Friday, August 22, 2014

The Top 1% Only Get 1% of Income... Well, Sort Of

Income inequality is a hot topic these days, with the Occupy Wall Street movement of a few years back and so much attention being paid to the disproportionate share of income for the top 1% in the U.S.  However, that's not true for income earned by labor (wages, tips, etc.).  In fact, it's quite the opposite, with the top 1% earning only about 1% of income from labor.  How can this be?  This discrepancy of polar extremes is because the top 1% earns around 75% of income from capital gains.

I always find it rather amusing how caught up Democrats and Republicans get in the debate over income brackets for personal income and what those progressive levels of taxation should be for earnings from individual labor, when capital gains remain a flat 20%.  That 20% is less than an individual will pay on their 36,901st dollar of income in 2014.  Now I'm not saying capital gains should necessarily follow the tax tables for earnings from wages, interest, etc., but come on!  At what point should a Top-One-Percenter pay an extra 5% on their capital gains?  How about their one millionth dollar of cap gains?  Too stifling for business you say?  How about the ten millionth dollar?

And why should all cap gains be treated equally?  How about a higher differential for short term capital gains as opposed to long term (gain on securities held over one year), since the average middle class investor is constantly preached to about the value of "investing for the long haul?"  How about leaving cap gains at 20% for gains from long positions and a higher tax rate for short positions, since institutional bets against the market increase volatility?  How about putting the cap gains tax higher for more exotic securities like derivatives, since their presence produces excess leverage which ultimately translates into higher market risk for all, as we saw in the financial crisis of 2008?

Now before you shake the Internal Revenue Code in my face and start bitching about complexity, consider that the great majority of folks who will really have to deal with the extra forms are in the Top 1% anyway, and those guys all have CPAs and tax attorneys to do the work for them.  And those fees are tax deductible.

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