A Philosopher's Blog

Philosophical Essays on Many Subjects

Capital gain

Very Taxing

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Taxes
Taxes (Photo credit: Tax Credits)

In 2012 I made about $6500 selling my 99 cent books through Amazon and Barnes & Noble (I get about 35 cents a book). On the plus side, the extra income offset the effective salary cut provided by Governor Scott of Florida. On the minus side, this royalty income is taxed using the self-employment rate. In 2012, the self employment tax rate was 13.3%. In 2013 it will be 15.3%.  In contrast, Mitt Romney pays taxes at under 15%. If I only got royalties from non-work sources (like copyrights), I’d be paying much less.

Without this income, my tax software reported that I’d get back about $2400. With this income, I’ll be getting back $36. So Uncle Sam gets a nice chunk of my book income.

On the plus side, my modest stock returns were taxed at an incredibly low rate. This is not surprising since capital gains taxes cap out at 15%. Yes, I do endeavor to plow as much money as I can into increasing my capital gains. And into my IRA.

I’m not mentioning this to brag about my modest success as a writer nor to weep about my taxes. Rather, I am bringing this up to explain why I fully accept that the idea that the tax system in the United States needs to be overhauled. I have, of course, had a general commitment to the idea that the tax system is a needlessly complicated mess packed with unfairness. However, really seeing the disparities in the tax system shows there is a problem. After all, I am taxed rather differently for my normal wages, for my self-employed income, for my capital gains, and for my interest income. It seems rather odd to have so many different tax rates based not on the amount of income but where it comes from. After all, income should (in general) be treated as equal-after all, it is all income. It should not matter that a specific dollar came from my writing, my stock, my savings interest or my job.

Not surprisingly, income from work has high tax rates relative to the others (especially capital gains). Of course, this makes sense: congress members and their supporters make most of their money in the areas that enjoy the lower taxes while people who work for a living pay higher rates. However, this disparity in rates is unfair and should be changed.

I do also see the appeal of having lower taxes. When asked how I’ll handle the tax increase for this year, I had to say the obvious: I’ll have to spend less. Of course, I also recognize that there are legitimate expenditures for the state and, as a citizen, I am obligated (and proud) to contribute to the general good. I am not, of course, keen on having my money wasted. I only wish the politicians thought the same way.

While it will cost me more in taxes, I still encourage everyone to buy my books: My Amazon Author Page

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35% versus 15%

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Tax
Image by 401K via Flickr

Mitt Romney garnered considerable media attention by his rambling answer to the question of whether or not he would make his tax returns public. While Mitt should have just said “yes”, he eventually noted that he probably paid at a tax rate of about 15%. He did note that he probably paid a higher percentage on his speaking fees, but he said he didn’t make much from that-a mere $374,328 last year.

While the capital gains tax caps at 15%, income tax caps at 35% (for those who have a taxable income of over $388,350). By way of comparison, a  person who earns $8,701-35,350 pays 15% income tax. Naturally, the actual percentage will vary based on factors such as deductions. However, it is certainly interesting that someone like Romney (who makes a fortune from capital gains) pays at the same rate as a person who makes vastly less by working.

The stock justification for this disparity is that it is intended to promote investment and that investment drives the economy. However, the fact that other income (like paychecks) can be taxed at much higher rates would seem to indicate that working for a living is regarded as less important than receiving profits from investments. This does seem to be something of a mistake: after all, without people actually doing things, there would be no point for the capital investments. That is, there would be no actual things to invest in (well, other than the arcane results of financial engineering). As such, if the low tax rates on capital gains are intended to promote investment, it would seem that comparable tax rates should be placed on other income to encourage people to work.

After all, it has been common for politicians and pundits to claim that higher tax rates on capital gains will destroy job creation because job creators will be de-motivated from investing. However, that logic would seem to entail that the higher tax rates on other income should also de-motivate people. That is, people should stop working because of the higher tax rates. Perhaps this explains the unemployment numbers-just as the pundits predicted, taxes have destroyed their motivation to create value. In fact, if the pundits are right, it is a wonder that anyone who makes more than $35,350 goes to work at all-after all, they have to pay more than 15% and this is the level that is apparently deemed to be the maximum percentage that investors can tolerate.

This disparity not only indicates the perceived value of work versus investment, but also the political influence. Those who derived most of their income from capital gains (like Mitt Romney) tend to be wealthy and generally tend to have far more influence than those who merely work for a living. Also, there is the obvious fact that the folks who write the laws tend to be heavy investors as well. As such, the tax laws are written to benefit the wealthy-which is hardly shocking. While the wealthy do have to pay some taxes, even this modest burden is seen as grotesquely unfair by some of them and some of their stalwart allies (who also tend to be wealthy). Romney is a natural poster boy for the incredible disparity in American incomes and his various comments nicely show the disconnect between most of the top 1% and the rest of America.

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