(July 16, 2011)
An entrepreneur in the top 1% explains the difference between those
in the top 1% of income and those in the top 1/10 of 1%: capital gains enable a much
lower tax burden on the thin layer of super-wealthy.
I have failed to make an essential distinction between those in the top 1% of
income earners who pay ordinary tax rates and those in the upper reaches of that 1%
who escape the heavy tax burden via shifting income to capital gains. The most
egregious example of this is hedge fund managers who bought a loophole which enables
their $600 million annual income each to be treated as capital gains, a rate of 15%
compared to a top rate of 35% for earned income and a self-employment tax on the
first $106,000 of 15.3% for self-employed/sole proprietors--a total of 50.3% for top earners of ordinary income.
Correspondent S.R. is an entrepreneur and business owner who identifies himself as
a top 1% income earner. He rightly (and politely) takes me to task for accepting
what he suggests is rank propaganda, that is, conflating those who are creating
value and jobs with those in the very top rungs who escape ordinary tax rates via
Panzer divisions of tax attorneys and political influence. Here is his commentary:
I need to bring to your attention one thing you have been promulgating as truth which is,
in fact, misleading -- and more than misleading. I am technically in the "top 1%"
which has been bad-mouthed and conflated with the "Power Elites" on your site and in
the main stream media for several years now. I'm convinced the conflation has been
a well orchestrated propaganda campaign and it has obviously been a big success if
even you have been substantially taken in.
It is LESS accurate to categorize the bottom 0.9% of the top 1% with the likes of Soros,
Paulson, Buffett, etc. than to lump them with those who are barely getting by on $40K.
Why? Because most of those who are in the "top 1%" -- probably 90% of them -- are
professionals and small business owners who may earn $150k to $2M a year or so but are
primarily taxed at "ordinary" income tax rates!
Those in the top 0.1%, on the other hand,
have mostly graduated to Wall Street and Washington with its stock options and shares
and other tricks for getting paid in forms which fall under capital gains. Nobody is
asking WHY capital gains should be taxed LESS than income from personal, productive effort.
Isn't that strange?? Obama, notably, pontificates about the "rich" who earn
"more than $250k" needing an increase in their (ordinary) income tax rates.
The Republicans say they are against ANY tax increase -- in their own way, skirting
the question of WHY *gambling* income is treated better than productive income.
I know you know this. In various articles you've tangentially pointed it out.
In fact, I think you wrote at least one article which was very close -- only you
said the status quo benefited "the top 1%", instead of only the top 0.1%.
Ordinary income tax rates rapidly approach 50% when state ordinary income taxes are
included and exceed it when you consider all the other taxes, including matching payroll
taxes and property taxes. There are few loopholes for ordinary income earners --
and there are "alternative minimum taxes" to make sure it stays that way!
I have no
clout to make a special deal with governments and, in fact, this year they have stepped
up their predation so extremely that I am beginning to think of quitting. I hire at
least 30 people directly ... and probably another 10 or more indirectly, and I am
profitable. I would be thinking of expanding, of hiring more, but I am beginning to
think of quitting. I am so sick of being eaten alive by government and this business
of being slandered as one of the "1%" -- something I used to be proud of having
achieved -- is extraordinarily discouraging.
I enjoy adding value to the world
through honest and productive business, I feel loyalty to my customers and my employees,
I was proud when I found a way to offer my factory workers health benefits more than
a decade ago. But I have ethics and ethics demands I NOT participate in Obamanation.
Sometimes I think of the people my taxes help kill in foreign countries and the way it
is being used against me and others here at home. I tell myself I will forgo profits,
if necessary, to opt out. I will NOT do "anything" for money. I despair. I go on.
Anyway, my request: I would appreciate if you would try harder to be clear that
the bigger issue is the preferential treatment of capital gains over ordinary income,
of corporations over sole proprietors, and that, in any case, there is a HUGE
difference between those who speculate or exercise fascist connections for profit
versus those who have achieved financial success through honest efforts and creation
of value in the free market.
Thank you, S.R., for taking the time to set me straight on the critical difference
between the top 1% and top .1%, and for highlighting the importance of aligning
capital gains taxation with regular tax rates. I plead guilty to failing to make these critical
distinctions in the past and will make that distinction going forward.
The most rewarding aspect of publishing this blog is learning from smart, experienced
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of exhausted near-delirium has worsened. I greatly appreciate your patience and understanding
of my limits.
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