different. Because it is, that's why. Shut up. Hey, look over there

Job Creation

This reaping of huge profits from "efficiencies" like downsizing, laying people off and making the remaining workers do 2 jobs each in the same amount of time, outsourcing, buying companies and firing everyone and then selling off the pieces, offshoring, force reductions, firing people and then bringing them back as "contractors" at half the pay, relocating factories out of the country where people don't have the protections of democracy, replacing workers with machines, etc. is called "creating jobs."

Effect Of Cutting Capital Gains Taxes

In 2001 these special low tax rates for the very rich "job creators" were made even lower. This was done in order to provide even more incentive for them to make even more profits from their large accumulations of property, houses, cars, yachts, private jets and race horses, so that these "producers" - the "job creators" - would produce even more and create even more jobs. (Click here for more on who and what really creates jobs.) The result of these 2001 tax cuts was spectacular: eight years of the lowest economic growth and lowest job-creation rate since WWII, followed by the collapse of the entire financial system and mass layoffs of millions of us.

Wealth and Income Inequality: America’s Moral Crisis

Sunday, 21 August, 2011 10:19 Written by Dr. Art Kamm

 

Less than one tenth of one percent of our population is holding a sum of wealth approaching three times the size of the US economy that is anticipated to more than double within the next decade, the earnings on which does not contribute to Medicare, Medicaid and Social Security.  And the wealthiest in America quintupled their income during the heart of the Great Recession.  To propose cuts to food stamps and unemployment benefits for the victims of the Great Recession during a time of increasing poverty and poverty-related deaths, without shared sacrifice at the top, represents nothing less than a moral crisis for our country.

Since 2009 there has been no attempt to raise taxes on 98-99% of America; in fact, tax breaks have been issued to Middle America (ref).  The battle regarding increasing revenue has been about closing tax loopholes and reinstating progressive tax rates on the wealthiest of Americans, generally the top 1% of income earners, the only class that has done well, and quite well, during this economic downturn.  That is where the debate lies.  That is where the GOP is digging in its heals.

Warren Buffet, the second wealthiest individual in America behind Bill Gates (ref), has advocated over the past several years to raise taxes on the wealthiest of Americans.  Using himself as an example, he paid 17.4% on his taxable income last year (around $40 million), a lower level than any of the other 20 individuals in his office (range 33% to 41%, average 36%).  The reason for this is that the “mega-rich pay income taxes at a rate of 15 percent on most of the earnings but pay practically nothing in payroll taxes.  It’s a different story for the middle class; typically they fall into the 15% and 25% income brackets, and then are hit with heavy payroll taxes to boot” (ref).

It didn’t used to be like that.  In 1976-77 capital gains rates were 39.9%; today they are just 15%.  The tax rate on the highest levels of income following WWII during Eisenhower (90%), then Kennedy (70%) until Reagan where it was reduced to 28%, now stands at 35% following the G.W. Bush tax cuts.  And these unfunded tax cuts, heavily weighted to the wealthy, have contributed to a growing income and wealth inequality (ref) as well as consistently increasing our national debt at a rate faster than the growth of our economy.

As more income has been pushed to the top over the past 30 years, the income growth of the middle class, and thus its purchasing power, has not kept pace with the growth of the economy.  Quintile by quintile, the lower 80 percent of America is down almost $10,000/yr in income distribution since 1979 while the upper 1% is up over $740,000 in average income during that same timeframe.  And with an economy that is 70% personal consumption, this has resulted in weaker demand for goods and services and thus slow recovery and higher unemployment (ref).

But graphs and charts do a disservice in showing what is really happening with wealth and income inequality in America. The actual dollar increases in income and wealth in recent years within the top 0.1% of income earners, as well as the rapidly growing sums of money held within that group, are mind-staggering; perhaps obscene is a better word during these economically troubled times.  And that will be thrust of this article.  It will compare and contrast increases in wealth and income at the top versus the extent and effects of growing poverty (including death) and unemployment in the rest of America.  The failure to share sacrifice at the top while pursuing cuts in programs benefitting the victims of the recession, represents nothing less than a moral crisis for our country.

