I am self-employed and I live in Montana. I make a modest income, enough to qualify me as “middle class”. My marginal tax rates are as follows: Federal income, 25%, Federal self-employment (FICA), 14.2%, Montana income tax, 6.9%. My marginal tax rate is 46.1%.
Contrast that with someone who lives on inherited wealth or on passive income, such as dividends and capital gains: Marginal tax rates: Federal rate, 15%, Montana rate either 5.9% or 6.9%. Marginal tax rate, either 22.9% or 23.9%.
Those special investor tax rates applies to all income, no matter how high – into the millions. The marginal tax rates that apply to me apply to me and all workers whose taxable income starts at $44,000 and extends to $113,000. The rates only go up from there. Working stiffs are getting taxed at more than twice the rate that investors and trust babies are.
When pundits now tell us that a third of American pay no tax at all, they are talking about the income tax, and not the payroll (FICA) tax. All working Americans pay the FICA or self-employment tax (two names for the same animal) at 14.2% of earnings with no deductions or exemptions allowed. Many poorer workers get an earned income credit that refunds some or all of this tax. Poorer workers with children get a true subsidy via the EIC. Those are the only one who pay no tax, and it is nowhere near a third of us.
Obviously I have oversimplified, not taking into consideration deductions or exemptions. I paint with a somewhat broad brush, but even with those things factored in, the bottom line is that working middle class Americans pay tax at very high rates, often double what investors pay.
Obama would raise the top federal marginal rate from 35% to 39%, where it was prior to Bush taking office. He would eliminate the special break that investors get on dividends and capital gains. That would take us back to where we were in 2000. He would ease the burden slightly on the middle class.
The right wing is screaming now ( in unison, of course), that Obama is a “socialist” for wanting to offer middle class Americans a tax break while restoring the top rates to the pre-Bush levels. It’s doesn’t take a lot of research here to see what their real agenda is, and who they really work for.
For those Americans who think that an Obama presidency is a threat to the middle class, pay attention! A vote for John McCain is a vote against your own economic interest.
Piece of Mindful 
>>>>and not the payroll (FICA) tax
The FICA tax is (supposedly) just for Social Security and Medicaid and not for the general fund.
>>>>often double what investors pay.
You are probably not in a mood to hear arguments about why we should tax investments even less. Experience shows that if you raise the rates on investment income, you don’t get any more money. You get more vigorous tax avoidance. You get further disincentive to save. A high capital gains tax suppresses economic activity since investors tend to hold on instead of selling and taking the risk of getting into something better.
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Lyndon Johnson invented the “Unified Federal Budget”, a way of throwing all revenues in the same pot. Social Security surpluses, which run about $200 billion per year, are used to pay off general fund deficits. It’s all one and the same.
Experience does not show what you say it shows. That’s theory, surprisingly void of factual support, that is used to run the right wing show. When the market upticks, the tax coffers well from capital gains receipts, no matter the rate. It’s income, but the people who have that kind of income are powerful, and have so managed to rig the game in their own favor. They control the narrative on your side.
In the meantime, all wages are double-taxed. You probably pay the same 46% that I do, though unknowingly. Who has power?
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This argument is silly. On the one hand, if cap gains taxes were set to zero there would be no tax tax revenue. If cap gains taxes were set to 100% we would likely see almost no investment and hence little cap gain revenue. This issue is not whether cap gains tax revenue would go up or down if taxes were raised or lowered but to what extent they would do go up or down in the sensitivity of taxes. The net revenue curve is parabolic and the adjustment to revenues depends on whether the current tax rate is on the left or right of the peak of the parabola. The same is true for the much misunderstood Laffer Curve. Here is a well argued quote that the complexities of cap gains tax cannot be explained by looking a cause and effect per se.
For those who take one side or the other is, as I said above, silly. That, notwithstanding and general principles on fairness.
There is as much evidence that cap gain tax revenues do go up when tax rates are lowered as there is to the contrary. In other words, the jury is still out. But that leaves us with much more to argue about. For example, to what extent do cap gains tax rates have to do with the accumulation of capital assets funded by equity rather than debt and how does that affect the cost of capital vs the cost of labor? This is where Hayek trumps Marx insomuch as Marx states that capital should go where it’s needed rather than where it’s most efficient.
