Lets try it this way with no tax on dividends:
Taxapeyer A has 90K Wage income. He pays 7.5% FICA and an effective tax rate after deductions of 25% on total wages of 90K. He has no dividend Income. He pays $29,250 in taxes, an effective tax rate of 32.5%
Taxapeyer B has 160K income. He pays 7.5% FICA (up to 90K) and an effective tax rate after deductions of 35% on total wages of 160K. He has 35K dividend Income. He pays 62,750 in taxes, an effective tax rate of 32.2%
Not a big difference eh?
Tax Tax
TABLE1 Income Rate Tax Income Rate Tax
Wages (tax) < FICA Cutoff 90,000 7.5% 6,750 90,000 7.5% 6,750
Wages > FICA Cutoff 0 0.0% 60,000
Total wages (tax) 90,000 25.0% 22,500 160,000 35.0% 56,000
Yotal Tax on Wages 29,250 62,750
Dividend Income 0 0.0% 0 35,000 0.0% 0
Total Income $90,000 $195,000 0
Total Tax $29,250 $62,750
Effective Tax Rate 32.5% 32.2%
When you factor in the employer match on FICA, the higher income person has a lower effective tax rate:
TABLE2 Income Rate Tax Income Rate Tax
Wages (tax) < FICA Cutoff 90,000 15.0% 13,500 90,000 15.0% 13,500
Wages > FICA Cutoff 0 0.0% 60,000
Total wages (tax) 90,000 25.0% 22,500 160,000 35.0% 56,000
Yotal Tax on Wages 36,000 69,500
Dividend Income 0 0.0% 0 35,000 0.0% 0
Total Income $90,000 $195,000 0
Total Tax $36,000 $69,500
Effective Tax Rate 40.0% 35.6%
No lets look at what Warren Buffet was trying to say. A really high income gets paid a $1.0 million in wages. Now add in $10 million in Dividend income ($200 million paying a 5% yield would do it). With a zero tax rate on dividends the effective tax rate on all income is 3.5%.
TABLE3 Income Rate Tax Income Rate Tax
Wages (tax) < FICA Cutoff 90,000 15.0% 6,750 90,000 15.0% 6,750
Wages > FICA Cutoff 0 0.0% 1,000,000
Total wages (tax) 90,000 25.0% 22,500 1,090,000 35.0% 381,500
Yotal Tax on Wages 29,250 388,250
Dividend Income 0 0.0% 0 10,000,000 0.0% 0
Total Income $90,000 $11,090,000
Total Tax $29,250 $388,250
Effective Tax Rate 32.5% 3.5%
Warren Buffet obviously understands. I would hope that you would take the time to do so as well, for your own good if nothing else.
Putting that aside, you are also confusing the argument about dividends and double taxation. Double taxation occurs because companies are taxed on their income before they distribute dividends. (If you wish to argue for the elimination of double taxation its far better to do so at the corporate level. That at least (a) eliminates the tax favoritism of debt over equity and (b) doesn't foster income inequality among individual taxpayers, i.e., put us at each others throats.
You wrote:
Income taxes have already been paid if the person is now making dividends and capital gains on the money
This is totally fallacious and contrary to the tax code.
Income is income.
For example,
I work and make 10K.
I pay tax on 10K income.
I put my 10K in the bank, it pays $500 interest.
I now have $500 income.
It is logically inconsistent that dividend income not be taxed at the individual level. Again, interest income is taxed. Interest and dividends are both "investment" income. The principal of both is at "risk". The market determines what that level of return should be based on risk. I can choose more risk or less. By changing the tax-effected rate of return, the government creates a perverse incentive to take more risk than the investor's propensity. For true "free marketers," this is the poster child for bad government intervention in free markets.
If you wish to argue that dividends and capital gains should not be taxed at all, then in addition to violating free market principles, you are arguing for a system which spawned Marxism in opposition, that capital should be favored over labor.
In a perfect world a flat "effective tax rate" (including FICA)without any deductions, on all income is best because it represents equal treatment under the law.
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