As read by George Hahn. https://www.profgalloway.com/earners-vs-owners-2/ Learn more about your ad choices. Visit podcastchoices.com/adchoices
Chapter 1: What is No Mercy / No Malice about?
I'm Scott Galloway, and this is No Mercy, No Malice. We talk about tax policy through the lens of rich versus poor. We should also discuss earners versus owners. Earners versus owners, as read by George Hahn.
Chapter 2: How does the U.S. tax system affect earners?
It's tax season in the U.S. 60 million-plus Americans' taxes are so simple, the IRS could process them automatically and just send a bill or refund check. Instead, the average American spends $270 and 13 hours filing their taxes each year. Spoiler alert, the IRS is the least popular federal agency. Last month, Doge came for the tax man.
Half the IRS workforce, 90,000 people in total, is reportedly on the Green Mile. Meanwhile, Republicans in Congress are inching closer to extending Trump's 2017 tax cuts. This is good news for the wealthy, i.e., owners. Lowering tax rates and decimating IRS enforcement capabilities is stupid. We get $12 back for every $1 given to the agency. but it's only a misdirect.
We talk about taxes and enforcement when the real juice is the tax code. Our tax code exacts a high price on earners, and the price is even higher when enforcement is rendered a paper tiger, as the shortfall is either added to the debt or used as a pretext for cutting Medicare, Medicaid, Social Security, and other programs.
As Warren Buffett once said, there is class warfare in America, quote, but it's my class that's making war, and we're winning, unquote. This post was originally published last May, but the war remains the same. Owners are crushing it, earners are getting crushed, and the battlefield, aka the U.S. tax code, continues to be a weapon of mass distraction.
Over the past several decades, America has waged a covert war against the young. One front in this war is our income tax system, which favors owners over earners. Young people are almost all earners, while owners are typically older. And the tax code is a wealth transfer vehicle for owners to garner a greater share of our common wealth. The good news? It can be changed. Back.
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Chapter 3: Why is the tax code biased towards owners?
If you get a paycheck, whether it's salary or freelance, and that's how you pay your bills, you're an earner. Owners, on the other hand, might collect wage income, but their real money comes through profits from investments, stock sales and dividends, rent from property, and other income streams derived from the ownership of assets. To be an earner is noble.
You work for a living, and labor is a sacred thing. Labor is the source of food, shelter, entertainment, and every material pleasure of society. We even celebrate it with a holiday, the first Monday in September. Pro tip, if you want to celebrate Labor Day somewhere awesome, try as hard as you can to become an owner. Owners also get a celebratory day. It's April 15th.
Another pro tip, if you're ever featured in a commercial calling you a hero, it means you're getting fucked. The most fortunate in our society have no holiday as they don't need one. They recognize that holidays wallpaper over the inequity faced by anybody who gets a day in their honor. Income taxes for earners are deceptively straightforward.
Take your annual income, subtract the standard deduction, $24,000 for a married couple, make a few other calculations, and then pay a percentage of what's left to Uncle Sam. And the income tax rates for most people are low. A two-adult household making less than $100,000 per year pays 10% or less in federal income tax. Many pay much less or none at all. Sounds reasonable, right?
But there's a catch. Several catches. First, for those paying only 10% or less of their wages in income taxes, other forms of tax are a heavier burden. At the federal level, Social Security and Medicare add almost 8%. then all states collect taxes, and most state tax systems are regressive. All told, lower-income people pay a greater portion of their income in taxes than many rich people.
Sales tax, property tax, and other government revenue sources – licensing fees, permits and filing fees, and car registrations – take a larger bite out of lower-income households. In low-tax Florida, the most regressive state, low-income families, earners, pay 13.2% of their income in state and local taxes. The middle class pays 9.1%, and the top 1%, owners, pays just 2.7%.
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Chapter 4: How does wealth inequality manifest in tax policies?
In fact, lower and middle-income Florida households pay about the same in total taxes as they would in high-tax California. The next time you hear someone complain about low-income people who don't pay any taxes, remind them that income tax doesn't exist in a vacuum. Low-income people often pay over 25% of their income in taxes. There's a myth that the rich don't pay their fair share of taxes.
