Wealth not Wages: The Fundamental Trick of Tax Policy

The Trump administration recently released a skeleton of a tax reform plan that has been widely panned as being skewed in favor of the richest Americans. Next up, Speaker of the House Paul Ryan announced his commitment that there will be a higher tax bracket added onto the highest incomes. This should not have been much of a surprise: Steve Bannon, the would-be populist prince, had presaged this move some time ago.

All good, right? Sounds like the politicians are listening to the people.

Not so fast. Trouble is that, like many things about tax policy these days, it’s all a trick.

There is a confusion that we at the People’s Tax Page frequently encounter as we go forth and try to educate the people about what is really going on in tax. Many observers point to statistics that show that high income earners pay a high share of the income tax. This is true.

Now, there is a problem at only looking at the income tax; most Americans pay more in payroll taxes, which are not skewed against the rich. But there can be no denying that those with the most income pay the most income tax, under the progressive rate system.

The trick turns on what the laws call “income.”

Specifically, the rich -- those with high net wealth -- are not the ones with high “incomes.” The statistics that show that the upper earners pay a disproportionate share of the income tax look only to reported income. Reported income, by and large, comes from wages. Wages are taxed, and heavily. The government’s computers know about wages from third party reporting (those dreaded W-2’s that serve to tell the government what you made every year).

The rich with wealth -- assets, property, capital -- need not pay any tax. Their wealth rises every year with the “unrealized appreciation” of their assets that is not included in “income” subject to the income tax. This is a big part of what we are explaining at the People’s Tax Page. Here is our cartoon explaining how the rich, those with assets, avoid paying any tax, using the three simple steps of what I call Tax Planning 101: buy/borrow/die:

For those who want more (and like to watch cute kids, including a couple of my own), here is the live action version:

In all of this, what is critical to see is that it is not about “high” versus “middle” or “low” income; it is about wealth versus wages. Those who have wealth need not pay taxes, those with wages cannot escape tax. Is it any wonder, then, that America now has over 500 billionaires, and that wealth inequality in America is at least ten times worse than income inequality? Or that many of America’s wealthiest persons draw little (like Steve Jobs’ $1 or Warren Buffet’s $100,000 annual salaries) or no (like Bill Gates, long not even the CEO of Microsoft) salary, yet make billions in unrealized appreciation every year?

The wonder is, or should be, that so few people understand all this. The Trump/Republican tax plan is wildly attractive to those with wealth: it repeals the estate tax, which only the wealthy pay, and it lowers corporate taxes, a move that recent studies suggests also benefits the rich. Adding a higher rate bracket for higher earners may affect those with higher wages. It won’t touch the rich, like President Trump himself, at all.

That’s been the fundamental trick of tax policy for a century and counting. It’s getting old, yet it still seems to work.

Come visit us at the People’s Tax Page to help us shed some light on what is really going on in tax.