
Why American Workers Pay Twice as Much in Taxes as Wealthy Investors - champagnepapi
https://www.bloomberg.com/news/features/2017-09-12/why-american-workers-pay-twice-as-much-in-taxes-as-wealthy-investors
======
chollida1
> Americans in the top 1 percent, and especially the top 0.1 percent, have
> seen their wealth and income multiply in recent decades as the rest of the
> country’s share of the economic pie shrank. Since 2000, a recent study
> found, the top 1 percent have made those gains almost entirely on income
> from capital, especially corporate stock—not on labor income. One reason may
> be the financial options of the wealthy: Business owners can lower their tax
> bills by paying themselves in dividends rather than in salary, for example.

I've written a few times about how the different tax rates on income, vs
dividends vs interest income vs capital gains, and even business vs personal
tax rates all work together to ensure the 1% come out ahead of the average
income earning individual.

I think I was 25 when I incorporated my first corporation, not because I was a
startup founder, but to reduce my taxes. I'll bet if you look around at the
most wealthy people you know, almost all will have their own corporation or
two.

I mean, just the fact that people pay taxes and then expense out of after tax
money and corporations pay expenses and then tax on whats left should be
enough to illustrate how corporations keep the rich ahead of the salaried
population.

It can get worse as corporations can change their tax year. This means if you
are someone who gets a large bonus at the end of the calendar year you can
shelter the tax on it for an entire year. So you can have someone who earns a
$100,000 salary and gets a $500,000 bonus on December 31st. The bonus goes
into the corporation and has a full year until November 30th before the tax is
due. If you invest the bonus and earn 20% by next November you have earned
enough money back to cover the corporate taxes due vs the salaried employee
who pays the full 40ish% tax rate on the $500,000 bonus. Now, you'll have to
eventually pay dividends to take the money out of the company but I think I've
shown enough to prove just how far ahead the person with the corporation comes
out ahead of the average person.

Until the tax law changes, smart people have corporations, the 99% don't.

~~~
bryanlarsen
They're currently trying to close a couple of those loopholes here in Canada,
and it's surprising how much traction the complaints against the reforms are
getting. The opponents are claiming that the reforms are going to devastate
family doctors and family farms. The complaints are mostly bogus, but people
don't understand tax law so are vulnerable to an emotional plea.

~~~
danudey
As someone who works at a startup and has interacted with many others, there
is some merit to the claims. I agree that these loopholes should be closed and
the tax system reformed, but I think we should be careful to do it in such a
way that doesn't negatively affect e.g. companies like the one I work for,
which went from three people to 70 and millions in revenue in just a few
years.

Especially as Vancouver is trying to build its tech and entrepreneurial
ecosystem, it's important to ensure that we aren't driving away or hindering
small businesses to grow while also not letting huge corporations like TD,
Telus, or Apple get the biggest benefits from the tax system the more money
they have.

~~~
aaronblohowiak
Since you pay taxes on profits and not revenue how would they impede growth?
Money reinvested is tax free.

~~~
IncRnd
Money is reinvested tax free for a c corp. That is not always true.

------
gnicholas
> _You owe the IRS about $38,500 more, assuming each of us pays the maximum
> with no special deductions._

This also assumes the investor has no interest income, which would be
unlikely. For a younger person with a big nest egg, this wouldn't be a huge
chunk of their assets. But as you age you'd want to shift into less-risky
assets, like interest-bearing ones.

Also, investors would probably be diversified into real estate (which
generates rental income, which is taxed as ordinary income). There are tricks
that can be played in real estate, of course, but there's also lots of
ordinary income tax paid.

> _I get to skip about $24,000 in payroll taxes that you and your employer
> must fork over each year._

"Payroll taxes" includes social security, which the worker will collect until
he/she dies. It is also payable to the worker's spouse in certain
circumstances. But you only get to collect social security to the extent you
paid into the system. So if there's an economic downturn, the worker will have
social security to fall back on in old age, where the investor will not.

