Work vs. Wealth

Low taxes on the income made from investments gives the richest Americans an unfair advantage.

By Brian Miller

Now that the dust has settled from this year's tax-filing scramble, here are a few facts to keep in mind as Congress moves closer to debating the expiring Bush tax cuts. By the end of 2010, those cuts, which began to take effect in 2001, will have cost our nation $2.5 trillion dollars.

To put that enormous loss of revenue into perspective, consider this: It's twice as much as the combined cost of the wars in Iraq and Afghanistan. And it's two-and-a-half times the cost of the recently passed health-care plan. 

Nearly half of those costly Bush tax cuts went to the top 5 percent of households. But instead of the promised trickle-down growth, we got stagnant wages for middle-class Americans while many wealthy households grew even wealthier. Over the last decade, a record federal budget surplus--before the Bush tax cuts--has turned into a massive federal deficit.

I recently spoke on a radio show about the work of Responsible Wealth, a network of American millionaires speaking out in favor of higher taxes on the wealthy. These millionaires want to dial back the portion of Bush tax cuts that benefited the top 5 percent, which includes people like themselves, while preserving the tax cuts for low and middle-income families. What's more ironic is that they're pledging to give away their savings under the Bush tax cuts to groups that are working to end those and other tax breaks for the wealthy.

I shared a story about one of those millionaires--he has an income of over half a million dollars per year, but pays less than 15 percent of those earnings to the IRS. The host and callers were all outraged, and rightfully so. But, their initial instinct--to direct their outrage at this millionaire for "gaming the system"--was misguided. He's not the one gaming the system. The Bush administration did it for him.

A lot of Americans look at the federal income tax, of which the top rate is 35 percent, and think that if someone like this millionaire is taxed at such a low rate, he must be cheating. Here's how it's possible: that 35 percent top rate only applies to earned income. While he's well paid as a professor, three-fourths of his total income is in the form of capital gains and dividends from a sizeable investment portfolio. (Some was inherited and some was built up during his days as an investment banker.) And the top rate for capital gains and dividends is only 15 percent.

In short, money earned through work is taxed at a higher rate than money made from, well, money.

The intense focus by the media and anti-tax groups on the federal income tax is preventing too many people from seeing the true size of the tax giveaways bestowed upon our nation's wealthiest households. It's like the ship's crew pointing at the tip of the iceberg, but ignoring the hulking mass beneath. 

For most Americans, wages and salaries account for roughly 80 percent of their total income, but that ratio starts dropping sharply for those earning over $200,000 per year. For many with incomes of $1 million or more per year, about 25 percent is from wages and salaries; the rest is primarily passive income, like capital gains and dividends. By taxing investment income at a lower rate than earned income, we've tilted the system heavily in favor of the rich.

For a country that prides itself on the hard work of its citizenry, we seem to have lost our way. It's unacceptable that those who have gained the most from our society, and who have the most to give back, are actually paying taxes at a lower overall rate than most others. We need to start taxing money-from-money income at the same level as the earned income that most Americans depend on. Ending the Bush tax cuts for the wealthiest households, which includes restoring the top capital gains and dividends rates to their pre-Bush levels, is an essential first step.