Mike Kueber's Blog

January 25, 2012

Double taxation

Filed under: Business,Issues,Politics — Mike Kueber @ 4:44 am
Tags: , ,

I confess that because I was preoccupied with a Happy Hour, I missed President Obama’s State of the Union address.  But prior to the address, I heard that a major part of the address was the so-called Buffett rule, which focuses on the fact that some secretaries paid taxes at a higher rate than their bosses.  I agree with this criticism of the American tax code.

Mitt Romney recently disclosed that his tax obligation was less than 14% even though he made about $20 million a year.  Based on news reports, President Obama was prepared to highlight that many secretaries not only paid taxes at a higher rate than 14%, but also had to pay social-security taxes of more than 7%, which the multimillionaires were not required to pay on the bulk of their income.

I agree that rich people should not be allowed to pay reduced income-tax rates simply because their income comes from capital gains.  The argument that such a tax amounts to double taxation doesn’t make sense.  Just because someone pays taxes on earned income doesn’t mean that additional income earned on that income shouldn’t be taxed.  America’s tax system is based on levying a tax on each transaction (e.g., sales tax is assessed every time your car is sold), and that is completely consistent with taxing a person on earned income and then taxing them again when those assets are used to generate capital gains.  The tax rate on capital gains should be at least at much, if not more, than the tax rate on earned income.  This concept would also work with estate taxes, where there is a tax on income earned and then another tax on the assets when they are tranferred to a beneficiary.  

To suggest that people will be reluctant to invest their capital because capital gains will be fully taxed is ludicrous.  That’s like saying you will decide to stop earning income above $250k just because the marginal rate on income over $250k is increased to 40%.

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