Millionaire households, that represent less than a tenth of a percent (0.076%) of the US population, hold $38.6 Trillion in wealth that is anticipated to increase 225% within the next decade to $87.1 Trillion (ref)

And those figures may actually be underestimated due to holdings in off-shore tax havens (ref).  How much money is $38.6 Trillion?  Less than one tenth of one percent of our population is holding wealth that is approaching three times the size of the entire US economy (GDP).  It is almost three times as great as our Gross National Debt.  And it is income producing and builds upon itself.  Consider that almost half (49.7%) of investment assets (financial securities, stocks, mutual funds, etc) are held within the top 1% of income earners (ref).  The capital gains and dividends produced by these investment assets are taxed at only 15% and are not subject to payroll taxes that contribute to Social Security, Medicare and Medicaid.  With ‘money making money’ at historically low tax rates, the wealth of millionaire households is anticipated to reach $87.1 Trillion within the next decade.

While refusing to let the unfunded Bush era tax cuts for the wealthiest expire or close tax loopholes, a Republican House proposal would cut funding for the food stamp program as part of its austerity measures.  The total cost of this program last year was $65 billion (just 0.17% of the wealth held by millionaire households) and helped feed 45 million needy Americans (ref).

Since the Great Recession there has been a marked increase in Food Stamp participation.  Currently 45.8 million people rely on them and that is anticipated to increase by an additional 22.5 million individuals bringing the total to over 68 million needy citizens.

 

This reliance on food stamps parallels the escalation in poverty (ref).  The most current census estimates have 43.6 million Americans, 14.3% of our population, living in poverty in 2009.  However, a recent study by the National Academy of Science places the figure at almost 53 million.  Using the census figures, 15.5 million of these individuals were children (1 child out of every 5).  The poverty rate amongst children increased 28% since 2000, and jumped 10% from 2008-2009 during the heart of the Great Recession.  Every day in America 2,573 babies are born into poverty (ref).

 

Columbia University’s School of Public Health conducted an examination of mortality and medical data and estimated that in 2000 875,000 deaths could be attributed to a cluster of social factors bound up with poverty and income inequality (ref).  Applying that rate to the current number of Americans living in poverty an estimated 1,228,169 Americans died in 2009 from the effects of poverty and income inequality (ref).

Who uses the food stamp program?  About half the recipients are children, 8% are the elderly, 41% have incomes half the poverty level or less, and 18% have no income at all.  The average family using food stamps has only $101 in savings or valuables (ref).  The growing number of these individuals represent the victims of the recession.  I submit that cutting benefits to the impoverished, the hungry, during economically difficult times while retaining historically low tax rates for the wealthiest, is morally corrupt and a statement of values that we as Americans should not tolerate.

The highest earners in America (74 of them with $50+ million in income) quintupled their pay in 2009, averaging $518.8 million in income ($10 million/week), and made as much income as the lowest paid 19 million workers in America combined (ref) (ref) (ref)

While 68 million Americans are relying on food stamps to feed themselves, and with wages declining for 90% of America, those earning the highest incomes in our country increased their income 5-fold during the heart of the Great Recession.  These 74 individuals alone made more money than the lowest paid 19 million American workers combined.

Both Eric Cantor (ref) and Michelle Bachmann (ref) have stated that they do not support extending unemployment benefits for those who find themselves out of work as a result of the economic downturn.  Ms. Bachmann’s position is that “We don’t have the money”.