The general point remains, but this is a highly stylized example designed to
emphasize (hyperbolize) the author's point.

~~~
rgbrenner
_But you only get to collect social security to the extent you paid into the
system_

Medicare and social security payout more in benefits than you paid in:
[http://www.politifact.com/truth-o-
meter/article/2013/feb/01/...](http://www.politifact.com/truth-o-
meter/article/2013/feb/01/medicare-and-social-security-what-you-paid-what-yo/)

~~~
gnicholas
I was trying to avoid saying "you only get benefits if you paid in", which
oversimplifies the situation. If someone paid in for decades, they'll get more
SS than if they paid in for 2 years. Basically, I meant "to the extent" to
mean that it scales with participation. Thanks for the link — interesting
details.

------
cgore
Because politicians sell progressive income taxes as a way to screw the rich,
when it actually just screws the upper middle class, since the actual rich
don't have jobs to tax the income from.

~~~
URSpider94
It's not the progressive tax structure that's the problem, it's the fact that
cap gains are taxed at a much lower rate than other forms of income.

~~~
walshemj
That's to encourage money to be invested and also to compensate for the risks.

~~~
Robotbeat
If I had the money, I'd renovate my roof, get a solar roof with battery
backup, etc. It's an investment just as much as in any business; why am I
discriminated against as an individual?

~~~
URSpider94
That's a tax-neutral investment. You would pay for the equipment with after-
tax dollars, and your returns would be in lower utility bills, which you pay
with after-tax dollars. So, your returns are effectively tax-free!

------
paulpauper
_Americans in the top 1 percent, and especially the top 0.1 percent, have seen
their wealth and income multiply in recent decades as the rest of the
country’s share of the economic pie shrank. Since 2000, a recent study found,
the top 1 percent have made those gains almost entirely on income from
capital, especially corporate stock—not on labor income. One reason may be the
financial options of the wealthy: Business owners can lower their tax bills by
paying themselves in dividends rather than in salary, for example._

Yeah...look at Bitcoin, Bay Area real estate, tech stocks (Google, Tesla,
Amazon, Apple, Facebook, Sales Force, etc.)...it would seem like 'assets' are
kicking the asses of wages. People are getting rich buy & holding assets and
with speculation than 'building and making things' (except for Tesla). And the
low long-term capital gains taxes to boot just makes it all the sweeter.

Now obviously,doctors, coders, and lawyers can do very well too. To get to the
stage where you can live off assets, you need income.

------
njarboe
Here is a question for any tax attorneys out there. Not sure how to find a
clear answer to this question but these pages[1][2] seems to suggest that the
capital gains tax rate is based on your "Taxable Income". This is shown
further down the second page to be "really Regularly Taxed Income minus
Adjustments, Deductions, and Exemptions". If your "Taxable Income" is less
than 37,950 your long range capital gains tax is 0%.

This seems to me to mean that if you are say Larry Page or Sergey Page and set
your salary to $1 (like the do), your main motivation for the low salary might
not be to signal that, as a large shareholder, you are aligning your interest
with shareholders and thus won't take a salary (this is what I thought the $1
salaries in the Valley were all about, but it always seemed a little silly to
me). Maybe your main motivation is that you make all of your income in capital
gains and if you have less than $37,950 in "Taxable Income", you pay %0 in
capital gains. $1 in "Taxable income" with $1 billion in capital gains and pay
$0 in tax. You could make a bit more with a salary of $37,949, but that is
nothing compared to your capital gains, and then people would be pointed to
exactly what was happening.

This would be a much bigger loophole than covered interest being taxed at the
long term capital gains rate. Although, now that I think about it, the two
loopholes would work together. Own a hedge fund, take $1 in salary, make $1
billion in carried interest, pay $0 in taxes.

I sure don't want to believe this is the way it works. Links to an IRS.gov web
page example that shows otherwise would be greatly appreciated.

