Most of us work for a living. We wait tables or write software. We teach kids or drive buses. We treat patients or lay block. Our income, just about all of it, comes from our work.
But some people — wealthy people — don’t depend on work for their living. They rely on their wealth. The stock they hold pays dividends. The bonds they own pay interest. The assets they sell bring capital gains.
Two different classes of Americans, two different sorts of income. Now which class should pay tax at a higher rate, those who work for a living or those who let their wealth do their work?
President Donald Trump and his Republican allies in the House of Representatives have just delivered their answer. Under the tax “reform” recently introduced in the House and endorsed by the president, income from the work we do, our labor, would face higher taxation than income from wealth.
The Trump-GOP plan would, in effect, turbocharge a rich people-friendly trend that’s been unfolding for 40 years. Their plan would saddle us with a tax code that leaves income derived from capital, that is, wealth, taxed at a rate up to 14.6 percentage points lower than income from work.
Before Ronald Reagan’s election in 1980, only long-term capital gains received tax treatment more favorable than wages and salaries. Under the Trump-GOP plan, every income stream that cascades dollars into the pockets of America’s most affluent would be guaranteed more favorable treatment.
The Trump-GOP tax plan, for instance, would eliminate the federal estate tax, our nation’s only direct tax on the unearned grand fortunes the offspring of the super rich collect every time a tycoon kicks the bucket. The Trump-GOP plan would also slash the corporate tax, a tax on income derived from wealth, by almost half.
Where would the Trump-GOP plan leave America’s working households? Consider a middle-class couple at what economists call the 60th percentile, a family earning more than three-fifths of America’s households but less than the remaining two-fifths.
Back in 1978, the combined effective rate of federal income tax and the payroll tax for Social Security and Medicare on the wages of a 60th-percentile household would have been just over 18 percent, assuming a family with one working spouse and two kids, one college-age, that spent a third of its income on mortgage interest and state and local taxes.
Under the Trump-GOP tax plan, a similar 60th-percentile couple would be subject to an effective rate just under 19 percent for the next five years, a rate that would increase to just under 20 percent upon the expiration of a temporary tax credit. In other words, about a 10 percent increase.
What about taxes at the upper end of the income scale? In 1978, a taxpayer who generated $266,122 in income from the ownership of a business — the equivalent of a $1 million income today — faced an overall effective rate of about 40 percent. An affluent taxpayer in the same situation today would, if the Trump-GOP tax plan becomes the law of the land, face an overall effective tax rate of about 25 percent. But under the Trump-GOP plan, a wage earner who was fortunate enough to generate that level of income, a heart surgeon for example, would pay over $50,000 more in tax than that business owner.
Excerpted, with permission, from an analysis that originally appeared in the November 12, 2017 edition of the Dallas Morning News. Bob Lord, an associate fellow with the Institute for Policy Studies, practices tax law in Phoenix. Sam Pizzigati, the author of The Rich Don’t Always Win, co-edits Inequality.org.