Despite popular fascination with the rich and famous, most working people have little understanding of the finances of the wealthy.
Take the competing tax proposals of the Republican presidential candidates. Going almost unremarked amid all the discussion of the 9-percent federal sales tax in Herman Cain’s “9-9-9” plan, or the surviving deductions in Rick Perry’s 20-percent flat tax, is that under both plans capital gains wouldn’t be taxed at all. Perry would also not tax dividends, and the other GOP hopefuls would largely exempt from taxation both of these kinds of passive income as well.
Now, if you’re a middle-class wage earner for whom dividends and capital gains are, at most, modest entries on your annual mutual fund statement, their exemption from taxation is a minor consideration when examining the merits of a tax plan. But if you’re among the independently wealthy who live almost entirely on dividends and capital gains, such a provision holds great appeal. It means you would pay no federal income tax at all. Nothing. Nada. Zero.
Of course, all the candidates would also eliminate the estate tax, meaning that rich people would never be taxed on their inherited assets or income. As in pre-revolutionary France, taxes would be left entirely to the middle-class and poor.
I’m quite familiar with these permanent passive-income tax holidays promised by the GOP presidential hopefuls, because I’m one of those independently wealthy people who would benefit so handsomely. I’m no Bill Gates or Warren Buffet, but I do have enough money that it makes enough money for me to live on. I mostly volunteer my time to worthy causes, and though I occasionally pull down a paycheck or charge a client fee, the bulk of my income comes from interest, dividends, and capital gains.
Why should I pay no taxes while someone who gets up and goes to work every day does? The reason usually offered for taxing passive income at a lower rate than wages, salaries, and small-business income is that such preferential treatment encourages investment and job creation. And that may be true of entrepreneurs who start businesses, seek investors, and then sell off their creations and start all over again.
But I don’t do any of those things, and there are millions of rich people like me who don’t either. Like a lot of them, I inherited stock in big companies like IBM and General Electric. I support myself primarily by depositing dividend checks. Occasionally I sell some shares at a profit. And conservative tax reformers believe I should be rewarded for this great exertion by exempting me entirely from taxation.
This is neither fair nor logical at a time of rising federal debt and severe budget cuts. True “job creators” could be encouraged without benefiting those like me who don’t need any more economic breaks. The preferential treatment already accorded capital gains and dividends from startup companies could be increased. Those who make a majority of their money from working could be encouraged to save and invest by taxing their investment income at lower rates than those of the already independently wealthy.
To his credit, Mitt Romney would still tax the passive income of those making over $200,000 a year.
But to ensure such sensible approaches are adopted, those of us who live off inherited wealth and believe in tax equity must speak up.
We have to blow the whistle on the giveaways in the proposed tax overhauls that most working folks are too busy to notice.