[1][http://www.moneychimp.com/features/capgain.htm](http://www.moneychimp.com/features/capgain.htm)

[2][http://www.moneychimp.com/features/tax_brackets.htm](http://www.moneychimp.com/features/tax_brackets.htm)

~~~
zamfi
IANATA, but if you look at the qualified dividends and capital gains tax
worksheet [0] on personal income tax form 1040 (that’s the main tax form for
individuals), you’ll find that your capital gains tax rate is dependent on
your income _including capital gains_.

For the purposes of your example, Larry and Sergei would pay no tax on the
first 37,949 of capital gain income (thanks to the $1 salary), but regular
capital gain rates on the next ~billion.

[0]:
[https://apps.irs.gov/app/vita/content/globalmedia/capital_ga...](https://apps.irs.gov/app/vita/content/globalmedia/capital_gain_tax_worksheet_1040i.pdf)

~~~
njarboe
Thanks. That makes sense. Didn't think a loophole that big would not be talked
about more. On the other hand, it is interesting to know that you can have a
capital gains income of ~75k as a married couple and pay no taxes, if you have
no other income. Not a bad income for early retirement.

~~~
tanderson92
Here's an even more ambitious use of loopholes: "How to pay ZERO taxes in
retirement with 6-figure expenses"

The poster "livesoft" is one of the consistently insightful and funny posters
I know.

[https://www.bogleheads.org/forum/viewtopic.php?t=87471](https://www.bogleheads.org/forum/viewtopic.php?t=87471)

------
RHSeeger
> The most famous economic boom in U.S. history, right after World War II,
> occurred when the top rates on dividends were between 70 and 90 percent.

This seems very much like presenting correlation without any semblance of
causation. Specifically, "right after World War II" is a pretty significant
variable to ignore. The financial impact of the war being over (and massive
amounts of resources being re-allocated) may well have been large enough to
counteract any other variables.

~~~
jrs95
But it's a really popular meme so who cares? It's not like Bloomberg is
supposed to understand economics or something

------
tabeth
One thing a middle class friend of mine does is the following:

1\. Buy house

2\. Rent out rooms

3\. Deduct all expenses that you'd have to pay anyway, utilities, internet,
etc. as "business expenses".

4\. Depreciate house

5\. Renovate the house and depreciate the new fixtures/additions/etc.

6\. Reappraise the house after a certain time and refinance.

7\. Take money out after refinancing and buy more property.

Go back to (1).

It's pretty much foolproof. The tough part is being an owner-occupied landlord
for a bit to get to the point where (6) is worth while. You also have to be in
a hot market.

~~~
vasilipupkin
when you sell those properties, you still have to pay all the taxes.
Depreciating doesn't save you from having to pay tax, it just defers the tax
liability to the future.

~~~
tabeth
You have to pay depreciation recapture tax whether or not you actually
depreciate your house[1]. Not depreciating a rental property is just stupid.

[0] [https://www.thebalance.com/depreciation-
recapture-3192979](https://www.thebalance.com/depreciation-recapture-3192979)
[1] Internal Revenue Code section 1250(b)(3)

~~~
vasilipupkin
I agree, I am just saying, depreciation is not a free pass, since when you
sell, you have to pay the tax.

~~~
tabeth
True, but you'd have to pay tax either way (e.g. don't have a rental and pay
capital gains, though this is minimized if you're a first time homeowner), is
what I'm saying. Though, the cool thing is that if your house is a rental (as
opposed to residential) you can actually offset depreciation recapture by
passive loss throughout the time the property was a rental. Often this
completely negates the tax.

Man... _too_ many benefits are given to those who own property.

~~~
vasilipupkin
doesn't passive loss lower your tax basis? so, no, I don't think it negates
the tax.

~~~
tabeth
You're right, however in the original scenario proposed you'd sell your
property and buy another one, enacting like kind exchange. So then you don't
have to pay any taxes.

------
cylinder
The biggest lie is this nonsense about "double taxation," ie taxing money
that's already been taxed is somehow unfair. So stupid.

Capital gains tax shouldn't exist. It should all be one income tax. You can
carve out discounts or exemptions for things like sale of PPOR, sale of family
business up to a certain point, if you want.

~~~
fooster
I don't see it that way. When you invest you risk the capital. You might get a
return, you might not and therefore the taxation rules should reflect that.
The situation as a worker is different. The only risk you take is that you
might select a bad company.

~~~
etwigg
"The only risk you take is that you might select a bad company." \- that's the
same risk an investor takes no? Except the investor can diversify across many
companies, while the employee can rely on only one. Yours seems like an
argument for investors to pay a _higher_ rate than an employee, because they
can diversify their risk.

Personally, I don't think taxes should be based on risk assessment.

~~~
fooster
If there was no capital gains tax it would almost certainly reduce investment
in risky industries. For example, high tech.

