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Comment by OJFord | Hacker News Reader

> [in the US] people who don’t need their income are taxed less than people who do

I'm not American; I don't know the tax structure. But I can't even imagine that this could possibly be true, or what is true that is meant.

Without looking it up, I would assume that the USA subscribes to progressive taxation, under which the richer pay more tax in both absolute and relative terms.

Even if it has a flat rate of tax, (a structure, incidentally, that makes far more intuitive sense to me) the richer are still paying more tax in absolute terms, and equal in relative terms.

What Earthly metric is the author using?

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Different types of income at taxed at different rates. The US Federal Income tax is rather progressive, with those at the bottom paying a negative rate (so they get more back than they pay in) and the bottom 40% paying effectively 0%.

Taxes on investments, as this author is likely alluding to, are taxed at a different rate that can sometimes be lower than, say, someone in the top 20% is paying, even though the person earning the money through investments may be making millions and have a net worth of $1 billion. Warren Buffet posts his taxes each year, if you want to see a simple example of this. There are various arguments for and against this, but most of them are too simple and focus on the extremes. Overall though, this could be improved and optimized.

US taxes are weird (I think?) in that there are the posted rates, and then we all deduct lots of things (mortgage interest, charitable contributions, etc) and end up with an effective rate that is sometimes significantly lower.

Let's look at Person A vs Person B.

Person A is a football player and makes $1 million in salary per year. This is all taxed progressively, meaning that Uncle Sam takes off 39.6% of most of his income. As a result, he pays close to $400k in taxes.

Person B is an investor. He invests in Applied Materials, and they have a very good year. His stock is now worth $1 million more than it was at the beginning of the year. Some of it, he sells - he's gotta eat, after all. That sold stock is taxed like income. Note that as long as he isn't living like a rockstar, he probably didn't sell enough to put him into the top tax bracket; he's just paying his expenses.

The remainder is taxed at about 20% - capital gains is taxed at a lower rate. Thus, because he can control how much of the stock he sells, Person B ends up paying somewhere around 60% of the tax that Person A pays.

This system screws over people who make most of their income through salary and benefits those who make most of their "income" through investments.

This description isn't quite right, though you're mostly in the right direction.

If you buy a share of stock (or any other asset) you don't pay any taxes until you sell it (or you die) and realize the income. That income is called a Capital Gain and is taxed either at Short Term or Long Term rates. Short Term gains (under 1 year) are (more or less) taxes just like regular income. Long Term gains (over 1 year) are taxed at a lower rate.

There are generally pretty good reasons for the different rates and the US is not at all unusual in this way. Virtually all countries have similar setups. The UK (where OP is from) does this.

It's also worth nothing since the blog author was talking about real estate that rent collected from residential real estate is NOT a capital gain, but is ordinary income.

It's even worse than you describe. For the part he doesn't sell, no taxes are owed on the capital gains. Only when capital gains are realised, are taxes owed. If he holds onto that stock forever he can keep compounding forever, without every being taxed.

Well you also can't spend paper gains, you have to sell and therefore pay taxes.

And you could, you know, lose money in the stock market.

Not always true about paying taxes - inherited assets are "bullet-vested" to the time of inheritance, with taxes only on increase in value after death.

> Well you also can't spend paper gains, you have to sell and therefore pay taxes.

Wealthy people don't have to spend their capital. They have enough income through e.g. dividends. E.g. Warren Buffett bought (through Berkshire Hathaway) Coca-Cola in 1989, and has never sold a single share. He has indicated he plans to keep holding on to them forever. Hence, he will never pay taxes on the capital gains.

> And you could, you know, lose money in the stock market.

That is true. But how is that relevant?

It's not so much that it benefits people who get income from investments as protects them from inflation. If you hold on to something for ten years and sell it for the same amount in constant dollars, the tax you pay on the increase in actual dollars is really a wealth tax.

In the US income tax is progressive but only a portion of the tax structure. The biggest factor is that capital gains are taxed at a much lower rate than earned income. (income from selling labor) There are also a number of flat amount / percent taxes, many of which vary by state. Finally, the tax structure is sufficiently complicated that those who can afford skilled accountants can further lower their paid taxes considerably through tricks and loopholes.

If you keep your money invested and never cash out, then you never pay tax. He mentions this later in the article. Also if you don't buy anything you don't pay sales tax.

I believe the author is referring to the lower tax on capital gains than on income in many situations. I haven't read it personally, but I understand that Thomas Piketty's “Capital” discusses this at length where there's a built-in structural favoring towards capital's rent over labor's wages.

Also tax havens and loopholes I suspect. Bon Jovi has some number of strawberry bushes on his estate so that he can count it as a farm for tax purposes.

It's the American metric - In America, the richer you are, the more you're able to afford hiring shifty accountants and lawyers who hide away your money and get you out of paying taxes. The more you're able to create offshore accounts and shell companies to hide your earnings. The more you're able to pay off politicians and others to look the other way while you do this.

The metric the author is using is the fantastic state American politics are in.

He's using the "I feel guilty" metric. It's useful in a lot of cases, but in his, it seems to cloud his reasoning to a large degree.

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