Raising the Top Marginal Tax Rate Isn’t the Answer to Wealth Inequality (We Need to Think Bigger)

Representative Alexandria Ocasio-Cortez believes that in order to pay for her Green New Deal, the US government should raise the tax rate on income over $10 million to up to 70 percent. Despite rabid opposition and cries of “socialism!” from conservative pundits and politicians, polls show the American people agree. People are tired of the growing concentration of wealth into the hands of a small minority, and are beginning to realize the power of the tax code to reduce inequality in our country.

There’s just one problem: AOC’s proposal doesn’t go far enough.

Raising taxes on the top levels of income is never going to be enough, simply because most extremely wealthy people don’t earn their money through income. They make their money from capital gains, which are currently taxed at just over half the rate of normal income at even the highest levels.

The gap between the income tax rate and the capital gains tax rate is the real problem with our tax code. It’s the reason that so many billionaires are able to pay lower tax rates than their employees. This isn’t a loophole – it’s the Grand Canyon of holes in our tax code. By giving preferential treatment to capital gains, our government puts those who are already wealthy at a permanent advantage, and forces working Americans to carry more of the burden of funding our government.

Here’s how it works, in more concrete terms:

Say that two people – we’ll call them Doug and Carrie Heffernan – both worked full time last year, putting in 40 hours a week every single week. Together they made $77,000 in combined income. Based on the New Republican Tax Code, the Heffernans would pay around $6,000 in federal income taxes.

Now say, two other people – we’ll call them Jared and Ivanka – sat around all year sipping strawberry daiquiris on a beach somewhere. One day, in between reapplying sunscreen, Jared clicked a button on their eTrade account and sold some stock they’ve owned for a while. Let’s say they made $77,000 on the sale of that stock – exactly the same amount as Doug and Carrie. Based on the new Republican tax code, Jared and Ivanka would pay ZERO dollars in taxes.

So two couples make the exact same amount of money, one couple by working all year, the other couple by sitting on the beach sipping drinks and letting their stocks increase in value. The working people end up $6,000 poorer than the strawberry daiquiri people.

It gets worse from there. Say the next year Jared and Ivanka sold some more stocks and made $700,000. Jared and Ivanka would again pay no taxes on the first $77,000, would pay just 15% on the next $402,000, and then just 20% on the rest, for a total tax bill of about $100,000.

Now let’s say Doug and Carrie got fancy new jobs.  They still worked 40 hours a week all year along, but this year they made $700,000 – the exact same amount Jared and Ivanka made sitting on the beach. At the end of the year, Doug and Carrie would owe almost $190,000 in federal income taxes.

So again, two couples make exactly the same amount of money – but one of them works full time and the other sits around on a beach not working.

The new Republican tax code leaves the daiquiri drinkers $90,000 richer at the end of the year than people who actually work for a living. Now play this out over a lifetime.

The people who make money off of investments ALWAYS end up ahead of the people who make their money by working.

If we want to fix our tax code, we should absolutely raise the top marginal tax rate, but fixing the gap between capital gains and income should be priority #1.

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