Which leads us to a second question: Does the tax structure affect the flow of capital to its highest and best use (the efficiency paradigm)?
But the big question is how does the accumulation of capital effect employment and the creation of jobs. The only meaningful aspect of Obama’s tax plan in creating jobs is to exempt small business from cap gains taxes. Do you think that came from nowhere?
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>>>>Lyndon Johnson invented the “Unified Federal Budget”
We’re still watching. At current trends, SS will go into a deficit and we’ll draw back the surplus. Eventually we will have to face the question: do we increase SS taxes, cut benefits, fund it from general revenues, or borrow money indefinitely. The FICA money is sill tagged for the system.
SS has fairness issues of its own. It is a pay-as-you-go system, and some current workers are wondering if the social compact will still be in place when their time to draw out arrives. The demographics are not in their favor.
I recall someone telling me, “My family all dies young, and I live a dangerous lifestyle. It doesn’t make any sense for me to participate in the SS system since I won’t be around to draw anything.” I pointed out that SSI is available for people like him, and he said, “I’ll take my chances on my own.”
>>>>That’s theory, surprisingly void of factual support, that is used to run the right wing show.
I realize you have your useless ideology such as “all right wings things are wrong so this is wrong” but some of us do want to see where the evidence leads. Dave Budge provides a good discussion.
>>>>When the market upticks, the tax coffers well from capital gains
True, but I’m curious about the revenue from the change in tax RATES. They do make a difference. I notice most municipal bonds are tax free, that should tell you something.
I’m not against raising taxes, but I think we need a conversation about what we get for our money. >>>>You probably pay the same 46% that I do, though unknowingly. Indeed. With a new, young employee there is invariably a conversation about why I withheld money from their paycheck. It makes me wish everyone had to pay Uncle Sam each month themselves, instead of having payroll withholding. Maybe public servants would have their feet held a little closer to the fire.
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1)No one has ever shown that we are at or near the apex of the Laffer Curve.
2)Income is income. That some of it is taxed at higher rates than other is merely a measure of how much power various classes of taxpayers have in Washington.
3)Investor A selling 100 shares of stock to investor B does not increases the amount of capital available for investment. It merely reallocates. The situation does not warrant special tax treatment. That’s most of what is going on.
4)When the market is on the uptick, capital gain receipts increase. Capital gains revenue soared in the late 1990’s even though the rate of tax was higher. It was unrelated to the rate of tax, which was set well below the apex of the curve.
5)Obama’s tax plan, such as it is, trends towards equity and away from special treatment of the rich. It’s not enough, and the table is set so that he can back off if he is elected. I’m wary of him – Clinton took office promising a middle class tax cut too.
6)The middle class does not have the Heritage Foundation and Cato to fight for them – they have no paid economists who formalize greed. Paid intellectuals acting in service of wealth do not necessarily spout truth.
7)Progressive taxation does not damper investment, since capital accumulates via small as well as large holders of wealth. There’s strength in numbers.
8)Wealth tends to accumulate in a few hands. Progressive taxation, minimum wage and hour laws, estate taxation, strong labor unions, public-sponsored health care and education all put a damper on that natural development. That is a good thing. Our differences are insurmountable – you have defined freedom as the ability to accumulate wealth without hindrance. You would lead us to great extremes and high inequality. People, rich and poor, are not that much different save luck and opportunity.
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Fred – Social Security is set through 2050 or so if we honor ouor commitment to pay off the bonds that have accumulated since the Reagan tax increase. By that time, we baby boomers will be long gone, and the system will return to normal. It’s a snake swallowing a pig. The system is healthy and prospects are good. Some tinkering may be necessary – it’s that need for tinkering that the right wing sees as an opportunity to dismantle the program. That’s why we don’t trust you.
The program does require universal participation, and some, like my brother, leave without collecting anything. Life sucks.
And as every tax collector knows, the very best tax is the one that people pay unknowingly. Workers are trained to think in terms of take home pay. They don’t even see half of their FICA tax. It’s no accident.
