Workers Pay While Trust Fund Babies Play

The manner in which taxes are computed vastly favors the wealthy. Workers pay higher taxes on wages than those living on investment income — and workers also have to pay Social Security and Medicare taxes on their wages but investment income recipients do not. A comparison of taxes due for 2018 for two married couples illustrates the gross inequities:

Couple No. 1: Trust Fund Babies. John receives qualified dividends of $50,600. Mary receives capital gains distributions from a mutual fund of $50,600. They have no other income and no deductions. This is how their IRS tax return looks:

Income $101,200
Standard Deduction – $24,000
Taxable Income $77,200
Income Tax Due $0
Social Security Tax Due $0
Medicare Tax Due $0

Couple No. 2:  Juan and Maria both work and each earn the same income as the above couple ($50,600 each). This is how their IRS tax return looks:

Wages $101,200
Standard Deduction – $24,000
Taxable Income $77,200
Income Tax Due $8,886

In addition, wages (but not investment income) are subject to both Social Security and Medicare taxes, which for Couple No. 2 they would look like this:

Taxable Income $77,200
Social Security Taxes Withheld @ 6.2% $6,274
Medicare Taxes Withheld @ 1.45% $1,467

Thus, Couple No. 1 would pay no income, Social Security or Medicare tax on their income but Couple No. 2 would pay a total of $16,627 on the identical income as Couple No. 1. That is a total of $1,385 per month! Additionally, Couple No. 2 must pay for transportation to commute to work —and they might even need two vehicles to get to work. In contrast, Couple No. 1 could sit around a pool and not have any commuting expenses at all.

The biggest reason for the vast difference in taxes owed by these two couples is that the first $77,200 of income for a married couple that comes from Qualified Dividends and Long Term Capital Gains is totally tax-free! How many poor and working people have enough wealth to generate that kind of income? Why on Earth do our tax laws grant $77,200 of investment income tax-free to anyone? Only rich people have enough wealth to generate that kind of income these days. Indeed, at 5%, it would require a portfolio of $1,544,000!

Working people usually just save money instead of investing in stocks, funds or real estate (except perhaps in their 401K’s). Interest is NOT eligible for that favorable tax-free status. Interest is 100% taxable (unless from municipal bonds and some other special products that working people rarely own). The average worker’s salary, wages and interest are 100% taxable but not the income of Trust Fund Babies who know how to invest for tax advantages (or who pay for professional help to do so).

Tax laws are created and voted upon by Congressional Members who are wealthy themselves or are beholden to wealthy supporters who expect their representatives to pass tax laws that favor the wealthy. Voters are befuddled by our complicated, convoluted tax laws and often vote for legislators who do not represent their own interests.  

It is unconscionable that working people are taxed more heavily than those who don’t have to get out of bed in the morning to live comfortably and also pay zero income taxes on substantial income. This is a recipe for populist rage — and rightfully so. Our income tax laws are so filled with loopholes for the rich and traps for workers that the average middle income person does not even suspect that they are carrying a much higher tax burden than the wealthy. The wealthy can easily afford to pay those taxes, but many working people struggle to do so.

Income from qualified dividends and long term capital gains (including “carried interest” income received by hedge fund managers) is taxed at only 15% on amounts higher than the $101,200 in the above example. In 2018, a married physician earning $488,850 would pay about $123,098 in income tax (part of which would be taxed at 37%). Contrast that with a married couple living on qualified dividends and long term capital gains, or a married hedge fund manager. Both of these couples would only pay 15% or  $73,328 on that same income, or a difference of nearly $50,000. Is our society better served by an MD or Trust Fund Babies and hedge fund managers? Our tax rates indicate that we value MDs less.

Some people say that taxing high earners and the wealthy is penalizing them for their success. If that is so, then taxing physicians, managers, actors, athletes, and everyday workers more heavily than investors is penalizing workers for being productive!

Supporting our government is everyone’s responsibility. If the wealthy are taxed more lightly than workers, then the burden to support our government falls disproportionately on everyone else.

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