Writing in Bloomberg, Ben Steverman lays out in an extremely evenhanded way exactly how we, the Land of the Free (TM), got to where we are now: A land where people who go to work every day and do work and are paid in exchange for doing real work are taxed at a significantly higher rate than people who sit on their ass all day doing nothing and make money from investments. People who work must pay payroll taxes—which investors do not pay—and money earned through work can be taxed at up to almost 40%, while capital gains taxes top out at about 24%. It was not always this way:
The last time Congress passed comprehensive tax reform, in 1986, it eliminated the gap between workers’ and investors’ taxes. Their rates didn’t start diverging again until the early ’90s, when Congresses controlled by Democrats boosted taxes on wealthy Americans’ wages more than on their investments. Republican-controlled Congresses widened the gap further by slashing rates on rich investors in the late 1990s and early 2000s.
A 1986-style rebalancing is unlikely to happen this fall, however, as President Trump and his fellow Republicans in Congress attempt to tackle tax reform. The gap may even widen further.
This is the shit that people should be mad about every day. This is the systematic, decades-long effort to charge the poor and middle class more and the rich less. This is the actual, mathematical class war, which the rich (and the Republicans, their party of choice, though Democrats are only moderately more progressive on this issue) have been winning for nearly our entire lifetime. Paul Ryan, the aw-shucks all-American kid, is intent on making the gap between investors and workers worse. It’s central to his entire plan! And the stated rationale for all this, which is that lower taxes on investments is good for economic growth, which thereby benefits everyone, is not just an explanation that completely leaves out the concept of “justice” in public life—it is an explanation that is not backed up by history.
There’s a big flaw, though, in the argument that lower taxes on the rich stimulate longer-term investment, and thus jobs, famously labeled as “trickle-down economics.” While tax rates might affect the timing of some investor decisions in the medium term, it’s much harder to see how they affect long-term behavior. No matter the tax rate, investors ultimately look for opportunities to get richer...
The most famous economic boom in U.S. history, right after World War II, occurred when the top rates on dividends were between 70 and 90 percent. Rapid growth also followed tax hikes on wealthy investors in the late 1980s and early ’90s. And more than a decade later, the Great Recession swamped any conceivable benefits from then-President George W. Bush’s tax cuts, which dropped the top rate on dividends by half.
Unless taxes get so high that they completely swallow all useful profits (this will never happen), investors will invest to make money no matter what the tax rate is—after all, “investing” just means “your money is off making money for you while you do nothing.” The alternative to people investing their money is people just saving their money under the proverbial mattress. And people make the decision to do that based on their fear and perceived risk and the larger business cycle, rather than on the tax rate. If they weren’t investing, after all, they might have to actually work.
Everyone gets bored talking about the tax code, but that’s where they actually rob you. Please share this story widely. It contains facts that will be useful when you are explaining to the Capitol Police why your armed band of Antifa is storming the Speaker of the House’s office.