Of capital gains, taxes and income inequality

January 23, 2015

On Monday the anti-poverty charity Oxfam reported that the top 80 of the most wealthy people in the world have the same worth as the poorest 3.5 billion, and predicted that by 2016 the richest one percent would own more than half the world’s wealth. Data from Forbes show that 35 of those top 80 are American, and it is safe to say that they did not get there by working overtime at their respective job sites.

As this Reuters graphic shows, the S&P 500 index grew by 13.69 percent in 2014, but mutual fund capital gains could exceed $300 billion, far outpacing the $239 billion yield from a 32.39 percent increase in 2013. In a Reuters report yesterday, Tim McLaughlin noted that the number of funds paying out capital gains increased to 61.4 percent in 2014 from 57.5 percent in 2013, and that preliminary percentage could adjust higher.

Why the disparity? Tax liability is a function of a fund’s composition, as McLaughlin  explains:

Funds that turn over their portfolios more frequently than peers tend to put their shareholders at a disadvantage by producing a higher percentage of short-term gains. Short term gains are taxed the same way as ordinary income, whereas long-term gains—on holdings kept in a portfolio for more than a year—are taxed at a much lower rate.

Wonkblog’s Christopher Ingraham noted earlier this week that 2012 IRS data show that only about 16 percent of Americans reported capital gains that year, and he included a nifty county-by-county map detailing the percentage of filers reporting such income. In Tuesday’s State of the Union address, President Obama called for raising the top capital gains rate from 23.5 percent to 28 percent, a proposal that seemed dead before he uttered it, with both chambers of the Republican-held Congress vehemently opposed. Venture capitalist Benedict Evans of Andreessen Horowitz wryly compared the British queen’s annual parliamentary speech to the State of the Union, tweeting, “So, every year the Queen reads a speech she didn’t write which will be implemented and the U.S. president reads a speech he did that won’t?” Time will tell whether American politicians can muster the will to work together to stem the tide of income inequality in the U.S.

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