We need a fairer tax

The stories about millionaires paying at a much lower tax rate than most ordinary folks - hedge fund managers at 15 percent, for instance, or Warren Buffett's complaint about his secretary paying at a higher rate than he does - prompts this examination of preferential tax rates.

The IRS defines earned income as that from wages and salaries, reported on a W-2.

Unearned income is everything else - capital gains, interest, dividends on stock and a relatively new one - carried interest, the money earned by many on Wall Street. Carried interest is taxed the same as capital gains. Of these, only interest income receives no preference.

It was President George W. Bush's second tax cut in 2003 that slashed the tax on capital gains and dividends, both to 15 percent, while the tax on earned income was 35 percent.

Prior to that, the tax on capital gains was 28 percent and dividends were taxed the same as earned income.

The cut on gains was particularly offensive, as that is the rate on much of the income for the wizards of Wall Street.

It is often claimed that many middle-income people are investors, so the cuts were considered fair.

However, for perhaps 80 percent of them, their only investment is in their retirement accounts, IRAs and 401Ks, for example. For these accounts, capital gains and dividends are not taxed at all until retirement, then combined with all the contributions to be taxed the same as earned income.

For those with more money to invest, there is of course great value in the reduced rate on gains and dividends.

Tax on capital gains has long been considered for preferred treatment, the gains accumulating over years but taxed in a single year.

With the past explosive growth of stock prices now unlikely to repeat, preferential taxation of capital gains should be less important.

Also, at the owner's death. capital gains are erased.

The reason given in 2003 to reduce the tax on dividends was that corporations providing the dividend have paid a tax on income, thus arguing that taxing the dividends is a double tax.

However, many dividend-paying corporations have been highly successful in avoiding paying almost any tax.

That alone blows the argument.

This was purely a gift for those in 2003 who owned dividend-paying stocks.

For those who invested later, the tax break raised the value of such stocks, raising their per-share price.

"Double taxation" was simply the excuse for this gift, not a reason for doing it.

For the great majority of workers, these preferential rates are no help at all, and it's an insult that working for income is treated as less important than earnings made from the comfort of one's home.

If we value a fair tax structure, we can't keep these big preferences that favor those among us most able to pay.

Congress in 2001 and 2003 included a sunset provision in the Bush cuts, knowing that without that, deficits would explode.

In reality, it turned out worse than anticipated because of the benefit extended to carried interest income. I expect President Obama will allow the Bush cuts to expire at the end of the year.

That would eliminate the preference for dividend income and also raise the tax on capital gains and carried interest from 15 to 28 percent. I think this sun setting would be virtually certain if he is defeated in November by a man committed to making the cuts permanent.

Early next year, whoever is president should send Congress a bill to reinstate those parts of the Bush cuts important to the middle class.

Can you imagine that tax-hating Republicans would deny these cuts for low to middle incomes?

- Victory Reilly was trained by the IRS for its VITA program and has been preparing free tax returns in Aiken for 20 years.