The writer is a former chair of the US Federal Deposit Insurance Corporation and author of the upcoming book ‘How Not to Lose a Million Dollars’
How do you explain to young people entering the US workforce that government taxes will take some 20 per cent plus from their paltry pay cheques while some megabillionaires will pay next to nothing? Like most developed countries, the US has long given preferential tax treatment to people who make money from investments over people who earn a living from wages. The unproven rationale for this costly tax break is that it incentivises investment. But as wealth continues to flow disproportionately to investors and away from workers — a trend that AI will probably accelerate — this policy needs a rethink.
There are many ways the US tax code favours investment income. Most controversial are the lower rates that apply to capital gains. Wages face a top marginal rate of 40.8 per cent while capital gains (and dividend income) are taxed at a top rate of 23.8 per cent. Importantly, gains are taxed only when investors’ assets are sold or “realised”. The rate is zero if they hold them until they die. Then, their heirs receive a “step up basis” at the asset’s current market value. If a stock originally purchased at $10 is worth $100 when the share’s owner dies, that $90 gain will never be taxed.