What is a fair share of taxes?

Combing the tax code to find every possible (legal!) deduction, offset or credit is a time-honored tradition for Americans during income tax season. But our tax laws don’t treat all income equally — which means some people pay far less than their fair share.

In 2006, for example, the 400 richest Americans had an effective income tax rate of 17 percent – the lowest in 15 years – and an average income of $263 million, a 23 percent jump over 2005. From NPR:

Bill Gale, co-director of the Tax Policy Center at the Brookings Institution…says the richest Americans had a relatively low tax burden because most of their income is in the form of capital gains, which are taxed at very low rates relative to wage income.

Capital gains is basically money made from other money, earned from increases in the value of financial instruments (like stocks, bonds, and interest income) rather than from clocking hours on the job. And that’s where those 400 Americans make the majority of their income:

Capital gains made up 63 percent of the richest 400 Americans’ adjusted gross income in 2006, or a combined $66.1 billion. In all, the 400 reported $105.3 billion of adjusted gross income in 2006, the most recent year the IRS has data for.

Yes, income tax rates in the U.S. are generally progressive – but those tax rates apply to wages, not capital gains. All the same, you’ll still hear arguments like this, defending the status quo:

When it comes to taxes paid…[t]hose earners in the top 1% pay 39.89% of all federal individual income taxes. The bottom 50% of earners pay just 2.99% of those taxes.

But so what? If 40% of all oranges are purchased by residents of Florida, and 30% by those in Alabama, that tells you next to nothing about which families are buying how many oranges.

Under our current federal tax structure, if Chris makes $150K in wages in a year, and Pat makes the same on stock options, Chris pays more in taxes than Pat. That’s the proverbial free lunch for Pat – but only because Chris is paying for the meal.

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