~~~
matt4077
The risks should be reflected in the possible return from the investment (pre-
tax), and it is. This is most obvious with fixed-income investments (bonds)
where the rate is directly derived from the perceived risks.

The justification also breaks down when you recognise that capital gains taxes
are the same for investments in any sector: If it's supposed to reward risk-
taking, why tax investments in retail or insurance stocks the same as early-
stage venture capital?

~~~
fooster
It is recognized to some extent. Thats why interest has a different taxation
rate than capital gains on stock investments.

------
vasilipupkin
"Taxing investors less is really not what the U.S. needs now,” Saez said.
“Instead, we should focus on trying to rebuild middle-class wealth” by
encouraging families to save for retirement and pay down mortgages."

How do you encourage families to save for retirement? isn't a lower tax rate
on investment income a way to do that?

~~~
Chardok
FTA “There is little empirical evidence showing that taxing investors less
stimulates savings and growth,” said Emmanuel Saez, an economist at the
University of California at Berkeley.

~~~
vasilipupkin
Yes. But that's because there is so little data and so many confounding
variables There is little empirical evidence for everything in macroeconomics,
including for Saez's claims.

~~~
mercutio2
Wait, did you really just say, “I acknowledge there is no evidence”
immediately followed by “there is no evidence for the absence of evidence”?

If I’m not missing something you though was implicit somehow, that is some
pretty remarkable logic.

~~~
vasilipupkin
There is evidence, but it's relatively weak from statistical significance
point of view. This is also true of Saez's claims, such as if only we get rid
of lower taxation on capital, things will improve for the 99%. I am not aware
of any evidence that would support this prediction.

------
chrismealy
If your only income is qualified dividends you can make about $90,000/year and
pay zero taxes.

~~~
mi100hael
If you're making $90k a year in qualified dividends, you're almost guaranteed
to be pulling a good chunk of change in other forms of income as well.

~~~
ReallyAnonymous
My parents saved their whole lives and now make about $100,000 / year in
qualified dividends - They pay about 6K in federal taxes with all that income.

My dad bought pcg_pe for $12 / share when they went into bankruptcy protection
bc Enron/etc. When they came out of bankruptcy they had to back pay him all
the missed dividends and now continue to pay $1.75/share/year. For his cost
basis, its 15% return yearly. Not too shabby.

------
dahdum
America has among the highest capital gains tax rate in the world, and if you
live in California (which treats gains as regular income) the combination of
ACA/NIIT, state, and long term capital gains I believe _is_ the highest in the
world.

------
andrewjl
The intention behind this tax regime was that long-term investing has positive
external effects on the overall economy so should can be incentivized (which
like all other social incentives in the US is done via tax incentives). In
2017 with a global glut of capital desperately looking for any kind of return,
it's not clear if this incentive is necessary anymore.

------
Shivetya
I would love a simple tax system but no politician in Washington wants,
especially those on the left side of the aisle. the tax system is the largest
source of political power that exists in the United States and likely
everywhere in the world.

Politicians refuse to let you disarm them. Worse they are adept at convincing
you they need more taxing power by playing you off each other, by preying on
your jealously or creating it.

What is ignored about investment income taxing is that original income used to
create the investment was taxed. Hence we are taxing it more than once and
doing so forever. the alternative is they pull their investments/risks and put
them into vehicles like bonds that government officials really want them in.
don't think these articles come out of thin air, they are politically
motivated to get you angry so you willingly give more power to the political
class; they are the true one percent

------
ryanmarsh
There's a startup idea in this. Help people convert to corp-to-corp with their
employer. Get them set up with health insurance and the normal bennies. Take
advantage of the preferable tax position.

------
almonj
Any person or group that manages to avoid paying taxes should be celebrated.
The solution to this "problem" should not be that the wealthy pay more taxes,
but that nobody should have to pay taxes since it is blatant theft that funds
incompetent and evil people. Nothing that the government does is good. All
money that goes to the government is either wasted or spent in ways that make
society objectively worse. All functions of government can be replaced and
improved by a free market system.