The reality is most rich people, the super earners, pay more than their fair share. A married household making more than $500,000 per year is in the top 5% of households by income and pays an effective federal income tax rate around 25%.
Half a million dollars may seem like a lot, but careers that pay that well require expensive college and graduate degrees, entail long hours, offer little job security, and they're typically in high cost of living locations with high state income tax. In New York or California, add another 10% onto that 25%.
With other taxes, including sales tax, the total tax burden borne by mid-career professionals can reach 40% of their income. The baller who makes seven figures plus is often working for the government. Their total effective tax burden can approach 50%. Until, that is, they can make the jump to light speed, i.e. become an owner. Think of building wealth as launching a rocket ship into orbit.
Rockets burn 95% of their fuel to escape Earth's soupy atmosphere and incessant gravity. Once you get to orbit, you're a master of the universe, covering thousands of miles with just a touch of propulsion. Wealth is similar. The atmosphere is your expenses. The distance traveled, your income. Most of us never generate enough current income to make the jump to space and become an owner.
Save enough to invest so our primary sources of income are passive. Saving your first $100,000 is incredibly hard. The next $100,000 is tough, but you now have momentum and start to see the curvature of the earth. Once your current income is substantially greater than your expenses, and you've deployed an army of capital that fights for you and your family in your sleep, you've made the jump.
What we've done with the tax code has rendered the atmosphere thicker and gravity stronger. Go to law or medical school or live at the office, and you'll see your current income increase, but you'll also lose a bigger share to taxes, and the harder it gets to save and escape the gravity of being an earner. Imagine if taxes worked like this.
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Chapter 5: What changes could make taxes fairer for earners?
Everything you spend that's remotely related to work is deducted from your taxable income. Clothes you wear and food you eat during the work week, your car, your internet and cell phone bills, furniture and square footage where you work at home, like the kitchen table, etc., all taken off your income before taxes. Pretty much anything you do on days you're working, deductible.
All past investments in education, deductible. If you spent more than you earned, as you did in college and graduate schools, you can roll over those losses as deductions in future years. In the meantime, deduct any credit card interest you're paying. Any money you don't spend, that's not taxed until you retire and start spending it. If you give it to your kids, it's never taxed at all.
If this sounds familiar but awkward, it is. It's our tax code through the lens of the owner. The federal income tax code looks progressive. The highest marginal tax rate is 37%, more than three times what the average American pays. But the published tax rates are a weapon of mass distraction. They are the rack rate published on the door of your hotel room. Owners never pay the rack rate.
They barely pay at all. Unlike earners' taxes, owners' taxes are complex. As a result, determining the total tax burden of the very wealthy is difficult. But here's what we know. In 2020, the 26,000 households with an income over $10 million paid 25.5% of their reported income in federal taxes, plus 5% to 10% in state and local taxes.
But as I'm about to explain, much of the cash they received isn't taxable income, and most of the increase in owner's wealth is never taxed at all. The White House has estimated that the 400 wealthiest households pay an effective income tax rate of just 8.2%. And ProPublica found that the wealthiest 25 households pay just 3.4%.
We can't say for sure what percent owners pay on average, but it's less than most of their employees pay. This complexity results in a transfer of wealth from earners to owners. The tax code has exploded from 400 to 4,000 pages in the past few decades. If you have GPS, advisors, loopholes for the wealthy, you want races run at night.
If the government is meant to decrease suffering and add happiness, then our current system makes no sense. Paying taxes of $5 million on $10 million in income is the difference between flying first class and flying private. Paying $15,000 on $60,000 in income might mean foregoing a second child. Capitalism means accepting a society of winners and losers. And that's okay.
Wealth is a great reward for hard work. And talent is what drives us to create value. And capitalism has brought prosperity to billions over the past 150 years. The problem is the system, if left unchecked, becomes increasingly inequitable and unsustainable. We've morphed from capitalism to cronyism, rigged in favor of owners. How? Three ways. Calculation, timing, and collection. Calculation.
Amateurs focus on tax rates. Professionals zero in on the calculation of the income to which those rates apply. In the 1950s, the highest federal income tax bracket was 91%, except nobody paid it. The tax code was a mosaic of loopholes, ensuring high-income taxpayers were able to shield most of their income. Now the top rate is 37%.
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