Starting in the early 1990s with a Democratic Congress (and continued by other congresses, Republican and Democrat, since), the rate of tax on "passive, unearned income" has been in decline, but someone has to pay to keep Uncle Sam's lights on, so the tax on workers' wages have diverged, until today, when the tax bite out of a worker's wage is double the tax taken on wealthy investor with the same amount in "passive income."
The easy explanation for this is that workers don't change their behavior when you raise payroll taxes (you still show up for work because you still you have to pay your mortgage), while investors are prone to changing their behavior depending on the tax code.
The more complete explanation is that, since the Reagan years, the share of national wealth owned by the richest Americans has gone up and up, and so has their political power, and so the political will to tax the wealth of the 10%, the 1% and the 0.1% has been steadily leached out of US politics.
Taxing workers more than investors is fair, conservatives also argue, because investors and workers are really the same people at different stages of their lives. When you’re young, you save and pay high tax rates on your wages. When you’re old, you get to enjoy the lightly taxed proceeds of that invested income.The wrench in these arguments is the massive jump in inherited American wealth—driven by rising income inequality and loose tax laws. In practice, the person who successfully accumulates assets is often not the person who spends them. Affluent retirees are increasingly reluctant to even touch their nest eggs. A huge and disproportionate share of the nation’s largest fortunes is in the hands of people in their 80s and 90s. And the estate tax, already very easy for the wealthy to avoid, is targeted for elimination by the Trump administration.
As a result, an unprecedented amount of wealth may soon be inherited. The generation on the receiving end of this familial largesse will get a tax break every time they cash in on the fruits of others’ labor.
Why American Workers Pay Twice as Much in Taxes as Wealthy Investors [Ben Steverman/Bloomberg]
