Wealthy Win with Fiscal Cliff Agreement

Media chatter implies "the rich" are about to pay their "fair share" of taxes with the Fiscal Cliff agreement of early 2013. Such claims ignore reality, which is nothing new when it comes to media coverage of the intersection of economics and politics.

First, "the rich" and the truly wealthy, those in the top half of one percent or so in personal net value, are unlikely to pay much more in federal taxes. Some might actually pay less with this agreement, depending on where and how they invest. How is this possible?

The tax rate on earned income is rising to 39.6% for households earning more than $450,000 annually ($400,000 for individuals). The new Medicare "supplemental" tax increase of 0.9 percent (which doesn't actually go to Medicare) is also based on household income of $250,000 ($200,000 for individuals).

But, what if your increases in personal wealth come from investing? Carried interest, dividends, and other wealth streams are not going to be taxed at significantly higher rates — and there are lots of loopholes offsetting even modest increases in taxation.

Dividend taxes for households with taxable incomes of $450,000 per year will rise from 15 percent to 20 percent, plus an additional 3.8% surcharge for "Medicare" (again, not really for Medicare, but we're paying for the "Affordable" Care Act one way or another. The 20 percent rate means that the investor class, as compared to "workers" earning higher incomes, avoided a serious tax increase. Plus, they got some really weird loopholes!

An example of a loophole for the wealthy, as compared to high-income worker: There is a new tax on rental income — but it does not apply to professional real estate investors. Yes, seriously, the government is taxing higher rental incomes if you are not in the business of real estate investing!

Read more: http://www.businessinsider.com/dividend-taxes-2013-1#ixzz2GqYYleY6

The dividend tax break alone skews who pays taxes in our nation. Remember, we have an income tax, and the wealthy don't have higher wage-based incomes — they have investment income. (There are some Constitutional arguments I've addressed on other posts, too. The Sixteenth Amendment approved an income tax, not a wealth tax.)

Consider the following data:

  • 47% of all dividend income is earned by the 3.8% of American households that earn more than $200,000.
  • The "rich" ($200,000 annual income) collect $70 billion in annual dividends (and that was in 2009, a bad year).
  • The "fiscal cliff" deal saves these upper-class households $14 billion a year in taxes.
  • The top 400 highest earning taxpayers received about $10 billion a year in dividends, or $25 million apiece in 2009. The super-wealthy just received a $5 million tax break, individually.

The fiscal cliff deal has so many special tax breaks hidden within the 250 pages of the legislation, that I can almost guarantee the government will experience little to no significant increase in tax revenues from the wealthy. It will be the "working almost-wealthy" that will bear any new tax burdens.

For example, "green energy" investment and use credits remain in the tax code. Solar panels, windmills, and biomass burners are expensive investments. Only the wealthy are going to benefit from tax breaks for investments in alternative energy companies. Burning "biomass" doesn't help the environment (it's highly inefficient), so tax breaks that feel good aren't necessarily great for the environment.

When I go through the entire legislation, I'm sure it will be depressing. But, the investor class might find lots to love in the legislation.

More debt, more tax loopholes, and more inequity. What a deal.

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