‘Worker Taxpayer’ earns her money by working (getting compensation by way of a W2) and ‘Investor Taxpayer’ earns her money from dividends in a $4 million stock portfolio she holds (its about 2.5% in yield – about right).
Let’s say they are both unmarried. Investor taxpayer does not work and has no compensation income. They are otherwise ‘equal’. Right? (Except that investor taxpayer fits the description of those who vituperate about lazy welfare recipients who sit on the couch all day and watch TV, right? I’ll keep the rhetoric down, because the facts are outrageous enough to speak for themselves.)
Worker taxpayer will pay $7650 in payroll tax, plus $21,617 in income tax for a total tax burden of $29,267.
Let’s look at investor taxpayer.
You would think they would be taxed at the same rate as worker, right? Wrong.
Because investor taxpayer receives all of her income from qualified dividends, they get a “special” tax treatment. Bear with me, we’re almost done. Generally, the maximum tax rate for qualified dividends is 15%, BUT HERE it is actually 0% because investor’s other income (remember she doesn’t work) is taxed at the 10% or 15% rate.
To refresh: Worker making $100K pays about $30K in tax.
Investor making $100K in qualified dividends pays $0 – no – tax. Huh? Yup.
What this means is that rich people – who are incented by tax policy to remain on their couches (too much earned income would otherwise trip them into the 15% dividend tax bracket) – are now getting off their couches and going to tea-party rallies to maintain this unfair redistribution of wealth in their favor.