Fairness in Taxation

Newell S. Gragg, an enrolled agent in Ventura, California wrote a letter to the Los Angeles Times in which he plead the case for fairer taxation. His examples demonstrate a point that follows up on my post on 'those overpaid executives.'

Mr. Gragg's first example: A waitress, filing as single and earning $7.50 per hour in 2006, working 40 hours a week for 52 weeks, will have an income of 15,600. On that income she will pay $749.00 in federal income tax, $967.00 in Social Security tax, $226.00 in Medicate tax, $36.00 in California state income tax, and $125.00 for a total of $2,103.00, plus whatever additional tax she will have to pay on her tips. Over 13% of her income goes to taxes.

I modified Mr. Graggs's second hypothetical example, to tie it to my previous post.

Suppose that a wealthy CEO takes just $10 million out of his $495 million in salary and benefits, and invests it in California municipal bonds. That's about 2% of his total income. On that one investment, he will receive a tax-exempt income of $500,000 per year for the next 30 years. He will not have to work a single hour of a single day to receive that income, nor will he pay any taxes on it.

If the waitress has to pay taxes on her $15,600 income, why should not the (now retired) CEO have to pay taxes on the $500,000 per year?

Answer: Because wealthy folks like him write our tax laws.

Our wealthy legislators know that few people who live entirely on salaries can afford to buy municipal bonds. That is only one of several types of income that are only available to the weathy, and that have been exempted by law from federal and state income taxes. Why, after all, should they pay income tax at 38% on capital gains from the sale of stock or a house when the law that they wrote lets them pay 15% capital gains tax on it? The waitress, of course, will never have a house or stocks to sell for a capital gain, nor will she own municipal bonds in any significant quantity.
And what percentage of the CEO's $500,000 annual income from bonds will go to social security and medicare taxes?

So the earned wages of most folks are heavily taxed, while the coupons clipped by the wealthy are virtually tax exempt.

Of course, the CEO will no doubt spend some of his tax-free income on a restaurant meal so that our waitress will have a salary, and maybe even a tip to pay taxes on--that's part of the "trickle down"--how considerate indeed.