We are a compassionate society that strongly believes in equality and fairness. Such noble principles, however, are notably absent from our tax system, which is regressive rather than progressive, meaning that the effective tax rate decreases as income increases. For example, if one earns less than $113,700 in 2013, she will pay 7.65% in payroll taxes but will pay only 1.45% on any income above that amount.130 In addition, low or middle income families spend a higher percentage of their earnings on routine purchases that are also hit by sales tax and other hidden taxes, such as taxes on gasoline.
If you are a working person, you may end up paying up to 35% of your income in taxes, yet as an investor (non-worker) the most you pay is only 20% in terms of the Federal tax rate. We are talking about the tax rates on ordinary income earned by working Americans, versus the tax rates on passive income, such as the capital gains—investment income derived from property, stocks, bonds, etc.—of corporations and wealthy individuals.
