When we think of Jeb Bush—grandson of a U.S. Senator, son and brother of former presidents—it’s pretty easy to classify him right away as a political stand-in for the one percent; a wealthy and connected former two-term governor who few us would compare to an average Joe. And based on what he makes in a year, he is, indeed, a one-percenter. But when it comes to paying taxes, Bush isn’t like a lot of his one-percent compatriots—he’s actually not unlike the rest of us. Most of his income has, over time, come from his labor, and not capital gains. Pretty much the case for most Americans.
We know because Bush, in the early stages of a presidential run, released years of tax returns, offering a look at where his money comes from. And like most Americans, when compared to the truly wealthy, Bush pays too much.
Our tax code treats income from capital much more favorably, which means that those at the very top wind up paying a lower effective rate than folks ranging from middle-income taxpayers all the way to Jeb. This shouldn’t be the case, but the only way it will change is if we start paying closer attention to the tax returns, not just of presidential hopefuls, but of members of Congress—the folks who decide tax policy.
In 2012, Bush’s income was just under $6 million—nothing to sneeze at—until you compare it with the income of the top 400 individuals, which was at least $140 million. But according to IRS statistics for that year, Bush’s tax rate was more than twice that of the top 400 individual filers, 35.5 percent vs. 16.7 percent. Even when you look down the list past the top 400, Bush still pays too much compared to his one-percent peers.
For the typical taxpayer in his bracket, the average rate was lower by more than 10 percentage points, 35.5 vs. 22.8. Why? Because according to Jeb’s Schedule C, his income mostly comes from speaking fees and consulting, while his peers’ income mostly comes from the appreciation of securities, mostly stocks, which we call capital gains, and which are generally taxed at no more than 20 percent. Wages, on the other hand, are taxed at up to 39.6 percent for the top marginal rate. Until that’s fixed, Bush, and the average middle-class taxpayer, will be screwed.
Cap gains represent more than two-thirds of the top 400 filers’ income, while they make up less than 10 percent for everyone else. Most of us aren’t eligible for this tax break: less than one in seven Americans own stock outright, as opposed to owning it in their retirement accounts. Like most Americans, Bush received very little income from capital gains—look at line 13 of his 1040 and you see that in 2012, he actually had more capital losses than gains.
Arguments that say Bush and the rest of us should pay more than wealthy investors is pretty thin. Writing in the Wall Street Journal, Bentley University’s Scott Sumner argued that the lower capital gains rate is justified because with investments, “much of the nominal gain,” over time, is an increase “simply reflecting inflation.” Yet you only need to hold your stock a year and a day—not very long—to benefit, and we haven’t had much inflation to worry about. Other opponents of hiking capital gains taxes, like Sen. Orrin Hatch (R-Utah), argue that the economy would be disrupted because raising rates “negates the benefits of the tax policies that have been successful in helping to expand the economy.” But wages and capital gains got the same treatment under President Ronald Reagan’s successful 1986 tax reform package that raised capital gains taxes from 20 to 28 percent and lowered the top marginal rate from 50 to 28 percent.
The argument in favor of raising capital gains taxes, though, isn’t complicated. Why, when most of us get out of bed every morning to go to work, should we be taxed at a higher rate than someone who can stay in bed and let their money go to work for them? Either way, money’s coming in, and when it comes to tax time, that money should be taxed equally under the law.
Polls suggest that Americans agree. Recent Gallup numbers show 62 percent of Americans think upper income Americans pay too little in taxes, yet Congress isn’t poised to take action and the imbalance between rates for capital gains and income remains. Presidential hopefuls voluntarily release their tax returns, but members of Congress, the people who’d actually vote to change our tax laws, do not.
More than half the members of Congress have a median net worth of over $1 million—true for Democrats and Republicans. While it’s possible that for most of them, their net worth comes from their wages, the public shouldn’t have to speculate, particularly if a significant number of them generate wealth from capital gains, and benefit from being taxed at a lower rate. My fix for this would be something called a 535 Report.
It would analyze the tax returns of all 100 senators 435 House members. No law would be required to accomplish this—the IRS could publish an anonymous compilation of Congress members’ tax data. Once the public were to get a glimpse of how, potentially, some members of Congress benefit from paying a lower effective tax rate than many of their constituents, members of Congress could be embarrassed (shamed, even) into enacting meaningful reform. If Congress tried to keep the information under wraps, we the people would have to hold them accountable. All it would take is one brave member of Congress—Sen. Bernie Sanders, let’s say—to formally request that the IRS prepare the report.
Sanders and Bush, both running in 2016, probably don’t agree on much policy-wise, but they might find common ground with the idea that neither Sanders, nor Bush—nor the middle class—should pay a higher rate than the richest among us. Bush bills himself as a tax-cutter, but unlike many of his Republican opponents, he hasn’t signed a pledge not to increase taxes if elected. It’s been noted that Bush might have set his taxes for political reasons, paying a higher rate than he otherwise might have in order to avoid Mitt Romney’s 2012 problem: appearing out of touch with mainstream America by having too low a tax rate. But whatever the motivation, he is, in fact, paying a higher rate and illustrating the disparity.
A 535 Report would enable taxpayers to better understand how tax policy affects their wallets and the wallets of those who enact policy. At a minimum, we’d have a small measure of transparency. Potentially, we could have tax fairness once and for all.