Let’s stop a moment to reflect on the tax lives of the 400 highest-earning Americans, and how they suffered in the Great Recession of 2008-2009.
Oh, wait a minute—they didn’t suffer. As James B. Stewart points out in The New York Times, the fortunate 400 still averaged $202 million apiece in adjusted gross income in 2009. Perhaps even more extraordinary, they paid an average federal income tax rate of less than 20%–less than people in the top 1% (adjusted gross income of at least $344,000) and quite possibly less than you.
How did they do it? Well, more than half of their income came from capital gains and qualifying dividends, which were taxed at the preferential rate of 15%, compared to wages and other income that could be taxed as high as 35%.
Is there any sound reason for taxing earnings from capital at half the rate or less than earnings from one’s labor? Not really. No less a financial heavyweight than Pimco mutual fund co-founder Bill Gross wrote in his November investment outlook that, “The era of taxing “capital” at lower rates than “labor” should now end.”
If that ever happens, we’ll be back to one of the features of The Tax Reform Act of 1986, under which capital gains and wages were taxed equally. That bill was promoted and signed by that well-known enemy of the wealthy . . . Ronald Reagan.