It truly is more than a bit hypocritical when almost half of the US is being condemned for (amongst others) not paying their fair share in taxes, while at the same time the upper echelons of society are perfectly comfortable paying next to no income taxes, and relatively paying even less when it comes to capital gains. In fact, not only do they think this situation is fair, they would very much like to see the latter lowered, possibly to a rate as low as 0.82%. Coming as I am from a country where any personal capital above € 21.139 (2012 amount per person) is taxed at 0.7% and capital gains up to 60%, in my opinion they are in no position to complain. As far as the developed world is concerned, I believe only 2 countries charge lower taxes than the US.
The main defense for not raising capital gains taxes is that the money has been previously taxed. Seemingly a very reasonable rebuttal, nevertheless it is misleading. I fail to understand why this apparently is widely accepted, fallacious as it is. Aside from possible questions as to where or how it was initially earned, the reasoning really only applies to the original capital. Any money made off of this (capital gains in other words), be it in the form of interest, dividends, or whatever other shape, is as yet untaxed. After all, gains derived from capital, is money one did not previously posses, therefore obviously not taxed in any way. Maybe I am utterly mistaken, in which case someone surely will correct me.
Meanwhile the rumors Mitt Romney paid no income taxes over the past decade persist. I, for one, think this is rather implausible, though more than likely he paid little enough to open himself up to more criticism, especially in light of his claims, as well as his recently released tax summary. There is, however, a fair number of ways to avoid paying income tax:
- Start a company, and subsequently pay yourself an annual dividend rather than salary. The maximum rate for dividends is 15%, whereas income is taxed at up to 35%
- Make it so you don’t have any income/ take none. Selling assets, or loaning towards them, will provide cash, should you need it
- Take/create a loss. A good CPA will know exactly what losses qualify to offset gains, the more “creative” ones will help generate artificial losses. Losses can be carried over to following years, to lower future tax liability
- Make charitable donations. Obviously there is the downside of losing assets, but it helps to seriously lower taxable income, potentially to zero
- Put your money offshore, in a tax shelter
There are many more tax avoidance schemes and, according to 2009 data the IRS released earlier this year, the superrich know how to make use of them. Although of the top 400 in the US “only” 6 paid no federal income taxes whatsoever, their average overall rate was a trifling 19.9%; a rather troubling number if you ask me.
If only because of the deficit, the current tax code needs addressed, although not in the way the wealthy envision. Up to a point the US has a progressive system: the higher the income, the higher the taxes. For the upper levels, though, it reverts to regressive taxation, due to (legal) loopholes. We cannot, I suppose, blame Romney for using these to their full extent. We can, however, take issue with his opinion about lower-income people, taking advantage of loopholes in the very same system. The most egregious, I daresay, is calling them dependents. A vast number of the infamous 47% pays payroll and other taxes, more often than not at a similar or higher rate. Almost a quarter is on social security and/or Medicare; forced savings programs over their working lives, returned to them in the form of retirement and healthcare benefits. Whether or not you want to call these entitlements is rather irrelevant; this is money owed to them. As for the solvency of these programs, they would be in significantly better shape if funds had not been appropriated for other purposes over the years. But that is a whole new can of worms, if you will..
(Sources: Dutch Tax & Customs, Guardian UK, New York Times, Tax Policy Center, Wikipedia)