~~~
Shikadi
Is this satire?

~~~
mrguyorama
Whether or not this specific example is, I know people who legitimately
believe this.

------
drpgq
I found this example interesting as a Canadian, as currently there's a big tax
battle over people incorporating to avoid high marginal tax rates and take
advantage of relatively low small business tax rates, plus income splitting
(which normal employees don't have in Canada). In Canada the emergency room
physician would be incorporated.

Personally I think a lot of the issue is coming from lowering small business
tax rates while cranking marginal tax rates federally and provincially.

------
squozzer
Where this article "phailed" persuasion-wise was in its archtypes -- the hard-
working, high-pressure ER surgeon v. trust-fund slacker baby. Really?

How about changing the dramatis personae a little -- say, make the wage-earner
a VP of product development at a soon-to-be-purchased startup (straddling both
wage-earning and investing, maybe) v. Warren Buffett?

------
fencepost
Legislators, the best investment money can buy.

It's amazing to witness the compound effects of interest^H^H^H^H^H^H^H^H long
term changes in tax policy, particularly when the advantage becomes the new
normal and is then the basis for further changes. How many people look at tax
legislation based on how much better it is than 50 years ago?

------
fortythirteen
If capital gains taxes are raised, then someone who invests outside of a 401k
or IRA gets double screwed.

~~~
kazagistar
Where does the double come from? Each dollar only gets taxed once... only the
profit gets taxed when investing, not the principal, right?

~~~
fortythirteen
If you make capital gains tax the same as income tax, then you're making the
situation worse for people who invest their actual income over trust fund
babies, not better.

It places another barrier on hard working people trying to move from middle to
upper-middle or upper class status.

~~~
ascagnel_
That doesn't explain how this person would have the same income taxed twice.
Taxes are paid on gains, not the return of principal. Income would be taxed,
and then the returns from the invested income would be taxed at a later date.

------
paulpauper
One of the arguments for low long term capital gains taxes is that investments
carry higher risk and volatility than wages. Accumulated wages grow
monotonically but investments are inherently volatile and there is always the
risk of losing everything

~~~
plandis
I can diversify my investments, I cannot diversify the company I work for. For
an individual being employed is pretty risky. I'm fairly confident that I have
enough money to survive a recession without needing to take a hit on my
investments (and I'm assuming the uber-wealthy are definitely in this
situation). I'm not confident that I won't entirely lose my main source of new
income.

------
lhh
How about the government spends a lot less money, thereby requiring far less
tax to fund it?

Also, wealthy people are mobile, as are companies that don't have tangible
assets. If you try to over-tax, they'll simply domicile everything elsewhere.

------
mfringel
Capital does not need to follow an immigration process in order to move to a
new country, beyond a known-fixed cost in customs duties, and typically not
even then.

Labor can't run away as fast, so it's easier to tax more.

------
hsileng
We are the country where money >> labor. Lets be real.

------
31reasons
Can't we just have Sales tax only. People who buy more will pay more taxes.
You can exempt certain items like food, education, healthcare. Why do we need
complicated income tax model? In the Sales Tax Only model, wealthy investors
can invest as much money as they like but they will only be taxed if they
liquidate their stocks and buy a fancy car or a yacht. I am trying to
understand why we need Income tax at all?

~~~
PeterisP
A sales-only tax (i.e. taxing consumption) means that the burden of taxation
is disproportionally shifted towards the poor. A poor person consumes almost
100% of their income; a very poor person consumes more than 100% of their
income (by going into debt), an upper-middle class person consumes much less
than 100% of their income (they get savings, some investments, and big
expenses like student loans and mortgage don't count for sales taxes), and a
very wealthy person consumes just a small part of their total income, as
_most_ of their spending is essentially buying control of means of production
and control of other people, which is not consumption and _not_ affected by
sales tax.

