As Washington stumbles from one crises to the next involving taxes and deficits, we need to take a moment to reflect upon exactly what is involved. The fundamentals of economics are still in play despite the words of “cliffs”, “debt limits” and “entitlements”.
So, the two basic elements of production, like in Gross Domestic Production are capital and labor. Capital consists of plants, equipment, stocks, bonds, cash, intellectual property, natural resources, etc. Labor is defined as those people that use all of that capital to produce goods and services.
You can take all of the cash, all of the equipment, factories, ships, planes, patents, natural resources and they would be useless without labor. You can stack up billions of dollars for someone to mow your grass, but if there is no labor to do it, the grass does not get mowed and the money is worthless. That goes for health care, auto mechanics, plumbers and yes, even lawyers. Without labor, capital is worthless. In short, capital is only a means of acquiring labor.
So, with that back drop, one would think that our government would want to tax labor the least but surely no more than capital. Such is not the case and you only had to look at the decisions of the last few days to see that.
As of now, the highest effective tax rate for wages (labor) is 39.6% yet the highest rate for long term capital gains and dividends is only 20%. The taxes for labor is almost double the taxes placed on capital. Now, when I say “long term”, just remember that if you hold a stock for six months and sell it for a profit, then that is considered “long term” and thus subject to the lower tax rate of 20%.
So, think of this. If a person has 10 million dollars to invest and he puts it into a company that pays a 5% dividend, he will get $500,000 a year. At a 20% tax rate, he pays $100,000 in taxes.
If he takes the same money, creates jobs or uses it to make a wage, he will be subject to a 39.6% tax or almost $200,000.
In short, labor is paying a penalty. Labor should be taxed at the same rate as capital and the mere ownership of property should not allow the abuse of another’s labor.
Travis M. Holley