The New York Times continued its shameless assault on the most successful people in America in its Saturday edition. In an article titled, "High Income, Low Taxes And Never A Bad Year," James B. Stewart led the charge against those Americans who earn too much. The premise of the piece is that the super rich, all 400 of them, made significant income even in down years like 2009 in part because of the tax benefits they receive.
Before criticizing this small group of billionaires, it would be appropriate for all to understand some of the tax issues that are beneficial to the group. There is no reason why they cannot be changed by Congress, although proposals to do so will likely face strong opposition from various special interest groups. Current billionaires themselves will likely remain neutral or in favor of new legislation. In any case, the most wealthy should not be demonized because of their wealth.
Very wealthy Americans rake in a disproportionate amount of net income because a large amount of their gross income is in the form of capital gains and dividends, which receive favorable tax treatment. To state this another way, the pre-tax profits of the super wealthy are subjected to a lower effective tax rate resulting in more net income. Below are two the most important tax advantages that cause this phenomenon.
Long-term capital gains are profits earned from assets that are bought and sold after a year. For those in the highest tax bracket, profits are taxed at 23.8%, as compared to a 39.6% tax rate for short-term capital gains and current salary.
Corporations pay dividends to shareholders. These payments represent a portion of the profits companies earn annually and are taxed at 15%. The rationale for this relatively low tax rate is that the dividends were already taxed at the corporate level, so a second tax is unfair.
You may not agree with these concessions, but they are the law of the land. Every super rich person, whether they are liberal (like George Soros), or not so liberal (like Warren Buffett), benefit by these tax concessions, and none of them pay one cent more than what is required by law.
Why do super rich people generate a large part of their total income from capital gains and dividends? It’s because they accumulate an enormous amount of wealth from their current income, which was, and is, taxed at the normal federal tax rate of close to 40%. A large portion of this money is then invested in securities. If these securities are held for more than a year, the gains receive capital gains treatment. Similarly, dividends paid by corporations also receive favorable treatment.
There is no conspiracy, illegal, or unethical activity taking place. To suggest so in articles like the Times piece is yet another form of financial discrimination and class warfare. Almost exclusively, wealthy investors enjoy these benefits.
Another fact is that the 400 wealthiest people in the U.S. had gross incomes of $202 million in 2009. Yet, there are over 140 million taxpayers who filed tax returns in 2009. We are only speaking of a handful of Americans.
The article suggests, "There’s widespread resentment at the lower rungs of the prosperity ladder." This is a total overstatement. Many of us are envious of the lifestyles of the rich to an extent, but these people are not reminiscent of the French and Russian monarchs who stole money from the middle and lower classes. The 400 referred to in the Times article earned or inherited their wealth. Further, it is not a zero sum game. The super rich can earn significant income while all other Americans prosper as well.
I know some of the people referred to in this article. Not once have I heard any of them make a case for continued favorable tax treatment. In fact, many of them believe that some of their benefits should be eliminated, or at least cut back, for the good of the country. Such an action on the part of the federal government will have a relatively small impact on the lifestyles of the super wealthy. Buffett, Druckenmiller, and Gross have publicly said that tax reform should include the items discussed herein.
From my perspective, the lion’s share of reform should be directed at long-term entitlements such as Social Security, Medicare, Medicaid, and Obamacare if we are ever going to achieve some level of fiscal sanity in this country. All the rhetoric about the super rich is not going to solve the long-term systemic problems that are percolating in our economy. Entitlement reform is the only real solution.