As part of the last comprehensive tax reform plan was passed in the 1980s, taxes on money made from investment and work were equalized. In the intervening years, the rates have substantially diverged. It’s now quite possible for workers to pay twice as much (or more) in taxes as heirs living off the same amount of investment income.
Bloomberg took a look at this phenomenon in a recent article. They found that while there was no grand plan to arrive at this inequity, there are now efforts by Congressional Republicans to enshrine it even further. House Speaker Paul Ryan has circulated a social media graphic of a draft “postcard” tax filing system. The only rate or other hard number included in it is an instruction that literally calls for investment income to be divided in half before being counted alongside wages towards your total income.
Wages for American workers have been stagnant for 40 years. By some measures, 99 percent of new income is going to the top one percent of earners. Given this, there is no reason to rig the tax code even further in favor of those fortunate enough to be living off of investment income. This is particularly true since, as the Bloomberg article points out, the middle class is largely already sheltered from any increases in the investment tax rate.
Despite this, expect arguments against bringing parity back to the tax rates paid by workers and investors to be framed as benefiting overachieving blue collar families. For evidence, look no further than President Donald Trump’s recent attempt to frame a promise to eliminate the inheritance tax as a benefit for North Dakota “family farmers.” In fact, a North Dakotan couple inheriting a $10.5 million dollar farm or “small” business from their parents would pay zero dollars in federal estate taxes.
As part of the Take on Wall Street coalition, Public Citizen is ramping up our work advocating for fair tax reform. One key reform we’re focusing on is removing the carried interest loophole. Carried interest refers to the money that hedge fund managers make by charging clients a portion of the profits their portfolio make. Instead of being taxed at traditional compensation rates, hedge fund managers are allowed to pay the much lower investment rates. Annually, this ends up costing taxpayers $18 billion dollars a year, all of which goes to 2,000 or so hedge fund manager. To learn more, sign-up for email updates.