Can you explain this, as this doesn’t appear to be backed up by IRS stats on effective rates & total revenue.
1. Are taxed at a much lower rate, and,
2. Are only taxed when the gains are "realized," e.g. when you sell at a profit.
As a result, if you have a large amount of wealth, your net worth can increase dramatically while being untaxed (if you don't sell) or taxed very low (if you sell some percentage of the gains — and only the sold percentage gets taxed, the rest doesn't). Depending on your investment strategy you can also play games with taxes, e.g. when rebalancing your portfolio, try to mostly sell your shares that have lost value, so that you put a loss on the books rather than a gain and are thus untaxed (or even get tax credits).
That's why Warren Buffett talks about paying less in taxes than his secretary.
The only way wealth can increase (in a usuable liquid form at least) is through income, which is already taxed.
If I eat beans and rice for 10 years to help save for a awesome retirement, I should be able to save that money.
Taxing upon realization also makes sense to me, but the very low long-term capital gains tax makes less sense to me. If you made a million dollars, I don't care if you made it via investment or by working for someone — you should support society in the same degree.
That they are taxed at a reduced rate is true but doesn't invalidate the fact they are still income.
And regardless of semantics, the original point still stands: relative to their wealth, Rich people, effectively, don't even pay income tax. This is trivially true: if your liquid net worth increases by $1 billion dollars, and you made that money via income, you would be taxed (depending on state) up to nearly 50% of those gains. If you made it via capital gains, you would be taxed at zero. Since very rich people make most of their money via capital gains, what little net worth increases they make via "income" pale in comparison to the gains from capital investments. Thus, they pay effectively no income tax relative to their wealth, which is large. If they make 1.2 billion dollars in liquid net worth, and only 0.2 billion is classified as income, they're paying an effective tax rate of about 12% in CA instead of 49.3% (what they would pay in CA if their gains were categorized as income). If only 0.1 billion was income, they're paying 6%. If they "only" made 50 million dollars of income that year, and the rest was classified as long-term cap gains, they're paying 3% tax.
For the record — I'm not saying we should tax unrealized capital gains! This is a very complex subject and changing the tax code in that way could have far-reaching, potentially very negative side effects on the US economy; for example: we wouldn't tax unrealized illiquid asset gains, right? That would be unfair: if it's illiquid, you may literally be unable to pay the taxes on your supposed gains. But that encourages mass migration of high-net-worth individuals' assets into illiquid assets like real estate (since by and large they don't need immediate access to the capital), and out of liquid assets like company stocks, which would drive up housing costs and reduce available capital for US companies. Not only that — it prioritizes illiquid assets over liquid ones, which is good for rich people who can park money on illiquid assets and don't need to spend it short-term, but bad for everyone else who actually may need to spend their money. Not exactly the outcome we want! In general tax is super hard and rich people will pay very smart people to game the tax code for them.
But capital gains being only up to 18% compared to income at up to 37% at the federal level (with similar breakdowns by state) seems pretty off.
Capital gains are a subset of income, taxed via income tax at, in some cases (mostly, “long-term” gains) preferential rates.
> There's a set of taxes called "income taxes,"
Capital gains are part of those taxes.
> and the rules are the same for anything classified as income
No, they aren't. There are all kinds of special cases with income. Capital gains are one: they are income, included in AGI (adjusted gross income) which effects eligibility for various tax credits and deductions, but in certain, but not all, cases taxed at lower rate than ordinary income, as low as zero percent for the portion of long-term gains within the tax bracket qualified for 12% rate on ordinary income.
Where are you getting this information? From what I can find, the top 20% of Americans pay 87% of income taxes: https://www.wsj.com/articles/top-20-of-americans-will-pay-87...
Why stop at 20%? Map peoples’ wealth on a normal curve and then look at which parts of the curve pay the bulk of income tax. Saying the top 20% of income earners pay 87% of income taxes says very little, actually, about who, exactly is paying the bulk of income tax relative to wealth. I mean probably most people on hacker news are in the top 20% income earners in the US for crying out loud. Are most of us wealthy? Not relative to how much wealth is out there.
Income tax is collected as a percentage of people's income, I'm not sure why you're referencing wealth here. And judging tax as a percentage of wealth is not a very sound approach:
* You have someone that makes $50,000 and has lived frugally and saved up $500,000 over the span of decades.
* You have someone that makes $250,000 a year and spends nearly all of their money as they earn it, and so only has $50,000 saved.
The former will pay $4,342 in federal income taxes (filing as single) and thus pay under 1% of their wealth in income taxes. The latter will pay $58,424 in federal income tax and thus pay over 100% of their wealth in income taxes. Am I to understand that this situation is unfair because the former is paying a smaller percentage of their wealth as compared to the latter, and that the former should be paying more than the latter?
Judging taxes as a function of people's wealth is not a sound approach because people's wealth has much more to do with their financial decisions than their income. Why should frugal people who save more be taxed more heavily than someone who makes as much (or even more) but spends their money?
This portion of your comment seems to indicate a fundamental misunderstanding of income vs. assets:
> ...they view taxation through the lens of income, but the primary source of most wealth (not most peoples’ wealth, but most wealth) is derived from property.
Property (in other words, the assets people own minus their debt) is wealth. Talking about how the source of wealth is derived from property is nonsensical - wealth and property are two words for the same thing: net assets.
Income is the delta of people's wealth. If you have an annual income of $X then your wealth is increasing by at most $X each year. Gains from increased value of assets (capital gains) are another source of wealth. These are taxed, too, but at the time that the assets are sold rather than immediately. Inheritance is another source of wealth and that is taxed as well.
Income is taxed because income, not property, is the source of people's wealth. It's valid to think of "income" as short for "incoming property".
Relative to their wealth, Rich people, effectively, do not even pay income tax. The bulk of income tax is paid by the middle class. Does that seem fair to you?
I agree with you that money is power, but you are not going to stop the existence of Billionaires and Trillionaires. That would need to be a coordinated global effort.