John Oliver on income inequality (updated)

I like Oliver’s stuff because he’s informative as well as funny:


A couple more points on the estate tax: As Oliver points out, only a microscopic proportion of estates — a mere 14 out of every 10,000 — pay any federal estate tax at all. He could have added that even for those estates, the tax applies only to the portion of the estate above the cutoff amount.

This same point is often misunderstood with respect to income tax. For example, single taxpayers with a taxable income over $406,750 in 2014 are in the 39.6 percent bracket, but they pay that tax rate only on the fraction of income that exceeds that cutoff. The rest of their income is taxed at multiple lower rates.

(And this is taxable income we’re talking about, after subtracting off deductions and what-not. In addition, most investment income income is taxed at a far lower rate. Also, unlike earned income, unearned income is not subject to Social Security tax.)

Back to the estate tax: Most of the value of large estates represents capital assets such as stocks, real estate, closely held businesses, etc. When heirs eventually sell the assets they inherit, they pay tax on the increase in value of those assets only since they inherited them. Any value increase before that point is not taxed at all. So the notion that the estate tax amounts to double taxation is nonsense.

Update: The post previously said that investment income isn’t subject to Medicare tax. As I belatedly remembered, that’s not quite true. One of the provisions of the Affordable Care Act is that net investment income is now subject to a 3.8 percent Medicare tax, but this applies only to people with a “modified adjusted gross income” above a certain limit, which is $200,000 for single taxpayers. The details can be found in a page on the IRS website.

In addition, it’s worth pointing out that the personal exemption phases out for very high-income individuals (which is mathematically equivalent to an additional tax in the income bad affected), and of course there’s a complication called the Alternative Minimum Tax.

Yes, this is unnecessarily complicated, and it would be good to simplify the personal income tax. Unfortunately, most “simplification” proposals considered by Congress in recent years involve reducing the number of tax brackets, which would not significantly simplify tax calculations at all but would have the effect of shifting more of the tax burden from the rich onto the middle class. If you’re wondering why that is, think about who it is who can afford to hire lobbyists.

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