It's Called "Income Tax"

It is not called “How much money I have in the bank or investment accounts” tax. If I save up millions of dollars and then put that into an investment account and earn interest I’m paying taxes on the interest, not what I already had in the account. This is a gross oversimplification of what’s commonly referred to as capital gains, and the capital gains tax (which is, I believe, at 15%) is how this is taxed. The tax code currently views capital gains differently than regular income (what you get in a paycheck).

So, when people say things like “The rich pay lower taxes” it’s not because they pay less income tax, it’s that they make most of their money in capital gains, which is taxed differently. This is most recognized in Romney’s released tax returns. It is also why Warren Buffet (falsely) claims he pays lower taxes than his secretary, because he’s mainly paying a different kind of tax than his secretary (he’s paying mostly capital gains tax while his secretary is paying income tax).

Again, this is all grossly oversimplified to make a point. That just because one has a lot of money, doesn’t mean that they’re paying taxes on that surplus. They’re only going to pay taxes on what was actually income, or their capital gains.

Now, with that in mind, it’s obvious that this is a tax code problem rather than a “rich pay less” problem. I’m all for changing the tax code. I’m also of the opinion that a person should take every single tax deduction they are legally allowed to and capable of, until such time the tax code is changed and they can’t take certain deductions anymore.

But please, please, please, remember, it’s called income tax for a reason, because it’s your actual income being taxed, not your surplus of cash.

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One Response to It's Called "Income Tax"

  1. Anonymous says:

    Most non public businesses are S corporations.  Distributions, which is how owners are paid, are taxed at a lower rate than someone that earns through W-2.  In addition, dividends are also paid to owners through their S corp, also taxed at a lower level than W-2 wage earners.

    Romney makes his money through dividends from an investment made more than 20 years ago.  Its passive income, meaning he’s not actively involved in generating that income.  

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