My Taxes Are Obscene

Having just completed my tax return, I can now confidently assert that my taxes are obscene – obscenely low.

Let me explain. My wife and I started doing the double-income-no-kids thing in 1984, when the Dow was at 1400. By now we’ve cut way back on our working hours, and make up the difference with dividends and capital gains. (That’s how I have the time to write articles like this one.) In 2004, I bet on oil and against the dollar, so I had a good year.

And because I’m lucky enough and clever enough to make money without working, my Uncle Sam loves me. If you work for wages, he doesn’t love you nearly as much.

I guess I already knew that, but seeing it play out on my 1040 made it all real. When you wade to the bottom of Schedule D, to the figure-your-tax worksheet on page D-9 of the instructions, you discover what the tax rate on investment income is: 15%. It’s easy to get lost in all the copy-this-line-to-that-line and subtract-this-from-that, but when you hit line 24 and it says “Multiply line 23 by .15,” what you’ve got on line 23 is long-term capital gains and qualified dividends. You could have a billion dollars of this kind of income, and your tax rate would still be 15%.

You might think that last line is just hyperbole – I did when I first wrote it – but in fact somebody did have at least $3 billion of dividend income in 2004: Bill Gates. Because he’s an insider, all his transactions in Microsoft stock have to be public. At last count, Bill owned slightly more than a billion (1,057,499,336) shares worth almost $25 billion, slightly more than half of what Fortune magazine estimates as a $46.5 billion nest egg.

For years Microsoft reinvested its profits in the business rather than paying dividends, but by 2004 it had built up far more cash than it knew what to do with. So on December 2 the company paid a special dividend of $3 a share, giving Bill a $3 billion payday. I hope somebody sent the cancelled check to the Smithsonian.

I suspect Bill Gates doesn’t do his own taxes, but if he did, he’d get to that same worksheet on page D-9, and write a number somewhat higher than $3 billion on line 23. He’d multiply it by .15 and get at least $450 million – his tax on the special dividend.

Now, a conservative might say: “What do you want out of the poor guy? He paid $450 million dollars!” And I admit, that’s a lot of money. It pays for three whole days of the Iraq War, maybe four if things are unusually quiet. I’m only picking on Bill because his numbers are so easy to find. It’s hard to make any guesses about fellow multi-billionaire Warren Buffett’s investment income, because his company (Berkshire Hathaway) doesn’t pay a dividend. But Warren has already complained publicly about a tax system in which he pays a lower rate than his secretary.

And that’s the obscenity. Not the $450 million, but the 15%. Just for laughs, I thought I’d figure out how low your wages could be and still qualify you for a 15% marginal tax rate. Incomes less than $100,000 take you to the tax tables on page 60. They’re just columns of unexplained numbers, but with a little high school math you can deduce the rates from the tables. Each line of the table represents $50 of income, so at a 15% marginal rate your taxes go up $15 for every two lines.

Where does that start to happen? If you’re married filing jointly, like me, it happens when your taxable income reaches $14,300. At that point you pay $1,434 in taxes, and at $14,400 you pay $1,449 – $15 more. If you’re single, you hit the 15% marginal rate at $7,150 when you pay $719 – an extra $100 in tips raises your tax $15 to $734. A Bill Gates or a Warren Buffett could toss that extra Benjamin on the table without even noticing, and the waitress would pay the same tax on it that he did.

Maybe more. A wage-earning married couple is up to a 25% marginal rate at $59,000, and a single person at $29,050.

Let’s flesh that out. Suppose you’re single, live alone, and have $29,050 in taxable income (line 42). Working backwards, the $3,100 personal exemption (line 41) and the $4,850 standard deduction (line 39) give you an adjusted gross income (line 36) of $37,000. Let’s say you didn’t have any income other than wages, and that you didn’t manage to set anything aside for your IRA last year – fairly typical at this income level. That means line 36 comes straight from line 7 – the wages, salaries, and tips number on your W-2.

A person who works full-time puts in about 2,000 hours a year (40 hours times 50 weeks, assuming two weeks of vacation). So $37,000 on your W-2 means you make $18.50 an hour, on average. That’s not bad. You earn more than triple the minimum wage ($5.15), so you might work in a unionized factory, do bookkeeping or some other skilled office work, sell something on commission, or manage a handful of people at WalMart or McDonalds. You might even be a poorly-paid professional like a teacher.

So if that’s who you are, the next $100 you make by working overtime or taking a second job will cost you $25 in federal income tax. That’s $10 more than Bill and Warren and I pay on our next $100 of dividends.

A married couple’s total rate reaches 15% at $65,200, when they pay $9,781. A single person hits 15% at $32,600. So a wage-earning married couple with $66,000 of taxable income pays a higher total tax rate than Bill Gates. And not because Bill hires an army of accountants to do something fancy with his money. (He may, but he wouldn’t have to.) Bill and Warren and I pay that little because the government doesn’t even try to get any more out of us. Our uncle loves us.

Maybe he loves you too. If you belong to the investor class, you may at times feel guilty about being such a favored niece or nephew. Maybe in weak moments you even sympathize with those poor laboring schmoes who pay the high tax rates. You shouldn’t. If they were real Americans, they’d be letting their money do the work, rather than punching a clock and doing it themselves like a Pakistani or an Indonesian. Don’t identify with them. Those people aren’t like you and me. By the end of a long hard day, they’re dirty and sweaty and look downright disgusting.

No wonder their uncle doesn’t love them.

Doug Muder

17 March 2005

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