There has been a marked increase in unemployment following the Great Recession as noted in the following graph (ref). The U3 is the official monthly headline number.  The U6 is the Bureau of Labor Statistics broadest unemployment measure including short-term discouraged, other marginally-attached workers, and those forced to work part time because of lack of full-time employment.  The SGS Alternative (ref) is an aggregate of U3 and U6 and additonally includes long-term discouraged workers ‘who are unemployed and want to work, but have not looked for work within the past year’.  These individuals were excluded from the official count in the 1990′s.  The SGS gives an unemployment rate of 22.5%, an all time record of 34 million people currently in need of work.

Without unemployment benefits, more individuals, including children, would be driven into poverty and its consequences including an increase in poverty-related deaths.  For Ms. Bachmann to state that “We don’t have the money” to extend unemployment benefits while supporting historically low tax rates benefitting the wealthiest is unconscionable.  To let unemployment benefits expire for the victims of this recession would be placing a higher value on tax benefits for the wealthiest over the lives of US citizens, both adults and children.  And regrettably this is not the first time I have made this argument regarding policy decisions on the Right (ref).

Retaining Tax Benefits for the Wealthiest While Cutting Safety Nets: A Few Other Statistics (ref)

• The richest 400 Americans hold more wealth than 154 million Americans, half the US population.  They paid 30% of their income in taxes in 1995, but only 18% now.
• The average millionaire saves $136,000/year due to reduced taxes, a sum greater than the highest income level in the lower 80% of America (and, by definition, there are no taxes paid on those savings).
• One percent of America holds 40% of this country’s wealth, more than the lower 90% of America combined, and holds almost half of all investment assets that produce income at lower tax rates without payroll taxes that contribute to Social Security, Medicare, and Medicaid.
• Between 1975-2010, income of the top 0.1% of income earners quadrupled and for the top 0.01% quintupled.  During this same time period worker productivity increased 80%, and yet the income shift has resulted in a shortfall of $400/week for the typical American family.
• From 2009 – Q4 2010, 88% of income growth went to corporate profits (i.e. CEOs) while just 1% went to workers.

Discussion

For those who choose to construe the above as an ‘attack on the rich’, I write from the perspective of having been there.  As I explained in an open letter to Senator McConnell and Congressman Boehner when they threatened to let benefits to the vulnerable expire unless tax cuts for the wealthiest were extended (ref), my views are shaped from having lived during my adult life at income levels that define poverty, the middle class and the wealthy.  I’ve never forgotten that surprise EITC check in the mail during a particularly lean year living on one income ($4500/yr and a student loan with child having medical needs and no insurance).  It meant alot and I never forgot that helping hand our government extended to me as I later went on to provide employment to others. I had no problem what-so-ever during the Clinton surtax years in paying that additional 3.6% on upper income (wow, that was a real back breaker) into the system to keep it well; the same system that lent a helping hand to me when I needed it and the same system that later allowed me to do well. It is a sense of obligation.  And it is worth noting that the redistribution  during the Clinton years contributed to 7 million fewer Americans living in poverty (ref).

The unfunded tax cuts did not stimulate economic growth, employment, or capital investment in America as was promised (ref) (ref).  And the current tax system is, frankly, grossly unfair to the middle class and damaging to our economy. When the wealthiest in our nation proportionately pay a smaller share of their total income in taxes than the middle class (this includes 1470 individuals who earned $1 million or more in 2009 and yet paid no taxes, ref) and when the tax system helps income and wealth accumulate at the top at the expense of our economic engine, the middle class (ref) Mr. Buffett is right when he said in 2006: “There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning” (ref).

But the real consequences of what is going on in America today is being sanitized; we’re not seeing the face of poverty on TV with well dressed and well fed commentators and guests debating the issue.  This is not dissimilar to the coverage of the Iraq War by mainstream media.  As was detailed in the documentary, Independent Intervention, what we saw in our living rooms were the bomb explosions of Shock and Awe, not the consequences of those explosions on women and children as was graphically shown in the documentary; something the filmmakers claim would have affected public opinion on that war.  And rarely do we hear about the racial component of the inequality where the March unemployment rate (seasonally adjusted) was 7.9%, 15.5%, and 11.3% for American whites, blacks and hispanics, respectively (ref).

