While there’s been a big outcry to make the rich pay more in taxes, there is one thing in particular in the U.S. tax code that stands out as unfair, Democratic former Sen. Heidi Heitkamp told CNBC on Monday.
“One of the great discrepancies and inequities in our tax system is earned income is taxed at a higher rate than unearned income,” she said on “The Exchange.”
Earned income is what a person makes at their place of employment, while unearned income can mean things such as stocks and dividends.
That means that the person who works on an assembly line is taxed at a higher rate than someone sitting on a huge trust fund, said Heitkamp, a CNBC contributor. “Is that the value that we have in this country? Are we people who believe that if you make money from your money that you should be taxed less than if you make money from your labor?”
The wealthy like to invest in stocks, in part, because of the lower tax rate on capital gains. For assets held for more than a year, the rates are zero, 15 percent and 20 percent for 2018. Meanwhile, the federal tax brackets on wages go from 10 percent for the lowest earner to 37 percent for the highest. Short-term capital gains taxes for assets held for less than a year are tied to the individual’s federal tax bracket.
Qualified dividends, which are held for a certain period of time, are also taxed at the lower capital gains rate.
“There’s been this discrepancy and this idea that if you tax unearned income higher, people won’t save as much and that it won’t grow and allow for investment,” Heitkamp said.
However, she said that isn’t necessarily the case for those who have under $200,000 adjusted gross income, because their investments are already in something like a 401(k) or IRA, which are tax-deferred. Therefore, people are only taxed once they start taking out money, usually after retirement.
“It might create an even greater incentive to shelter that income in a … provision like a 401(k) or an IRA because you know that it’s not going to be taxed,” she argued.
Heitkamp isn’t jumping on board any specific Democratic proposal to make the rich pay more, yet.
Sen. Elizabeth Warren, who represents Massachusetts and launched her campaign for the 2020 Democratic presidential nomination earlier this month, has proposed a 2 percent tax every year on households with assets over $50 million and 3 percent on households with assets over $1 billion. Rep. Alexandria Ocasio-Cortez, D-N.Y., wants to slap a 70 percent marginal tax rate on income above $10 million. And independent Sen. Bernie Sanders, of Vermont, is looking at an estate-tax hike.
Even billionaire Warren Buffett has weighed in. He told CNBC on Monday he believes wealthy Americans aren’t paying enough taxes.
“The wealthy are definitely undertaxed relative to the general population,” Buffett told CNBC’s Becky Quick during a “Squawk Box” interview. “As we get more specialized, the rich will get richer. The question is: How do you take care of a guy who is a wonderful citizen whose father died in Normandy and just doesn’t have market skills? I think the income tax credit is the best way to address that.”
“That probably means more taxes for guys like me, and I’m fine with it,” he said.
contributed to this report.