Tuesday, October 11, 2011
During the Eisenhower administration (1953 - 1961), the tax rate on the richest Americans was 91 percent. With tax rates high, the wealthy built factories and bought new equipment and hired workers. The economy boomed. High tax rates on the wealthy seem to have turned them into better job creators then than the low tax rates we have now.
Just to be clear:
Earned income is income made from a job.
Capital gains, in contrast, is money made from the appreciation in value of something one owns (assets such as stocks, property, art, ...), rather than money earned from a job.
Average families gets most of their income from their jobs, and thus the tax rate on earned income is most important to them. The wealthy get most of their income from the appreciation of assets, and thus the tax rate on capital gains is more important to them. (Side Note: salaries paid to managers of Venture Capital Funds, Hedge Funds, and Private Equity Funds are classified as "carried interest" and taxed at the lower capital gains rate. There is no justification for this and it amazes me. PS - a lot of corporations structure their executive compensation in ways that enable them to also pay tax at the lower rate or in tax deferred retirement accounts (neither of which are available to non-executive salaried employees).
It is considered to be almost gospel today that capital gains should be taxed at the far lower rate of 15%. This is why the middle and working class, who are dependant on earned income, effectively pay taxes at a higher rate than do the wealthy. By the way, a higher capital gains rate would encourage long term investment because capital gains tax is not paid until the sale of the asset.
In 1953 - 1961, capital gains were not treated differently from earned income, so the rich paid 91% tax on capital gains. Since then the rate has dropped from 91% to 15% - makes no sense - but if you earned most of your money from investment income - it sure is favorable to your personal pocketbook. If most of your income is from your job - it sure seems unfair that you pay a higher rate on your income than a wealthy person does on their income.