There are real life consequences to poverty and there is no denying that one of the consequences is that it claims lives. And when cuts to safety nets are being threatened for the victims of this Great Recession while historically low tax rates are being maintained for the wealthiest, a higher value is being placed on those tax benefits than human life itself.

I submit that this represents a moral crisis for our country.  Representative Bachmann and others may claim that we do not have the money to pay for those unemployment benefits, but they should first increase revenue by reducing the gap between what the wealthy and middle class proportionately pay into the system.  Yes, Ms. Bachmann, it is good that people get to keep their money, but the rich are proportionately getting to keep more of theirs than the middle class.

Why is this happening?  It is difficult to deny that part of it is that our politicians now are beholden to a different ‘person’ than the general public to retain their job.  It is a person in the form of corporations and special interests that can contribute unlimited sums to political campaigns and sway public opinion through expensive media blitzes (ref).

In 2009, Texas Governor Rick Perry described the expansion of unemployment benefits under the stimulus plan to thousands of low-wage workers as burdening tax payers with “higher taxes and expanded obligations” (ref), and his Texas tax laws actually “redistribute income away from ordinary families and towards the richest Texans” (ref).  Regarding his recent Christian Prayer event in Houston that was billed as an attempt to reverse America’s national decline (ref), I wonder if Proverbs 22:16 was included in the prayer list: “He who oppresses the poor to increase his wealth and he who gives gifts to the rich – both come to poverty”.

Tags:  Clinton, Deficits, Economic Crisis, G.W. Bush, GDP, National Debt, Progressive Tax, Reagan, Recession, special interests, Tax Cut Legislation, Wealth Distribution

NYT: The Truth about Taxes (revenue RAISING, folks)

http://www.nytimes.com/2011/08/07/opinion/sunday/the-truth-about-taxes.html?_r=1&emc=tnt&tntemail0=y

A week later and we are still amazed at how the Republicans in Congress pulled it off. They held the economy hostage, won some cheap political points, and all of us will spend the next decade paying the ransom as government programs — $900 billion over 10 years in the first round — are slashed and the recovery is put at risk.

Related

• Times Topic: Federal Debt Ceiling

• S.& P. Downgrades Debt Rating of U.S. for the First Time (August 6, 2011)

• Post a Comment »

The only glimmer of hope is that the battle is not completely over — if President Obama is finally willing to fight.
Under the terms of the ill-conceived debt agreement, Congress has to propose another $1.5 trillion in deficit reduction measures by December. Just to ensure that rationality does not have a chance, Republican leaders said they would not put anyone on the deficit-cutting “super-committee” who might entertain the idea of raising taxes.
A week later and we are even more amazed by the failure of Mr. Obama and the Democratic leadership to stand up to this intransigence. If they do not start pushing back, with the same ferocity, the results will be disastrous.
Standard & Poor’s made its judgment about both the political standoff and the all-cuts, no-new-revenues deal on Friday when it lowered the country’s long-term debt rating one notch, down from AAA. And while “no new taxes” pledges are almost always big political winners, Americans are also figuring out that the country cannot keep on this way. According to the latest New York Times/CBS News Poll, 63 percent support raising taxes on households that earn more than $250,000 a year to help address the deficit.
If that is not enough to energize the White House, here are a few more facts. To avoid across-the-board cuts, Congress must enact at least another $1.2 trillion in deficit reduction measures over the 10 years. For all of the talk of “big government,” there is no way to cut that much in discretionary programs without crippling basic functions. Lawmakers could eliminate the Federal Bureau of Investigation, Pell Grants, the Centers for Disease Control and Prevention, the National Institutes of Health and Head Start and still not cut $110 billion annually.
Entitlement reform is essential. But it is unlikely that lawmakers will agree on deep cuts to Medicare, Medicaid and Social Security. Finally, asserting that deficits can be tamed with spending cuts alone ignores that the Bush tax cuts — costing $1.8 trillion from 2002 to 2009 — are a big reason we got into this deep hole.
Here is the bottom line. There is no economically sensible or politically honest way to address the deficit without also increasing revenues and reforming the tax code. The major challenges are these:
LET THE BUSH CUTS EXPIRE Mr. Obama vowed to let the high-end tax cuts (for people making more than $250,00) expire in 2010. But in a preview of the debt fight, he agreed to extend the cuts for two more years when Republicans held unemployment benefits and other measures hostage.
Letting all of the cuts expire at the end of 2012 would save $3.8 trillion over the next decade. Letting the tax cuts expire for those making more than $250,000 would save $700 billion. That would make a real dent in the $2.4 trillion in total deficit reduction envisioned in the debt limit deal.
A sensible and fair approach would be to let the high-end tax cuts expire as scheduled, but keep the other tax cuts for another year. That would keep more cash in the hands of people most likely to spend it and prop up consumer demand while the economy is weak. It would give Congress and the administration time to undertake tax reform.
MAKE REAL REFORMS Most Congressional Republicans are willing to embrace reform, but only if it is “revenue neutral.” There is no question that the system is overly complicated; it is also riddled with hugely costly special deals for special interests. Any reform must streamline the code, make it fairer and — most important — raise more revenue.
TARGET TAX BREAKS AND LOWER RATES Each year, the government provides $1 trillion in tax breaks. Some of the largest breaks — for itemized deductions and retirement savings — should be retained because they subsidize important goals, like home ownership and old-age security. Right now, wealthier taxpayers get the greatest benefit. The process needs to be reformed so that most of the help flows to those who most need it: low- and middle-income taxpayers.
At the same time, super-low tax rates for investment income should be ended. Capital gains are taxed at a top rate of 15 percent, compared with a top rate for wages and salary of 35 percent. Proponents argue that the lower rate is an incentive to invest, but research shows that it also encourages gaming of the system. Tax breaks that have outlived their purpose must be ended, starting with subsidies for the oil industry, which is making billions in profits.
The revenue from such reforms could be used to pay down the deficit and allow all tax rates to be lowered, improving incentives to work. The amount of revenue raised and the drop in tax rates will depend on how much tax breaks are curbed.
OTHER TAXES Congress should consider raising revenues in other ways, like a value-added tax, or carbon taxes. That way all of the needed revenue for deficit reduction, and for what government provides, does not need to be squeezed from the income tax. A value-added tax is conducive to saving, and a carbon tax helps protect the environment.
The public is open to new taxes, and the economic facts are clear. Until tax increases are considered in equal measure to spending cuts, there will be no budget fix.

BR has an interesting story on the Top 400...

http://www.ritholtz.com/blog/2010/04/top-400-taxpayers/

• The top 400 U.S. individual taxpayers got 1.59% of the nation’s household income in 2007 — 3X the p% they got in the 1990s.

• The top 400 paid 2.05% of all individual income taxes in 2007.

• Only 220 of the top 400 were in the top marginal tax bracket.

• Average tax rate of the 400 = 16.6% — the lowest since the IRS began tracking the 400 in 1992.

• Minimum annual income to make the top 400 = $138.8 million.

• Top 400 reported $137.9 billion in income; they paid $22.9 billion in federal income taxes.

• 81.3% of income was from capital gains, dividends or interest. Salaries and wages? Just 6.5%.

• The top 400 list changes from year to year: 1992-2007, it contained 3,472 different taxpayers (out of a maximum 6400).

81.3% of income was from capital gains, dividends or interest. Salaries and wages? Just 6.5%.

Read more: http://www.businessinsider.com/20-more-tax-facts-that-will-make-your-head-explode-2010-4#ixzz1OhKNER5s

Read more: http://www.businessinsider.com/20-more-tax-facts-that-will-make-your-head-explode-2010-4#ixzz1OhJqhPgz\