Friday, October 7, 2011

Dear Right Wing: Capital Gains are Different Than Ordinary Income

Very simply put, if a person has no ordinary income (such as from wages), instead deriving their income from investments (dividends, capital gains on the sale of assets), then talking about tax brackets is irrelevant.

The top capital gains rate has been at 15% for roughly 10 years. This is why many extremely wealthy people clock in at an effective tax rate of under 20%, if they pay taxes at all. If they earn $2 million in a year, and only $250,000 of that is in the form of wages, then only 12.5% of their income is subject to payroll withholding as well as ordinary income tax rates. These rates are applied to their AGI (adjusted gross income), which is the $250,000 minus any qualifying deductions they claim (mortgage interest, charitable giving, standard deductions, all as applicable).

There have been a number of periods in recent history where the top tax rates (and cap gains rates) have been at least twice as high as they are at present, yet the economy was booming, employment was a more tolerable 4-6%, etc. GDP steadily rising, new companies *voluntarily* forming, creating jobs, etc etc.

It really pisses me off when the Right continually claims that raising taxes and closing loopholes would kill jobs. Shows that they either don't understand taxes or are intentionally misleading their listeners about how taxes really work.

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