Alexandria Ocasio-Cortez has proposed a 70% tax rate for the highest earners recently, which has sparked a lot of debate among the sycophants of the rich who think it will affect them in some way. If you earn enough for that to affect you, you’re probably not reading what I have to say about it.
First of all, most Americans do not understand how our incremental tax system works, even though it probably does affect you personally.
This is just an example and does not use real numbers. With an incremental tax system, if you earn $10,000, you pay no tax on that income. If you earn $50,000, you pay a 20% tax rate. But that only applies to the amount between $10,000 and $50,000. You still pay no tax on the first $10,000.
Tax brackets continue to increase from there but the same rule applies all the way to the top tax bracket. If you earn $1 billion a year, you pay no tax on the first $10,000, then 20% on the next $40,000 and so forth. The tax rate being suggested does not affect anyone unless they make something like $500 million. So they would only pay a 70% tax on anything above $500 million.
Hence the actual tax rate on the first $500 million is far lower.
However, that is not enough. No by far. There are still many loopholes which a person making that amount can use to avoid paying that tax rate. For one thing, this does not change the capital gains tax rate, which is far lower, especially for long term holdings. Nor does it change the tax on dividends, which is again far lower.
How do capital gains work? Let’s say you make over $500 million a year. You are unlikely to spend that much, so you can place part of that income in investments. You do not have to pay taxes on the money you invested. That investment can be in stocks, bonds, real estate, equities, etc. At the time you invest that money, it counts as a cost which can be deducted from your taxes. Later, if you sell that investment for a profit, you only pay taxes on the profit you made from the sale. That tax is typically around 20% in the highest tax bracket. So you just avoided paying 50% of that 70% tax rate.
It does not end there. Once again, you can avoid paying taxes by putting the money back into another investment, once again making it a cost which can be deducted. If you invest the profits as well as the initial investment, you pay no taxes on any of it.
Dividends tax. Much of the same process applies to taxes paid on dividends. The highest tax rate on dividends is 37%. That only applies if you have dividend income above $500,000 in a single year. Easiest way to avoid paying even that? Why, put that money back into investments, of course. Which once again turns it into an expense which you can deduct from your taxes and pay no tax on it. Because if you have enough to earn $500,000 in dividend payments, chances are pretty high you don’t need the income from those dividends to live on.
You may do the same thing. If you have a 401k or an IRA you should be able to understand this. You have money taken out before taxes for an investment. If that account makes money, it rolls over from year to year and compounds. You only pay taxes when you take the money out to spend. If you keep rolling the money over or move it to another investment, you still pay no taxes on it.
The difference here is scale. The other difference is that you will probably draw that money out at some point in your life, while they have more money than they will ever need in 10 lifetimes.
Too limited in scope. A major problem with such a proposed tax rate is that it only applies to individual income. It does not apply to corporate income. I have written before that the trickle down theory could actually work if economic policies and legislation were designed to make it work. That is by no means the case. Such legislation would not allow corporations to count stock repurchases (or stock purchases, other than dedicated investment firms) as a cost of business. Nor would it allow corporations to count off the cost of building manufacturing plants in other countries, especially when those plants replace jobs eliminated in this country.
We all know that numerous corporations have paid no taxes at all for years at a time. This tax proposal does nothing to change that.
Corporations pay lower taxes than individuals do in practice. Yet you can incorporate any business. If you trade stocks, have a YouTube channel or write, you can incorporate that as a business. Many professional writers and YouTubers do this.
Better idea. I am still far more in favor of a concept which I wrote about some time back. Imposing a maximum income. Not wage, income. Corporations should be limited profits by percentage (again, not allowing stock purchases to count as a business cost). Anything above those caps should be taxed at 100%. That would force businesses to create jobs and increase wages. I wrote about that in more detail in a dedicated article, https://medium.com/@russellmeyers_35963/maximum-income-897236e681bd
Would any of this do any good to attempt? Not if we are as close to a real revolution as we appear to be.