How the Left Misleads On Tax Rates

The Left plays identity politics to gain and maintain power. Identity politics creates an “us versus them” mentality. One of the oldest versions of this is to pit the poor against the rich. The rich are rich because they cheat or get a better deal than you, and if we took from them you would be better off.

An easy way to do that is to play on ignorance.  Most people truly don’t understand taxes and how they work.  So it is easy to take a truthful statement and use it to play on this lack of knowledge in the area of taxes.  Take for example the following meme:  


Looking specifically at the following (punctuation added by me for clarity):

The rich are taxed at 15-20% on capital gains, dividends, and carried interest.
Middle class are taxed at 35%.

These two sentences are actually truthful (if you think “middle class” means $500k/year – but we’ll get to that), but they leave out A LOT of additional information – and that is intentional.  It is meant to make you think the following:

The rich are only taxed at 15-20% while I’m taxed 35%

But that’s not actually true.

We are talking about two separate tax types, income and capital gains, that both groups may or may not pay.  It doesn’t even bother to define what qualifies as “rich” or “middle class.” So what is the whole picture here?

First, regular income

Our current tax on regular income is a graduated system.  Here’s a look at current regular income and income tax rates:

Tax Rate Individuals Married, Filing Jointly
10% Up to $9,525 Up to $19,050
12% $9,526 to $38,700 $19,051 to $77,400
22% $38,701 to $82,500 $77,401 to $165,000
24% $82,501 to $157,500 $165,001 to $315,000
32% $157,501 to $200,000 $315,001 to $400,000
35% $200,001 to $500,000 $400,001 to $600,000
37% over $500,000 over $600,000

First, this is the tax rate based on your regular income.  Not all of your income will be “regular.”  Some of your income might be from the sale of stock, or from bank interest on a CD. Those types of income are “capital gains.”

Next, Capital Gains

Your capital gains rate will be different than your regular income tax rate.  Under the current tax system, the brackets are no longer based on your regular income tax bracket, but rather your maximum taxable income.

Long-Term Capital Gains Rate Single Taxpayers Married Filing Jointly
0% Up to $38,600 Up to $77,200
15% $38,600-$425,800 $77,200-$479,000
20% Over $425,800 Over $479,000

So if your taxable income is $500k, your capital gains rate is 20% on capital gains. But it is 35-37% on regular income.

Note that this is only on long term capital gains. Short term is always taxed as regular income (see the brackets above).

What’s Your Real Tax Rate

It only gets more complicated from here but hopefully you can see at this point how the meme is misleading.  Let’s drill down so we can make it more clear.

The meme says the middle class pays 35%. What is “middle class?” It depends on who you ask.  Generally, I think we can agree that around $100-125k might do it in some places (some places that’s not enough and in others that’s rich).

What about “rich”?  For sake of argument, let’s just call that $250k and up.

Using those numbers, let’s look at the meme’s data with more objectivity:

The rich are taxed at 32-37% on regular income; 15-20% on capital gains, dividends, and carried interest.
Middle class are taxed at 22-24% on regular income; 15% on capital gains.

That’s a very different picture when all things are considered.

Yes, I understand that a very wealthy person is going to have more capital gains than regular income, so percentage that they pay in total taxes may be a smaller total percentage of the entire pool of money.  But that’s a very different thing than suggesting they are taxed at a lower tax rate than poor and middle class people.

Also, just to note, the capital gains tax rates are specifically for long term capital gains.  Short term capital gains, such as something a day-trader might experience, are still taxed at regular income tax rates.

This was just a simplistic view. We didn’t even talk about the importance of investment in the economy, which is the very reason we have capital gains rates that are lower than regular income rate. If you want to read some real nerdy discussion about what else is wrong with Nick Hanauer’s views on this, there’s an article on Forbes that is great for tax wonks.

This is the problem with developing your opinion based on sound bites, memes, and tweets. They don’t look at the whole picture. And we haven’t even talked about the other flawed statistic in this meme about the unemployment rate.  Perhaps that’s one for another time.