Sunday, February 19, 2012

Nice chart showing the effective tax rates of the Top 400 Taxpayers and a very brief explanation of how this came to be...

From this chart, you can see the 400 taxpayers in the US (data from 2008) earn most of their income in what are called "Capital Gains" (56.8% --center chart) and a bulk of them pay an effective tax rate of between 10% and 20% (left chart).  Below the chart I give a brief (albeit not comprehensive)  explanation on how this works.

Source: NYTIMES
A Capital Gain (or loss--I am going to focus on Gain) is the difference between the buying price of a qualified investment (i.e. a stock) and the selling price. Really as simple as that.  Here is the important point: The time span between the buying and selling is going to determine how much tax you pay on that gain.

If you buy it and sell it within the same year (365 days) you have to included it as regular income and the gain is taxed at the marginal tax rate (assume you are one of 400 above) of 35%.

If you sell it anytime after one year (365 days) the Capital Gain in not considered regular income and is taxed at 15%. What a difference a day makes!

Over time, as the richest 400 (and ones above that threshold) moved from being income earners to financial and physical asset holders their overall effective tax rate decreased as well. Look at the list of them HERE. You can see that many/most of them were prime earners/entrepreneurs in the 80's and 90's and built very valuable physical and financial assets. Mostly financial assets, though, in terms of the value of the stock in the companies they created.
Not saying I agree or disagree---it is just the way it has panned out...What do you think???
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