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Tax Reform

Consider relief for those who work for income

We have heard about the economy and tax reform from both presidential candidates. I am a tax practitioner and I have created the following scenario. Couple A has investments generating "qualifying" dividend income of $100,000 per year, which represents $2 million of stock ownership. Couple B are both wage earners, each earning $50,000 for a total household income of $100,000. They each have mortgage interest of $10,000, a sales tax deduction of $1,597, property taxes of $4,000 and charities of $2,000.

Couple A pays $5,000 in income taxes and Couple B pays $12,000 (not to mention $7,650 of social security taxes). This is a simplistic example of economic policies of the Bush administration.  The jobs they created? Maybe some domestic help at minimum wage (probably paid under the table). Wealth redistribution? Let's just say it has gone the wrong way for too long. I hope relief is considered for those who work for their income rather than those whose incomes work for them.

Couple A is NOT paying for day care, transportation, clothing or any of the other costs associated with working for a living. Couple B is struggling AND paying more in taxes.

Anne Griffin

Mukilteo, WA

In my fourty-two years of tax practice, I have seen the tax pendulum swing.  Certain capital gains have always had a preferential tax rate. When I started, the maximum income tax rate was 70%-now it is 35%.  While the maximum tax rate remained 70%, the maximum tax rate on income earned from wages or self-employment was reduced to 50%.  Then the maximum tax rates were reduced over time, but were equal for all types of income, except for certain capital gains.  Finally the maximum income tax rate on qualified dividends was reduced to be the same as that on certain capital gains, and the tax rate on certain capital gains was again reduced.

Capital gains have always enjoyed a preferential tax rate because they represent the gain in an asset’s value over time, often due to inflation rather than a true increase in value of the asset.  In some countries of the world, capital gains are not taxed.  Modern investment philosophy, at least until the current financial meltdown, has taken a “total return” approach to investment returns, treating the growth in value (capital gain) and the return on investment (dividends or interest) the same, which led to the reduction of the tax rate on dividends.  Of course they are not the same.  A capital gain is only taxed when the asset is sold, while the dividend is always taxed when it is received. 

Ms. Griffin’s analysis invites us to again look at the equity of our tax system as we consider the disparity between how one’s income from his or her work is taxed as compared with how one’s investment income is taxed.  The disparity is even greater for the person who is self-employed, as his or her social security burden is double that of the employee.

I pray that tomorrow’s actions will bring tax equity to the vanishing middle class of Americans.