The Rich Are Different onTaxes Too

Harold Meyerson, opinion writer for the Washington Post, has made a strong case that the newly enacted tax hikes on the wealthiest Americans have affected them hardly at all. The reason for this is that they get about a quarter or less of their income from wages and salaries.

In 2006, the bottom four-fifths of U.S. tax filers got 82 pevcent of their income from wages and salaries, a Congressional Research Service (CRS) study found. The richest one percent got 26 percent of their income that way, while the richest one tenth of one percent got just 18.6 percent. The bottom four fifths of tax filers got just 0.7 percent of their income through investments. The wealthiest one percent realized 38.2 percent of their income from investments and the wealthiest one tenth of one percent realized more than half: 51.9 percent. Under the newly enacted tax laws, capital gains and dividend income are taxed a maximum 20 percent. The newest economic royalists, hedge fund managers, label most of taxable income as capital gains. [1]

Taxing investment income at a lower rate than labor presumably fosters more investment in the U.S. economy, but since virtually every major U.S.-chartered corporation is a global company, we reward a company like GE for, in effect, sending money overseas. The GE employee who produces wealth entirely within U.S. borders, may be taxed at a higher rate than a GE investor. Globalization has completely changed the investment patterns of American corporations.

Taxing wages and salaries at a higher rate than investment income means that the tax code is taking a bigger bite out of a steadily shrinking share of Americans’ income. The St. Louis Federal Reserve has documented that income from wages and salaries as of July 7, 2012, constituted the smallest share of GDP since Worle War II. The earned-income share of GDP peaked in 1969 at 53.5 percent, whereas in 2012 it was 43.5 percent. This ten percent loss (about $1.5 trillion a year) went, in significant part, to corporate profit. In the third quarter of 2012, after-tax corporate profits constituted the largest share of U.S. GDP since World War II: 11.1 percent. [2]

The shift from wages to profits is called redistribution. It is the primary reason that economic inequality in the United States has skyrocketed. Besides creating economic inequality, this shift from wages to profits rewards offshoring more than work done in the U.S. and deprives the governmnent of needed revenue.

Footnotes

[1] Harold Meyerson, “A tax deal only the utra-rich could love,” The Washington Post, January 8, 2013.

[2] Ibid.

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