My taxes are half what I’d pay if I just made wages

OK Donald, I’m not going to publish my tax returns either, but I do want to reveal enough information about them to make a point.

Over the last few years, my wife and I have eased towards retirement, which means that an ever-higher percentage of our income comes from investments (interest, dividends, and capital gains) rather than wages. And I’ve watched our taxes go down accordingly, because the tax code is stacked against people who get their money by working. (I’ve been complaining about this at least since 2005. I made a related complaint about estate taxes after I settled my father’s estate in 2015. As a worker I paid one rate; as an investor I have paid a much lower rate, and as an heir I paid essentially nothing.)

I think 2017 was the first year (or maybe the first since that lucky investing year of 2004 that made my tax return look so shocking to me in 2005) that wages have been less than half of our income. And that made me wonder: If I refigured our federal income tax with the assumption that we had the same income, but it was all wages, what would that do to the tax we pay?

Answer: More than double it. A couple who had our same income, same deductions, and so on, but got all their income by working, would pay twice as much tax as we paid, and then a little more. (If you had a lot of wages and want to do my experiment in reverse, go to page 44 of the 1040 Instructions and fill out the Qualified Dividends and Capital Gains Tax Worksheet under the assumption that your whole income consists of capital gains. If you’re willing to share, you can post in the comments the percentage decrease you see.)

You might wonder how that is possible, since capital gains are supposedly taxed at 15%: low, but more than half the rate most wage-earners pay. The answer is that your first chunk of capital gains isn’t taxed at all.

Taxpayers in the 10 and 15 percent tax brackets pay no tax on long-term gains on most assets; taxpayers in the 25-, 28-, 33-, or 35- percent income tax brackets face a 15 percent rate on long-term capital gains. For those in the top 39.6 percent bracket for ordinary income, the rate is 20 percent.

If you don’t have a lot of wages, you only start paying those 15-20% rates after you’ve maxxed out the untaxed chunk.

A response you’ll sometimes hear from conservatives is: “Well, if that bothers you, you should make a voluntary contribution to the Treasury.” And that entirely misses the point. If the problem were my personal sense of guilt over being allowed to pull less than my weight, a contribution to the Treasury would deal with part of it. (I still would have the privilege of deciding for myself what my fair share is, though. That still would put me in a different class from people who have to either pay what they owe or go to jail.)

But my complaint isn’t that I lack some proper method to flagellate myself for having income. The guilt shouldn’t reside with those of us who fill out our tax returns honestly and arrive at the ridiculously low number the law intends us to pay. It’s with the politicians who write these rules, and (even moreso) with the people who use the outsized influence their wealth gives them to induce politicians to write such unfair rules in the first place.

Our tax system is unjust, and every person who earns wages should feel insulted and abused by it. Me sending an extra check to the Treasury would do absolutely nothing to change that.

The problem is structural, so the solution needs to be structural: All forms of income — wages, interest, dividends, capital gains — should be taxed the same. (That’s not a flat tax. Once you total up your income, the tax tables could still be progressive, with rich people paying a higher rate than poor people.) Not only would that change make our tax system fairer and more just, it would achieve goals conservatives are always claiming they support: Figuring out what you owe would be simpler, and the tax code would distort our economy less, since there would be no need for the shenanigans wealthy people pull to make their wages look like capital gains.

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Comments

  • Anonymous  On April 16, 2018 at 10:23 am

    I think this is a great assessment of an inherent flaw in American taxation. As a former Canadian citizen, I have personal experience of other taxation strategies, and am often frustrated by the decreasing percentage of taxes paid by high income earners. Let’s hope there will be will to change this system in our next election.

  • Barb  On April 16, 2018 at 10:51 am

    As a tax professional I would also add that your capital gain/non-wage income is not subject to the SS and Medicare taxes, although realistically since we have the completely ridiculous cap on how much wage income is subject to those taxes you probably have enough wage income that you are already maxed out on SS and Medicare. If that fraud Paul Ryan actually wanted to reform Social Security and Medicare (which I refuse to call “entitlements” since everyone freaking PAYS into the system) he could have simply raised the cap on contributions, or eliminated it altogether. In its current form SS and Medicare taxes are regressive, hitting every dollar of earnings made by people who make less than 113K or so (not sure the exact cap since it is indexed) but NONE of the earnings of people who make more than that. but of course Congress doesn’t want to do that because that would be a tax increase ON THEM.

