THE BLOG
09/24/2010 08:49 am ET | Updated May 25, 2011

Tax equality for workers - and investors

We have become so accustomed to being unfairly taxed, that when finally the President is setting out to make a correction--we barely pay mind. I am speaking about the fact that you pay a much higher rate of taxes on money you earn by the sweat of your brow than on monies you get from clipping coupons. Oh, I don't mean that you are taxed for cutting out coupons from throwaway papers to get a discount at the supermarket.  I am using an old-fashioned term to refer to monies people get from funds they inherited from their parents or grandparents, won in a lottery or in the great casino known as the stock market, or from other investments. In the old days, bonds and stocks were pieces of paper to which coupons were attached, and you mailed them in when they matured, and got a check in return. It often requires little effort compared to toiling on the farm, in the factory or even in the office, all day long, five days a week. The IRS has a very telling term for this kind of revenue. It calls it "unearned income." (To be fair, those whose investments reflect what they put aside from what they earned from work did work hard for their savings. However, from hereon, these savings spit out returns that requires not sweating.)

Congress nevertheless looks much more favorably on income gained from investments than from labor.  However much you make from investments, the tax on dividends is set at 15% for those individuals who make more than $34,000, while on wages tax rates range from 25% to 35%.  To round off: the tax rates on earned income are twice as high as on unearned income. In July, Secretary Geithner proposed raising the rate on dividends not to the same level as gains from labor but merely to 20%.

This modest proposal is not well received by the conservative think tanks, such as CATO and Heritage, and Republican representatives, to put it mildly.  Their major argument is that taxing capital is bad for you, me, and the man behind the tree. They argue, that "taxes on capital" discourage "capital accumulation, productivity, and wage growth," as Glenn Hubbard, dean of Columbia Business School, put it in the Wall Street Journal. On closer examination one notes that the tax on dividends is not a tax on capital, they way say the estate tax is. The tax is only on the revenues that capital throws off.

If you just came from Mars, you may wonder about another difference between the two kinds of income. Taxes due from those of us who work our backsides off are withheld by those who pay us. If at the end of year it turns out that too much tax was withheld, we are free to ask for the excess to be refunded to us. Meanwhile, we have granted the government a loan on which it pays no interest. In contrast, those who are paid dividends can keep what they get until next April, when taxes are due. When some courageous soul suggested some decades ago that taxes from dividends also be withheld at the source, Wall Street and the banks mounted such a fierce campaign of criticism--arguing that such a change would leave orphans and widows starving in the streets--that no one since has had the audacity to so much as promote such a basic way to equalize the ways the taxes on the two kinds of income are collected.  As a result IRS losses from taxes due but not collected on dividends and capital gains run into the billions.

 You can love capitalism, favor private enterprise, call for less government in our life, and above all, demand lower taxes. However, you may still agree that as long as tax we must, all income should be treated in the same manner.

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