Since the Reagan scam that began in the early 1980’s – the one that cut tax rates on investment income and inherited wealth, and raised them on wage & salary income – even high salary workers are middle class. It’s hard to beat the low to zero tax regime afforded the idle elite.
I wonder why you would pay your attorney father a higher mortgage interest rate than a commercial bank? Either you were a bad credit risk, or bad at arithmetic.
You earn $100 K vs you earn $100K in dividend + capital gains… is easy to understand; But if you earn $1M in capital gains vs $1M in salary.. the difference is unbelievable.
The interesting thing is if you are efficient with money (saved lots) and retire early, you reap enormous benefit from tax code written to benefit wealthy people. Lightly taxed capital gains, Roth conversions, etc.
This is COMPLETELY wrong, look it up! The Reagan tax bill unified rates for ordinary income (earned income) and capital gains (long-term and short-term). Basically, the top rates for ordinary income dropped from 70% to 50% and a few years later were dropped further to 28%. And the rate for long-term capital gains went from 28% down to 20% and a few years later were brought back up to 28%. So, it’s more or less the opposite of what you wrote above.
There was a short period of time in which all income was created equal - earned or capital gains (other than payroll taxes, but you are getting something separate of value for those). The “corruption” of that concept occurred in the tax bills that came AFTER the Reagan era.
This is also mostly wrong. In the USA, if you (a typical couple with a kid or two) earn ONLY $100k earned income, you will pay a bunch of payroll taxes, and a very small amount of income taxes that will probably be refunded to you in the form of a child tax credit. But if you earn $100k of long-term capital gains plus a tiny amount of wage income, you will pay zero income tax, a tiny amount of payroll taxes, and may even receive some refundable child tax credits.
At $1M of ONLY ordinary income, you will pay a bunch of payroll taxes, and a hefty amount of income taxes, probably about 25-27% average of income tax, and you will pay about 23.8% tax on your small amount of long-term capital gains. Plus any state taxes depending where you live. If you only have $1M of long-term capital gains, you will pay 23.8% income tax on most of it.
This is only partially true. The 0% long-term capital gains bracket mostly benefits the upper middle class or lower segments. The wealthy are generally so far above that level that it isn’t very useful for them anymore.
Let us take the numbers you have presented, there is $40K difference, in addition to that the salaried will pay SS, medicare, unemployment insurance etc.
A $40k difference on a $1M income isn’t as stark a difference as you implied earlier. It is a relatively small difference.
Yes, of course, and the salaried will receive Social Security benefits upon retirement, and they will receive disability benefits for their entire career, and their kids will receive some benefits as well, and they will receive Medicare benefits from age 65 until death, and they will receive unemployment coverage as necessary, etc.
The ideal scenario, as many times previously discussed here is to work at a salaried job for 20-30 years, at which point you’ve reached the last “bend” in the social security curve, and save enough during those 20-30 years to live on for the remainder of your life using lightly taxed long-term capital gains and/or dividends. Ask @intercst for details about that.
