Saturday, July 16, 2011

The Critical Difference Between the Top 1% and the Top .1%: Capital Gains

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 readers. Being open-minded to new information and insightful analysis may well be the key skill needed to navigate the next 20 years. Fostering that skill is one of my goals, and I hope it is reflected in the blog's content.

Note about email: Projects (replacing a water heater and a concrete pour) over the past two weekends absorbed all the time and energy I usually devote to catching up with email. I am also working mono-maniacally to complete my book and so my usual state of exhausted near-delirium has worsened. I greatly appreciate your patience and understanding of my limits.

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