Wednesday, March 9, 2011

Not Taxing Enough?

The Wall Street Journal reported today that Senator Kent Conrad of North Dakota is starting a new push for tax hikes for the rich. As the articles presents, there is ample evidence to support Mr. Conrad's pushes. For those of you not familiar with the tax code of the U.S., it is not true that wealthy people pay a nominally lower tax rate, however taking into account deductions and exemptions, their rate is effectively lower. As the WSJ notes, the capital gains taxes are key in this estimation. These taxes are lower than other income taxes under the assumption that they promote investment. Wealthy people, being more plugged into investing, naturally benefit more from this break. For 2008-2012, the short term capital gains tax is 10%.

But is the issue really a poorly constructed tax code for the wealthy? No, it is a poorly constructed tax code FOR ALL. Off the top of my head, the IRS estimate is that over $1 billion in tax revenues are lost each year due misfiled taxes. These losses do not stem from purposeful fraud, but simply because the payers can't understand the code. Although, I would remiss to not mention that our system is far more streamlined than it once was. There are currently 6 income tax brackets for households. From 1971-1981, there were 15. While the issue of an unfairly lenient tax burden on the wealthy may be perceived as an entirely different issue than the obtuse tax code as a whole, I believe tackling the latter problem will make resolving the former much less, say, emotional. A clearer tax code makes identifying loopholes much less difficult. The fact that it takes a tax expert to explain how the wealthy are managing to pay less sums my argument pretty well.


  1. You incorrectly state that the short term capital gains tax is 10% when it is really taxed at your ordinary income tax level. (which may be 10%)

    Also I don't know where you got your $1 billion number from the but the US collects over $4 trillion in tax revenue each year. 1 billion because of misfiled taxes is not a compelling argument. This isn't to say I disagree with simplifying the US tax code.

  2. You're correct about the 10%...

    I reported the wrong statistic, but here's what I was looking for:

    Long term capital gains in that same time span are taxed at significantly lower rates than the corresponding income tax. For example, the 35% income tax bracket pays only 15% capital gains tax. The argument being that is precisely the wealthiest citizens who have the most capital gains in the first place.

    And while $1 bil is not much compared to $4 tril, I think it's a bit lax to simply write of a billion dollars as unimportant. Also, this problem is not unique to the US: