|Figure 1: 2012 Qualified Dividends and Capital Gain Tax Worksheet|
The tax system in the United States favors income from property, while taxing wages more heavily. Property income includes interest, dividends, and capital gains, for instance. This post provides empirical evidence for this claim by documenting such favoritism in current selected Federal income tax forms.
The Federal system already imposes a heavy burden on wages, even prior to the calculation of income tax. Taxes to fund Social Security and Medicare (also known as Federal Insurance Contributions Act (FICA) taxes) are paid out of wages, up to a cap. But FICA taxes are not taken out of property income.
Americans who pay income taxes must file various forms, of which the 1040 form is a master form, in some sense. (The 1040A and 1040EZ forms apply to people with simpler situations.) The instructions for the 1040 form include various tables and methods for calculating taxes, depending on your situation. Figure 1, above, shows the Qualified Dividends and Capital Gain Tax Worksheet for calculating taxes on income earned last year. As I understand it, qualified dividends are dividends on stock held for more than a year. Capital gains are the (nominal) profits made by selling assets previously acquired. That is, they are the difference between the selling price of an asset and the price for which an asset was bought.
Notice that Lines 16 and 18 call out either a table or a Tax Computation worksheet. Figure 2, below, presents this Tax Computation Worksheet.
|Figure 1: 2012 Tax Computation Worksheet|
One can step through these worksheets and determine marginal tax rates on various forms of income, given certain assumptions. My notes on Figure 1 point out that the marginal tax rate on qualified dividends and capital gains is typically 15%. You can see in Figure 2 that the marginal tax rate on, for example, wages is progressive. The marginal tax rate increases with income, for various filing statuses. But, as I understand it, nowhere is it as low as 15%. So the structure of the Federal income tax, for taxes being paid this year for income earned last year, rewards those earning income from property and punishes labor.