Happy Tax Day and Why the 1% Pay a Much Lower Rate than You

Robert Reich’s Blog (also see video there), April 15, 2014

It’s tax time again, April 15, when our minds turn toward paying the taxes we owe or possibly getting a tax refund. But what we don’t think about enough is whether our tax system is fair. The richest 1 percent of Americans are now getting the largest percent of total national income in almost a century. So you might think they’d pay a much higher tax rate than everyone else.

But you’d be wrong. Many millionaires pay a lower federal tax rate than many middle-class Americans.

Some don’t pay any federal taxes at all. That’s because they‘re allowed to deduct from their taxable income such things as large interest payments on mortgages for huge homes, also the costs of business entertainment and conferences (aka vacations at golf resorts), and gold plated health care plans.

Some also take advantage of tax loopholes that let them park some of their earnings in offshore tax havens like the Bahamas or the Netherlands Antilles.

And other loopholes that allow them to treat some income as capital gains – subject to a much lower tax rate than ordinary income. If you happen to be a hedge-fund or private-equity manager, there’s a capital gains loophole designed especially for you.

Consider the Social Security payroll tax and the situation is even more lopsided. That tax applies to every dollar of income up to a cap — which this year is $117,000. Anything earned above the cap is not subject to Social Security taxes at all – meaning anyone with a high income pays a much smaller percentage of it in Social Security taxes than most people do.

Put these all together and you see why Warren Buffet, the second richest person in America, pays a lower tax rate than his secretary, as he readily admits.

State and local taxes are even more regressive. The poorest fifth of Americans pay an average state and local tax rate of over 11 percent, while the richest fifth pay only 5.6 percent. This isn’t small change. State and local taxes account for about 40 percent of all government revenues.

Believe it or not, Republicans want to make all this worse by cutting taxes on the wealthy even more. Paul Ryan’s new budget doesn’t just slice Medicare, education, and food stamps. It also lowers the top federal tax rate to 25 percent.

When the rich are let off the hook in all these ways, the rest of America has to pay more in taxes to make up the difference – or have services cut because government doesn’t have the funds.

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1 Comment

Filed under Economy, Labor, Tax

One response to “Happy Tax Day and Why the 1% Pay a Much Lower Rate than You

  1. Kevin

    This tax rate is the result of a hundred years of tax law manipulation by both parties. It is true that the richest pay a smaller percent because they have money to be able to move around creating capital gains and capital losses (which are deductible). But they still pay over 70% of the total tax burden. And the bottom 40% pay little or nothing. But it is time to stop blaming one party or another. They have all had a hand in it. If you want to get to something that people can’t dodge then go to the “Fair Tax”. Everybody is a tax payer (even those criminals that probably don’t file a 1040 on their drug or prostitution money). Since the rich purchase more, they pay more. There is no tax on used items, only new. Everybody gets a “prebate” which is money to offset much of the tax so the poor are not burdened. Corporations will pay no taxes (instead of the highest in the world). Which means that the cost of goods will come down because the businesses will not have to make up that amount to pay taxes. And anyone that thinks that they won’t come down does not understand economics and the free market. Plus, with no corporate tax we will not have our businesses being outsourced to save on taxes. In fact, we will probably see companies from other countries outsourcing to us to escape their taxes. So much for an unemployment problem. Lastly, wouldn’t it be nice to not see that line on your paystub that indicates “Federal Tax Withheld”? Because it won’t be. You get to keep it.

    Check it out with an open mind and see if it is not better than the thousands of pages of tax law that both sides add to every year. I am tired of both parties whining about who is hurt and who is getting by. Basically using the tax laws like sabers in a fencing duel.

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