Income and Tax Inequality (Part 2)

Published by DonDavidson on

In my previous blog post, I noted that the wealthiest 400 people pay only about 23% of their income in taxes—federal, state, and local—compared to 28% for the average American. Why is this?

One reason is that while the federal income tax is progressive—meaning that the higher your income is, the higher the percentage of tax you must pay—most taxes are not. The Social Security payroll tax, for example, is a flat tax of 6.2% of your wages up to $137,700. The Medicare payroll tax is also a flat tax of 1.45% of your wages, plus an additional tax of 0.9% of your wages above $200,000.

Property taxes are generally a fixed percentage of the value of your property, but in many states this only applies to real estate. Most wealthy people own corporate stocks and bonds, which are usually exempt from property tax.

Sales tax is also a regressive tax, since it is a flat percentage of the goods (and in some cases, services) which you purchase. A wealthy person pays the same percentage as a poor person.

But these regressive taxes are not the only reason the super-wealthy pay less tax as a percentage than the average American. The super-wealthy can also manipulate their income to minimize their tax.

A factory worker or a mechanic has no real opportunity to manipulate his income. The employer calculates his wages and that’s his income.

But what about a man who owns a thriving corporation? Did you know that the top tax rate for wages is 37%, but that the top tax rate for most dividends is only 20%? So if you are the owner of a corporation, would you prefer to have the corporation pay you a large salary or a lot of dividends? The answer should be obvious. And if that owner wants to further minimize his income—and thus his income tax—he can simply have the corporation not pay dividends at all.

If you want to learn more about our tax system, and why it seems to favor the rich, I suggest you read the book, The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay, by Emmanuel Saez and Gabriel Zucman (W.W. Norton & Company, New York 2019.


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