Smoke, Mirrors, and Taxes

A short while ago, there was a debate in this country about tax fairness.  The Republican Party said people in general were paying too much in tax.  The Democrats said that the super rich weren't paying their "fair share." 

Warren Buffet, a man who was briefly the richest man in the world, basically won this argument for the Democrats by saying that he was actually paying half the tax rate that his secretary paid.  This is obviously unfair, and it was 100% true.  This was proof that the super-rich should be taxed at a higher rate -- even the super rich agree!

However, the supposed solution did not match the problem.  What the Democrats demanded (and won) was an increase in the highest marginal rate of income tax.  That's money you get from working for somebody.

What nobody publicized was that the reason Mr. Buffet paid half his secretary's rate is that she was already at the top bracket of the income tax, close to 35%, whereas Mr. Buffet's income came primarily in the form of capital gains, i.e. returns on investments, which were taxed at a maximum of 15%.  He paid slightly more than that, 17.4%, because a small fraction of his money comes from salary/wages, and is therefore taxed at the much higher rates that most highly paid professionals are used to.

What this means is that the tax plan that actually passed -- the one that raised the highest marginal income tax rate from 35% to 39% and raised payroll taxes by 2% across the board (even on the poorest people who make so little that they pay no income tax!) while raising the highest rate for capital gains from 15% to 20% will have a perverse outcome:

It will raise Buffet's secretary's tax rate by 6% (as she's in the top bracket) but only raise his effective tax rate only a little over 5%.  WTF!

If Democratic representatives were serious about targeting the tax advantages of the super wealthy, they would actually leave the Income Tax alone (or even lower it) and raise the capital gains tax (by a lot more than 5%).  Not surprisingly, a large portion of congressmen (and an even larger percentage of their biggest donors) actually receive most of their own personal income through capital gains, so it's no wonder they're not interested in raising it to match the income tax. 

Lucky for them, people are too off-put by math and tax law to figure out that their leaders, from both parties, decided to balance the books on the backs of the poor and the middle class, through the payroll tax (our most regressive), rather than making capital gains taxes significantly more progressive (and/or cutting spending).