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Is Tax Reform Viable?
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My Beautiful Capital Gain
An investor ponders taxes and the 99 Percent
This past year was a very good one for me: a large media company purchased the enterprise in which I had made a relatively small investment. For the sake of discussion, let’s say my share of the deal netted me $7 million, more or less. A good day at the office by any standard.
For this happy transaction, my accountant advised me shortly thereafter that I would likely owe Uncle Sam a little more than $1 million in tax. A million dollars seemed like a large check to write to the government, and that started me thinking about America’s tax policy. Specifically, I recalled Warren Buffett’s observation that his secretary paid a higher tax rate than he did and that it was hard for him to justify that advantage. I wondered what Warren’s secretary would be taxed if he or she earned $7 million being a secretary. The answer is that secretary would have to pay close to $2.5 million in taxes, $1.5 million more than I would.
The difference, of course, is that my good fortune was a long-term capital gain, and the secretary’s good fortune was “earned income.” On the face of it, it’s hard to understand the logic of earned income being taxed at about two and a half times the rate of a capital gain. My first thought was of the advice of certain commentators: if I didn’t think I was paying enough tax, I could always voluntarily pay at the same rate as Warren’s secretary. Talk about a nonstarter: no way am I going to voluntarily pay more. That noble act would neither correct the unfairness of the system nor make much of an impact on the country’s unbalanced budget.
Perhaps I could justify my lower rate on the basis that I had made my investment a few years ago, that some of my return was due to inflation, and that government arguably bore some responsibility for that inflation. But when I dug a little further, I found that over the three years my investment was at risk, inflation averaged about 1 percent annually. Hardly enough to justify the $1.5 million tax advantage. If the goal of a lower rate for capital gains was to compensate for inflation, wouldn’t it be easier simply to index the gain for inflation?
How about the argument that my type of income is better for the economy than the secretary’s type of income because my investment creates businesses, jobs, and prosperity? Sorry, I can’t buy that. Earned income has the potential to create the same sort of economic value as investment income. As for the argument that my investment was at risk and I deserved a little bonus for taking that risk, such reasoning would have more merit if one could claim that earned income bore no risk, such as the risk of layoffs.
As for the argument that folks like me wouldn’t invest our money and stimulate the economy unless we got a preferential tax rate, I don’t buy that either. What else would we do with our money except to continue to invest in new and emerging businesses, even if our returns were subject to the same rates as our earned income?
Alas, I can find no way to justify my good-fortune tax rate. I reluctantly conclude that the few of us who can afford to make substantial investments (the fortunate One Percent) can also afford to invest in the careers of politicians who will vow to keep our unfair tax advantages.
—Dal LaMagna (MBA 1970) is president and CEO of Brooklyn, New York–based IceStoneUSA, which makes countertops out of recycled glass and cement. The founder of Tweezerman, he is the author of Raising Eyebrows: A Failed Entrepreneur Finally Gets It Right.
(Illustration by Robert Saunders, photo courtesy Dal LaMagna)
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