If all your spending is consumption, then all of that is taxable, and if much
of your spending is to gain more income in the future (e.g. buying rent
housing, or stock/control in companies) then that's tax-free - in essence it's
a tax system that strongly facilitates a rich-get-richer, poor-stay-poor
dynamic and increases inequality. And that's generally considered a bad thing
for society.

~~~
nieksand
A couple of random thoughts as a former WA state resident...

* WA omits groceries, prescriptions, and rent from sales tax. So many of the actual necessities in life are already not impacted.

* No personal income tax drastically simplifies and shrinks the tax bureaucracy. According to the Seattle Times, the city's goal of taxing high earners will cost "10 million to $13 million to set up, plus $5 million to $6 million per year to manage and enforce". That isn't counting the overhead costs on the citizens themselves. This is all money that could more productively flow elsewhere.

* There seems to be an assumption that income taxes will drastically reduce the sales tax. But from my memories of living in both CA and NY don't really bear that up. If anything, these states all have problems with spending too much... more tax revenue is like giving alcohol to an alcoholic and just makes the problem worse.

* Income taxes give politicians another tool for pandering to special interests. In NY, one of my exes got a fixed tax deduction for classroom supply expenses because she was a teacher. That's neat, but there was no such tax-payer candy for my own professional expenses. And back then her salary quite a bit higher than mine. Not fair.

* (bonus!) We often tax things that we wish to disincentivize, such as cigarettes. If you accept the premise of anthropogenic global warming, then perhaps we should drastically jack up sales tax instead to reduce consumption, keeping the omitted categories above.

------
ChemicalWarfare
Ok, so how about we lower the tax the "american workers" (more like upper
middle class) are paying? Get rid of progressive tax system maybe? Fix the
situation where the "bottom 50%" aren't paying anything thus making them an
easily manipulated group by promising higher taxation of the "evuhl 1%"?

------
pcurve
Makes my blood boil reading this, especially how poor republicans who have the
most to gain through tax reform are consistently voting against their
interest.

~~~
brianwawok
But poor republicans have often a religious obligation to vote republican.

So do you vote democrat to get more money and fail your religious obligtation?
Or do you vote repblican to fulfill your religious obligation at the cost of
some rich guys getting richer?

Not all people vote through an economic lens. Many othet lenses exist.
Religion is just one of them. You could replace religion with gun rights. Or
states rights. Same story.

I would guess for most people, no one party matches all their wants. So they
need to prioritize.

~~~
TheAdamAndChe
This is why our two-party political system needs to change. It's proven
inadequate to reflect the people in a nuanced enough way.

~~~
sharemywin
The problem is a strong multiparty system can get fringe elements in power.

We also, need to rank candidates:
[https://www.scientificamerican.com/article/ranking-
candidate...](https://www.scientificamerican.com/article/ranking-candidates-
more-accurate/)

~~~
danudey
> The problem is a strong multiparty system can get fringe elements in power.

But as demonstrated, a two-party system can (will?) eventually lead to
polarization, causing one of the only two options in the system to _become_ a
fringe element, and unfortunately the only option the people have now are the
democrats or a party of right-wing extremists who are anti-woman, anti-poor,
anti-education, anti-science, and white supremacists, all while lying about
anything they can to make people afraid of anything that will drive them to
vote Republican.

In other words, a multi-party system might end up with fringe elements, but
we've proven that the two-party system can not only do that but effectively
force a huge number of people to vote for that fringe element.

~~~
arca_vorago
I don't have time to go into the length I want, but this comment is a perfect
example of the myopia that polarizes peoples opinions. Both parties are
equally part of the problem, and the people on both sides who fail to see that
are also, including comments like yours.

Please, don't try and turn this into a whataboutism and argue how much worse
one party is, that's the trite and cliche response we always here that never
addresses root causal issues.

Rant about your comment aside, after long deliberation this is why I support
the unparty movement, the people could get enough third party people in to
take away the majority from both parties. Congress (and the rest of gov) needs
to be reminded they work for the people. Right now, both parties work for
themselves and those that corrupt/black mail/threaten them.

~~~
TheAdamAndChe
> Both parties are equally part of the problem, and the people on both sides
> who fail to see that are also, including comments like yours.

Be careful not to cause useless agurments. Both sides are at fault, of course,
and it should be obvious that one side is currently more extreme than the
other, just like the post above said. Such partisanship is a failure of the
two-party political system that amplifies an us-vs-them mentality that people
naturally get when under stress.

> this is why I support the unparty movement

I assume the unparty movement is a movement to completely remove parties,
which wouldn't work in my opinion. It ignores the human tendency to form
groups, and makes negotiations difficult if you don't have at least some
centralization of power or method of organization. A multiparty system is a
better balance IMO because it maintains natural human hierarchies while easing
the adaptation of the government to changing demographics with different
needs.

