Do rich people really pay no taxes on their investment returns?

[Gingersnap]

Do rich people really pay no taxes on their investment returns?
By Matt Krantz, USA TODAY

Q: Is it true that rich people pay no taxes on their investment returns?


A: Given the increasing concentration of the world’s wealth, it’s tempting to figure the rich are getting a free ride when it comes to taxes. But, with investors in the U.S., the tax code provides just the opposite.

First of all, issues of fraud, cheating and tax evasion by the wealthy goes behind the topic of this column. There’s no question that crafty folks forever have played games with taxing authorities to hide their wealth. Tricks used to reduce taxes range from bribing to simply hiding wealth. Certainly, there are plenty of rich investors who have hired accountants that have illegally, or perhaps legally, reduced their investment taxes to $0. That’s the subject of another forum.

But here, we can talk about the rules when it comes to investing. And there’s the ironic part. At least according to the U.S. tax code, it’s lower-income families, not the rich, that get a free ride on taxes due on investment gains, or capital gains. For the tax year 2010, lower-income households in tax brackets below 25% paid a 0% capital gains rate. Meanwhile, the bulk of households that fall into a tax rate of 25% or higher pay the 15% maximum capital gains rate.

Meanwhile, any gains on collectibles, say if a wealthy person were to sell part of a prized art collection, is taxed at a much higher 28% capital gains rate.

USA Today

[Wei Wu Wei]

They pay less in long term capital gains returns taxes than they do in income tax, and the amount of each of these sources of income differ greatly depending on your economic class. Obviously it's not a perfect divide but people making $25,000 a year are not going to have as large of a percentage of their income in the forms of capital gains returns as someone making $300,000 a year. If you have enough money, you can shift your assets in a way that is not possible for someone without money, which results in lower effective tax rates.

[lacarnut]

They pay less in long term capital gains returns taxes than they do in income tax, and the amount of each of these sources of income differ greatly depending on your economic class. Obviously it's not a perfect divide but people making $25,000 a year are not going to have as large of a percentage of their income in the forms of capital gains returns as someone making $300,000 a year. If you have enough money, you can shift your assets in a way that is not possible for someone without money, which results in lower effective tax rates.

You heard of the minimum alternative tax dummy. That blows your theory out of the water.

[Lager]

They pay less in long term capital gains returns taxes than they do in income tax, and the amount of each of these sources of income differ greatly depending on your economic class. Obviously it's not a perfect divide but people making $25,000 a year are not going to have as large of a percentage of their income in the forms of capital gains returns as someone making $300,000 a year. If you have enough money, you can shift your assets in a way that is not possible for someone without money, which results in lower effective tax rates.

Which is why people making 25 k a year pay very little in income taxes. And, if they have a family may not pay any taxes at all, plus, may actually get a refund anyway thru EIC. So you see... all is not always as one sided as your personally constructed world view might indicate.