Taxation and fairness – what an oxymoron!

Taxation and fairness – what an oxymoron!

 Much debate has taken place recently on the issue of “rich bosses paying taxes at a rate lower than their secretaries”.  The reason for the difference is in itself interesting. The tax rate on qualified dividends is 0% or 15% (depending on the individual’s income tax rate). If the individual has a regular income tax rate of 25% or higher, then the qualified dividend tax rate is 15%. If the individual’s income tax rate is less than 25%, then qualified dividends are taxed at the zero percent rate.  Whatever the reasons are for this “arrangement”, it is clear that income earned by a person by actually working is taxed at a much higher rate than money coming from an investment interest generated by someone else…  It would seem much fairer the other way round…

 There are other examples showing that the US tax system does not reward work efforts. Recently I used a commercially available tax-preparation software. An answer I was given to a question: If my self-employment and income taxes combined is around 40%, isn’t that high?” surprised me. I was told that “Your tax rate is dependent on your amount of income and your type of income. Since you’re self employed, you have to pay self-employment tax, as well as your regular income tax. As a self-employed individual, you’re required to pay both your portion and an employer’s portion for Social Security and Medicare. You pay 13.3% on the first $106,800 of income for Social Security and Medicare. You’re taxed at a 2.9% rate for income above $106,800.Your regular tax is calculated by including your self-employment income and all other sources of income. You receive deductions for your expenses and half of your self-employment tax. This result is applied against your regular income tax rate. The highest marginal income tax rate is currently 35%. So, depending on your income level, a 40% tax rate might be correct.”

 No matter how one looks at it, a 40% tax rate is just ridiculously high, especially when compared to tax rate on dividends. It is now high time that a tax system that rewards people at work is introduced!

 

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