Policy 101 – Personal Tax Rates

Policy 101

Personal Tax Rates

One Sentence Argument

Our tax code is deliberately designed to reward people who already have money over people who work for a living.

Issue Breakdown

If there’s one thing that voters should know about the tax code, it’s that it is deliberately designed to reward money over work. It gives an enormous built-in benefit to people who already have money (and who are using that money to make more money), rather than the people who are using their skills and work to make money. Here’s how:

Our tax code has two different rates for two distinct types of earnings: “ordinary” income, and “capital gains” income.

Ordinary Income

The tax that most people pay, ordinary income is taken from money earned through labor. You go to work, get a paycheck, and pay income tax.

Capital Gains Income

The capital gains tax, on the other hand, is a different rate that is paid on money that comes from the sale of an asset. So if you buy a stock or real estate, it goes up in value, and you sell it for a profit, that profit is then considered a capital gain, and taxed accordingly (as long as you held the asset for at least a year).

The fact that these two types of income are treated differently by the tax code isn’t the real problem – it’s how they’re treated differently.

The top capital gains tax rate is barely half of the top income tax rate, meaning people who earn their money from investments pay a lot less in taxes than people who work for a living. And wouldn’t you know it, it turns out that the people earning the vast majority of capital gains income are people who are already wealthy. When you look at the rates side by side, it becomes clear that the already-rich are making out like bandits.

To those at the very top, working for your money is a sucker’s game. It’s much more lucrative to make your money work for you.

A Case Study in Unfairness

Say that two people – we’ll call them Doug and Carrie Heffernan – both worked full time last year, putting in 40 hours a week every single week. Together they made $77,000 in combined income. Based on the New Republican Tax Code, the Heffernans would pay around $6,000 in federal income taxes.

Now say, two other people – we’ll call them Jared and Ivanka – sat around all year sipping strawberry daiquiris on a beach somewhere. One day, in between reapplying sunscreen, Jared clicked a button on their eTrade account and sold some stock they’ve owned for a while. Let’s say they made $77,000 on the sale of that stock – exactly the same amount as Doug and Carrie. Based on the new Republican tax code, Jared and Ivanka would pay ZERO dollars in taxes.

So two couples make the exact same amount of money, one couple by working all year, the other couple by sitting on the beach sipping drinks and letting their stocks increase in value. The working people end up $6,000 poorer than the strawberry daiquiri people.

It gets worse from there. Say the next year Jared and Ivanka sold some more stocks and made $700,000. Jared and Ivanka would again pay no taxes on the first $77,000, would pay just 15% on the next $402,000, then just 20% on the rest, for a total tax bill of about $100,000.

Now let’s say Doug and Carrie got fancy new jobs. They still worked 40 hours a week all year along, but this year they made $700,000 – the exact same amount Jared and Ivanka made sitting on the beach. At the end of the year, Doug and Carrie would owe almost $190,000 in federal income taxes.

So again, two couples make exactly the same amount of money – but one of them works full time and the other sits around on a beach not working – and the one not working comes out over $90,000 richer. There’s just nothing working people can do to catch up.