May 21, 2008
Federal Tax Cuts on Investment Income Heavily Favor Top One Percent of West Virginians
by Ted Boettner
In 2003, the U.S. tax rate for capital gains and corporate stock dividends was reduced dramatically. The top tax rate for capital gains and dividends dropped to 15 percent. Prior to these changes, dividends were taxed as ordinary income (which for the wealthiest meant a top marginal rate of 39.6 percent), while the top rate for capital gains was tat 20 percent, reduced from an earlier rate of 28 percent.
Both of these rate reductions are set to expire after 2010.
A new
report from Citizens for Tax Justice (CTJ) shows that these
tax cuts heavily favor the wealthiest Americans and West
Virginians. The top one percent of taxpayers in West Virginia
making an average income of $667,800 a year will gain $9,168 in
2009, while the bottom 99 percent making an average income of
$63,400 a year will gain only $147.
2003 Tax Cuts on Investment Income in West Virginia
Source: Institute for Taxation and Economic Policy Tax Model, May 2008
For the bottom 80 percent of taxpayers in West Virginia, the average gain will be just $18 in 2009. The reason capital gains and dividend tax cuts have not helped middle- and lower-income families is because their investments are typically in 410(k) plans, Individual Retirement Accounts (IRAs) or other similar retirement saving vehicles. According to the CTJ report, taxes on such investments are deferred until retirement and then treated as “ordinary income.” This means most Americans, and almost all West Virginians, will not benefit from cuts in the capital gains and dividends tax rate.
Reduced rates for capital gains is unfair to the vast majority of wage-earners in West Virginia who must pay taxes at a higher rate than the wealthy few who receive much of their income from investments.
Recently, billionaire investor Warren Buffett told reporters that because the capital gains tax was less than the income tax he only paid 17.7 percent of his income in federal taxes while his employees paid an average of 32.9 percent. Buffet offered a million dollars to anyone on the Forbes 400 list of wealthiest Americans who could show they paid a higher rate. So far, he’s had no takers.
While taxpayers in West Virginia and around the country saw very little benefit from these enacted tax cuts, they will be forced to deal with these fiscally irresponsible policies in the form of a mounting federal deficit.
The good news is that Congress and the next president can make sure these tax cuts expire and could enact legislation to treat capital gains income the same as wage income.