Promoting Our Freedom By Modifying
TAXES

Loosely speaking, there are two types of income – wage income, and investment income. Wage income is money you earn by your labor, your time and effort, and it’s taxed on a graduated scale. If you don’t earn much money, you don’t pay any taxes at all, and may even receive money from the government as a benefit of the tax system. Those with just enough wage income to pay taxes pay only a little. And the more wage income you earn, the higher your effective tax rate is. So over time if you get pay raises, your taxes will always increase faster than your wages. The theory supposedly is the more you earn, the more you can afford to pay.

But that theory falls apart when you consider how taxes are paid by wealthy investors on their investment income. Investment income, called capital gains, is money you acquire simply because you already have a lot more than you need, so you can park your extra money in an investment that increases in value, like stocks, or provides a stream of cash, like rental real estate. This is the type of income enjoyed by virtually all people who are truly wealthy. They have enough money to live on income they obtain from their investments. They don’t have to spend any of the money already invested. They don’t have to work for any of their income if they don’t want to. They just live on the extra money they make from the money they already have. By the way, in my view this is the best way to define “rich”, not the recently advanced view that couples earning over $250,000 per year in wage income are rich, even though they still have to work to get that income.

Regardless of the amount of capital gains a rich person has, the tax rate on their investment income is very low. Much lower than the percentage of our wage income we commoners pay in taxes. This is true even of the extremely rich whose investment returns are in the millions, or even billions, of dollars per year. Capital gains income is defined as profits from the sale of a capital asset, such as a rental property or shares of stock. If you don’t sell it, you don’t owe any taxes on it, no matter how much it goes up in value. Say for example you own $1 million worth of a particular stock, and the price of the stock goes through the roof. If you don’t sell any of your stock, you don’t owe any taxes on the increase in its value because you haven’t “realized” any of the increase. This isn’t even a loophole. It’s part of the basic structure of the tax system.

Suppose we agree that a reasonable, rational tax burden on wage earners is 10% of our wage income, with no exceptions, no loopholes, no deductions. Suppose we also agree to define by law the highest “wage” a person can earn is 50 times as much as a minimum wage worker earns working full time, and suppose we raise the minimum wage to $15/hr. The minimum wage worker then would earn $30,000 per year, which it might actually be possible to live on. And the highest “wage income” a person could earn would be capped at 50 times as much, or $1,500,000. A person who earns more than that, such as a corporate CEO who earns $2 million per year for example, would be taxed at a “non-wage” tax rate on earnings above the wage cap. For this example CEO, that amount is $2M - $1.5M = $500,000, even though that “non-wage” income is the same as what is generally recognized as wage income.

Suppose we also agree that a reasonable, rational tax burden on wealthy investors whose investments increase in value whether the increase is “realized” or not, would be set annually at a rate sufficient to balance the federal budget every year, up to some maximum percentage of their income. Suppose we impose a graduated tax structure on non-wage income, including both investment income and corporate income. For example, we could make non-wage income up to $100,000 per year non-taxable, so ordinary wage earners can save and invest without increasing our tax burden, until we have a sizable income just from our investments.

We can make non-wage income between $100,001 and $1,500,000 taxable at 10%, just like wage income. But the tax rate on non-wage income in excess of $1,500,000 could be set at a rate calculated to balance the federal budget for that year, but no higher than 50% and no lower than the tax rate on wage income, that is, no lower than 10%. Increases in the value of investments would be taxable even if the value wasn’t “realized” as income during the year. Investors holding such investments would have to pay taxes on the increase, even if they have to sell some of the investments to pay their taxes. And if an investment is sold at a loss, the loss can offset other non-wage income, but not wage income. One result is that everybody pays taxes on their wage income at the same wage tax rate.

The extremely wealthy would probably initially despise such a change and would do their best to defeat it, including offering incentives to the legislators who write the laws. But if ordinary people are making the laws in Congress, as we should be doing in our republic, we could commit ourselves to resist such incentives, and any other temptations offered, to eradicate governmental corruption. But such an overhaul of the tax system has a lot of desirable features from the standpoint of the average worker. It ensures wage earners, all wage earners, earn a reasonable wage, and pay a reasonable tax and have some skin in the game. That is, we all have a personal stake in how our tax money is collected and spent. This also places a proportionally greater tax burden on the very rich who can afford it. And it gives the middle class something to shoot for by allowing us to save and invest without adding to our tax burden, until we have amassed a considerable nest egg. We wouldn’t have to pay any taxes on income from our investments until we make more than $100,000 per year just from the investments. On the other hand, if an investor makes a billion dollars in a year from their investments, they’d have to pay taxes on the billion dollar increase even if they have to sell some of their investments to pay their taxes. However, they’d still have an enviable quality of life even if their tax burden on the increase is the maximum 50%. This investor would have after-tax income of 50% of a billion (that is, $500,000,000) to enjoy. In addition, they would retain their entire original investment, which remains untaxed. Contrast this with the investor’s current tax free increase in their investments’ value if the investor doesn’t sell any of the investments.

Furthermore, such a change to the tax law would provide the very rich with a huge incentive to be supportive of reducing federal expenditures to a rational level and greatly reducing the size of government, because the taxes on the increase in value of their investments would decrease proportionally down to a minimum of 10%. This tax structure is far better for the overwhelming majority of us commoners, including the entire middle class, than the structure we now have to deal with. And, it doesn’t impose any undue burdens on the wealthy. For at least these reasons it’s worthy of serious consideration.

How would we implement a change in our tax structure? No matter how drastically we want to change the tax system, we just have to pass a new law repealing relevant portions of the existing tax laws and regularions, and replacing them with a new tax law we would write ourselves. Presto. New tax structure in place. No muss, no fuss. No letters, no complaining, no demonstrations, no million person march, no grass roots movement. Just straight to business with a newly elected congress of non-politicians trying to make our own lives better.

Such a law can and should be short and to the point, and easy to understand in its entirety by anyone of average intelligence. In addition to increasing the minimum wage to a more rational level, we can also reduce the hours in a work week, and increase the minimum amount of vacation time we get, to give us more actual freedom to enjoy. A suggested bill that is completely suitable for these purposes will be proposed shortly in these pages.