    • weeklysift  On April 16, 2018 at 11:32 am

      Good point about SS and Medicare taxes. I had forgotten them completely.

      • 1mime  On April 16, 2018 at 12:32 pm

        Social Security and Medicare exemption from capital gains/non-wage income…..Not “yet”. Give this GOP “entitlement-busters” group time…by hook or by crook …

  • Bill Camarda  On April 16, 2018 at 11:41 am

    I spent the weekend working on my federal taxes. In part because I’m in a similar place in life and in part due to one-time family reasons, my household’s earnings shifted substantially towards dividends this year. I was *shocked* at how much lower my taxes turned out to be than I had expected. I couldn’t believe what TurboTax was telling me, and went back to recalculate all the relevant numbers on paper using the official printed IRS booklet. It was true — and, yes, it is breathtakingly unfair.

    But we now have a political system where the Republican Party continues to privilege wealth, the Democratic Party’s core strength is well-educated upper middle class suburbanites, unions have been decimated, and many of the (white) people who are hurt by this vote conservative for cultural reasons. I simply have no idea where to start to do anything about this.

    • 1mime  On April 16, 2018 at 11:43 am

      You start by: getting involved at the grassroots level to recruit people to vote; register new people to vote; assist directly in campaigns of people who share your values; and working like hell to GOTV in November.

      • Bill Camarda  On April 16, 2018 at 11:48 am

        All true, all good advice that I completely agree with (and am trying to do). You’re right.

    • Guest  On April 18, 2018 at 1:38 pm

      “I simply have no idea where to start to do anything about this.”

      Maybe this can be your “come-to-Bernie” moment, Bill! And by Bernie I don’t just mean Bernie, but progressive politics in the tradition of Martin Luther King Jr including, to mime’s point, expanding democracy at the grassroots. Your assessment of the situation is spot on.

  • GJacq726  On April 16, 2018 at 11:52 am

    Isn’t there reasoning around keeping investment taxes low as incentive to invest? Granted, completely over-applicated, but maybe take that into consideration in your calculations? It still promotes an unjust system when those who only earn wages haven’t the money, after taxes, to invest. Maybe there is something to this? Wage earners “invest” in public institutions via taxes, those able to invest don’t, or much less so? Stupid, stupid, stupid, if so. I work for a commuter railroad now and am learning just how frayed our nationalinfrastructure is. Seems to me infrastructure would be an important institutional investment for the rich and corporations?

    • Tom Amitai (@TomAmitaiUSA)  On April 17, 2018 at 6:47 am

      It certainly gives the rich an incentive to “invest” in the politicians who write the tax code! 😉

    • weeklysift  On April 17, 2018 at 7:53 am

      Conversely, someone could argue that we should keep wage-earners’ taxes low as an incentive to work.

      When this administration thinks about incentives to work, though, it thinks about punishments, not rewards: If you’re not working, we’ll take away your Medicaid or Food Stamps. The whole philosophy is “Carrots for the rich, sticks for the poor.”

  • dividendsandhobbies  On May 12, 2018 at 6:32 pm

    The money i put into the stock market is already taxed so if they were to raise the taxes on it it would hurt the small investor.

Trackbacks

  • By To Investigate or Not? | The Weekly Sift on April 16, 2018 at 11:25 am

    […] This week I have a lot of featured posts that are shorter than usual: “‘Make a Deal’: My Contribution to the Trump/Mueller Musical“, “Can I Stop Writing About Paul Ryan Now?“, and “My taxes are half what I’d pay if I just made wages“. […]

  • By The Friday Nine (4/20/18) on April 21, 2018 at 4:01 am

    […] My taxes are half what I’d pay if I just made wages: “Over the last few years, my wife and I have eased towards retirement, which means that an ever-higher percentage of our income comes from investments (interest, dividends, and capital gains) rather than wages. And I’ve watched our taxes go down accordingly, because the tax code is stacked against people who get their money by working.” (The Weekly Sift) […]

  • […] Who Do Tax Breaks Benefit? Go on and take a guess. The Weekly Sift guy understands: My taxes are half what I’d pay if I just made wages. […]

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