you're getting downvoted for your comment being irrelevant to the discussion. If most of your income is salary, you will be paying a much higher effective tax rate than if most of your income is capital gains. The latter correlates with being wealthy.
> If most of your income is salary, you will be paying a much higher effective tax rate than if most of your income is capital gains.
Correct only for individual incomes above $165,000. Current long-term capital gains rate with ACA surcharge is 23.8%, and according to https://www.taxact.com/tools/tax-bracket-calculator.asp the effective income tax rate for a single individual goes above that at $166,000. Having any family or other dependents introduces new deductions, and so does contributing to an IRA or 401(k), extending that runway.
This also ignores the fact that planning to generate stable income via long-term capital gains is akin to planning on generating stable income by consistently winning the lottery.
1) the lottery has a negative expected value, investment does not. In the long run, this is a qualitative difference.
2) That is federal income tax, you've missed state, medicare and social security, and are also completely discounting the fact that the capital gains rate is bounded from above by the income tax rate.
3) most importantly, 165000/year isn't very much money. It is plenty to generate personal wealth. Most of the actual income in america is made well in excess of 165k/year, and much of that income is in the form of capital gains.
The article you linked concludes that "the wealthiest 1 percent are an outlier: 36 percent of their income comes from capital gains". As the graph suggests, that number quickly decreases to 10% and 5% when the group encompasses the wealthiest 5% and 10%.
So for those three groups the income not subject to capital gains tax constitutes 64%, 90% and 95%.
This is before the capital gains are even broken down into long-term vs short-term (which are taxed at plain old income tax rates).
I am still not seeing what led you to believe that the effective tax rate will be significantly lower.
> That is federal income tax, you've missed state
Mmm, okay. Well, I am not a CPA and not sure about other states, but California makes it easy by treating any capital gains (long-term or short-term) as income, so (at least for CA) the effective tax rate of someone relying on long-term capital gains will be pushed up, not down.
I agree though that if some other states have favorable treatment of long-term capital gains, the numbers would look different.
> medicare and social security
Both are subjects to wage limits, and at $166,000 (which will be a higher value once the state tax is incorporated) we're well past those limits.
> the lottery has a negative expected value, investment does not. In the long run
But a capital gains requires a sale, which means the position has been exited, and there's no long-run. True, it might be a partial sale of an asset, and in some case the proceeds of a sale are invested into another position, but at this point you're pretty much betting the new assets will increase in value and be a candidate for a sale. Hence my lottery comment.
