On the surface, the American taxation system is progressive, meaning that those who make more money pay more in taxes. This kind of thinking stems from the belief that those at the bottom of the income ladder need the most support because they may become vulnerable if their disposable income dips below a certain level. However, when the tax structure is examined more closely, a startling revelation comes to light. Those at the very top of the income ladder actually pay less in taxes than those who are slightly less well-off or just a little less wealthy. This does not add-up and is actually a contradiction that has come about because of the repercussions of a tax law that is due to expire at the end of 2010.
From the time this trend was first discovered, much ado has been made over the disparity in treatment. There are very few people in this elite bracket and most put the estimate at around 400 persons. These are the richest people in America and they all have an estimated net worth that is counted in the billions. Bill Gates, Warren Buffet and Jim Walton of Wal-Mart success are just a few of the most popular names to make the super-rich list.
So why do these people pay less in taxes than those who are simply millionaires for instance? The answer is the measure of their portfolio that is in capital gains. The total income of those in the super-rich category is generally made up of two things, income from salaries and wages and income from capital gains on stock investments. However, the larger proportion comes from income from investments.
While income tax rates are progressive all the way up the income brackets, capital gains taxes are not. The Economic Growth and Tax Relief Reconciliation Act of 2001 or EGTRRA is probably more commonly known as one of the Bush Tax Cuts was signed into law by President Bush. This piece of legislation was far-reaching and extensive but arguably one of the most notable changes that it brought about was an amendment to the rates of taxes on capital gains.
Under EGTRRA the rates of taxes levied on capital gains taxes were reduced considerably, but especially on stocks that were held on a long-term basis. This had a positive effect on the incomes of large stock investors or majority shareholders, many of whom are in the elite 400 member billionaire club.
One of the other important characteristics of this tax legislation is its sunset nature which means that there is an expiry date that is fast approaching. President Obama is strapped with a crippled economy and the challenge of mounting public liability. He has also made it no secret that he believes that those who make the money should pay the taxes. As the end of the Bush Tax Cut is set to expire at the end of 2010, there is already intense debate on how capital gains should be treated under tax law. Soon enough a new way forward will emerge and a re-examination of the effect of the tax changes that are sure to come will then be in order.