Now that Washington has agreed to tax increases on Americans with incomes in excess of $400,000, it is time to assess what has transpired. Much of the debate over the so-called “fiscal cliff” centered on tax rates.
On numerous occasions, the president and his fellow Democrats have said that “the wealthiest Americans” should pay more in taxes—their “fair share.” Unfortunately, the “fiscal cliff” deal of 1 January 2013 did not necessarily tax “the wealthiest.”
When referring to wealth, we are generally talking about people at different stages of life. Typically, “the wealthiest,” or “the rich,” have worked for years and have accumulated their wealth over time. By nature, the very young do not have wealth in large part because they have not worked for very long.
Another, perhaps more critical, point is that many of the folks we think of as wealthy no longer work daily jobs. They often derive their income from capital gains. Specifically, they have, in the past, taken money they have saved over time and invested it in the economy in order to grow it.
In doing so, they did two things: First, their cash reserves contributed to job creation. Second, they put their savings at risk—investments, after all, vary in value and are prone to dramatic spikes and falls. Thus, those dividends have been taxed at a preferential rate in order to encourage more investment. Also, the principal investments actually consisted of net income that had already been taxed at prevailing income rates.
Moving on to the tax rates, the Congress specifically raised income taxes on individuals earning $400,000 per year and couples earning $450,000 per year. That is, Congress has taxed people in the processing of accumulating their wealth. Or trying to, anyway.
The poster boy for the wealthy may very well be Warren Buffett, who has famously demanded higher taxes on “the wealthiest Americans” while lamenting how his secretary pays a higher tax rate than he. A sad fact lost of many of us is that Buffett derives the bulk of his income from capital gains. This is money that he earned—a lot of it, yes—but put back in the economy with the hope of earning more, so his “income” is actually capital gains, which are taxed at lower rates for the very purpose of encouraging him to continue doing so.
In other words, Buffett didn’t get soaked on New Year’s Day. In fact, “the wealthiest Americans” escaped somewhat unscathed. So those who really got taxed are people like, say, your dentist, who earns $600,000 per year and employs four. He might have to let one of those folks go or reduce their hours.
Moreover, the deal also allowed a payroll tax holiday to expire, raising taxes on earners in all income brackets. The UK Daily Mail reported that middle-class workers “take a bigger hit to their income proportionally” than higher income earners. As a result, “nearly 80 percent of households will pay more money to the federal government as a result of the fiscal cliff deal.”
And again, those with wealth, while seeing capital gains rates go up through the deal and the new health care law, were at best mildly affected with these taxes. So this entire debate about taxing “the wealthiest Americans” has either been obfuscated for political theatre or misunderstood.