Should Investment Income be Taxed Lower Than Wages?

by Sean Bryant on February 1, 2012

Over the last few months one of the hot topics has been whether or not it is fair that investment income is taxed at a lower rate than wages. A couple of weeks ago Republican presidential candidate Mitt Romney released his 2010 tax return and it showed that he paid roughly 15% tax on around $21 million in income.

At the current time the top tax late for dividends and capitals gains is 15%. For those you you who don’t know capitals gains are the proceeds from selling an investment. The top tax rate for wages is currently at 35% but you need to earn over $388,000 to qualify for that.

The stance that the Occupy Wall Street movement is taking is that individuals who make up the overwhelming majority of the wealth in the United States (aka the 1%) should be paying a higher rate on investment income. President Obama has laid out a plan that calls for the investment tax rate to increase to 20%. During his State of the Union speech he also talked about what he likes to call the “Buffett rule,” which is named after investor Warren Buffett. This rule would make it so that anyone making over $1 million would pay at least 30% off their income in taxes. It wouldn’t matter if they were wages or from investments.

Republicans are worried that a system like this will hurt economic growth in the United States. It would be harder for companies to raise capital which in turn could further hurt job growth. If an individual is going to be taxed at the same rate on his investments that he is on his wages that he is less likely to buy an sell investments. By doing this you could see a drop in the financial markets which would also hurt economic growth.

Personally I feel that both sides need to come together and hammer out a plan that is not only going to increase tax revenues but also allow for people to feel comfortable taking a risk by investing money in the first place.

What are your thoughts on this issue? Leave a comment and let us know.

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Sean Bryant

Sean Bryant created in 2011 to help pass along his knowledge of finance and economics to others. After graduating from the University of Iowa with a degree in economics he worked as a construction superintendent before jumping into the world of finance. Sean has worked on the trade desk for a commodities brokerage firm, he was a project manager for an investment research company and was a CDO analyst at a big bank. That being said he brings a good understanding of the finance field to the One Smart Dollar community. When not working Sean and his wife are avid world travelers. He enjoys spending time with his two kids and dog Charlie.

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