Dear Mr. Tanji,
I was happy to read your column in this morning's Maui News. My adjusted gross income last year was $48,000 and I paid zero federal income tax. If I had earned the money as a teacher or a policeman, I would have had to pay 15% on whatever was left over after exemptions and deductions, but since the money came from capital gains and dividends, I was the kind of person Dubya and his legislator allies admire. Nowadays I guess I would be called a "job creator," although I cannot see why.
- a Haku Mo'olelo reader
received Sept. 9
It was a validating comment from a reader in response to a column. The column cited a Tax Policy Center report that: "More than 90 percent of the tax savings from preferential tax rates on long-term capital gains and qualified dividends go to taxpayers in the top quintile (top fifth) of the income distribution, and nearly half of the benefits go to people in the top 1/10th of 1 percent" ("Who benefits from tax expenditures?," Tax Facts, May 2, www.taxpolicycenter.org).
There are caveats to HM reader's example, but his notice that he receives a significant tax benefit for his income level compared to wage earners suggests there is an inequity. At $48,000 annual income, he would be below median income for Maui County, which is running about $60,000 for a household (usually involving two or more wage earners).
Given Maui County's cost of living, it would be reasonable to expect HM reader needs all of his income to maintain a standard of living. But his level of income places him among households that receive other tax benefits. Among households nationally, 41 percent of those earning $40,000 to $50,000 a year (17.2 million) receive tax benefits, according to a Tax Policy Center report.
HM reader just receives more tax benefits because of how his income is derived. As he notes, the average wage earner in his bracket still will pay some income tax after deductions and credits.
In fact, another Tax Policy Center report ("Why some tax units pay no income tax," July) notes that the reduced taxes on capital gains and dividends kick in for tax units beginning at the $40,000 level. The data show that the greatest benefit is for incomes of more than $100,000, of which 20 percent have nontaxable income through a lower capital gains/dividend rate.
HM reader may be among the 22 percent of households in his income bracket who benefit from reductions in tax liability provided to the elderly. Overall, 44 percent of all tax units nationally that pay no taxes receive an exclusion for Social Security. It may be a main income resource for some elderly. Of 28.3 million households earning $10,000 to $20,000 a year, 9 million receive "elderly tax benefits" that result in no tax liability. Of 13.7 million in HM reader's bracket, about 35 percent have elderly tax benefits.
There is some justification for HM reader's tax benefit, if it is derived from investments made from prior earnings on which he paid income taxes. Capital gains and dividends from post-tax investments are different from retirement investments such as IRAs or 401(k)s made before taxes. HM reader may be an example of an individual able to parlay earned income into a successful investment strategy that rewards him with continuing income. It would be unfair to penalize him for success.
But it's possible HM reader, as with many other high-income investors, did not pay taxes on his investment nest egg - if his investments were derived from stock options awarded to corporate executives in lieu of cash bonuses, for example.
Payouts from IRA and 401(k) accounts are treated as normal income, not as capital gains that receive a tax benefit. What's good for the middle-income saver ought to be good for the high-income bonus recipient.
* Edwin Tanji is a former city editor of The Maui News. He can be reached at hakumoolelo@earthlink.net. "Haku Mo'olelo," "writing stories," is about stories that are being written or have been written. It appears every Friday.