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“1)No one has ever shown that we are at or near the apex of the Laffer Curve”
I never said they did.
“2)Income is income. That some of it is taxed at higher rates than other is merely a measure of how much power various classes of taxpayers have in Washington”
And so my that logic we should get rid of the muni-bond interest tax exclusion. Theresa Heinz-Kerry watch out.
“3)Investor A selling 100 shares of stock to investor B does not increases the amount of capital available for investment. It merely reallocates. The situation does not warrant special tax treatment. That’s most of what is going on.”
Mark, think fractional banking and the money multiplier effect.
“4)When the market is on the uptick, capital gain receipts increase. Capital gains revenue soared in the late 1990’s even though the rate of tax was higher. It was unrelated to the rate of tax, which was set well below the apex of the curve.”
Did you bother to read the article I linked?
“5)Obama’s tax plan, such as it is, trends towards equity and away from special treatment of the rich. It’s not enough, and the table is set so that he can back off if he is elected. I’m wary of him – Clinton took office promising a middle class tax cut too.”
How about double taxation of dividends?
“6)The middle class does not have the Heritage Foundation and Cato to fight for them – they have no paid economists who formalize greed. Paid intellectuals acting in service of wealth do not necessarily spout truth.”
I disagree -especially concerning Cato. Cato has been the loudest voice against corporate welfare for many years.
“7)Progressive taxation does not damper investment, since capital accumulates via small as well as large holders of wealth. There’s strength in numbers.”
Prove it.
“8)Wealth tends to accumulate in a few hands. Progressive taxation, minimum wage and hour laws, estate taxation, strong labor unions, public-sponsored health care and education all put a damper on that natural development. That is a good thing. Our differences are insurmountable – you have defined freedom as the ability to accumulate wealth without hindrance. You would lead us to great extremes and high inequality. People, rich and poor, are not that much different save luck and opportunity.”
Comrade! I have defined no such thing.
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>>>>2)Income is income. That some of it is taxed at higher rates than other is merely a measure of how much power various classes of taxpayers have in Washington.
Are you telling me the poor have the most power since they are taxed at the lowest rate?
>>>>3)Investor A selling 100 shares of stock to investor B does not increases the amount of capital available for investment. It merely reallocates. The situation does not warrant special tax treatment. That’s most of what is going on.
Way too simple. Reallocation is the key word. A society is better served by getting money out of fading investments into better investments. It’s a big part of wealth creation. If you frictionalize this too much, you end up like Cuba, where the lucky get someone’s past, now frozen, investment in a “57 chevy.
>>>>4)When the market is on the uptick, capital gain receipts increase. Capital gains revenue soared in the late 1990’s even though the rate of tax was higher. It was unrelated to the rate of tax, which was set well below the apex of the curve.
I believe the rate was cut in “97. Other factors were in play here, such as the run up in tech stocks.
>>>>8)Wealth tends to accumulate in a few hands.
Would you include government as one of the few hands of which we should be watchful?
>>>>Progressive taxation, minimum wage and hour laws, estate taxation, strong labor unions, public-sponsored health care and education all put a damper on that natural development.
Progressive taxation, yes. The others, not so much. The kids blow the inheritance naturally.
>>>>People, rich and poor, are not that much different save luck and opportunity.
They are often different in small ways that add up to a lot in the long run. It is tough to escape the Pareto distribution.
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>>>>The [Social Security] system is healthy and prospects are good. Some tinkering may be necessary
If you use optimistic projections, and the “tinkering” is done properly. Don’t underestimate the Left’s ability to mess things up, too.
>>>>The program does require universal participation, and some, like my brother, leave without collecting anything. Life sucks.
Sorry to hear about your brother.
Let’s be honest and make the system more fair. If genomic research can begin to sort us by life span, let’s deal with it.
>>>>And as every tax collector knows, the very best tax is the one that people pay unknowingly.
Too cynical. ‘You can’t fool all the people all the time’. You have to let the people know what they are getting for their money. If it becomes too unfair, people start dropping out of the system, and you end up with Mexico.
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