Earned vs Inherited Wealth

Paul Krugman’s latest tackles the issue of policies that favor inherited wealth more than earned income. He argues that Republicans have become more supportive of old, established money than entrepreneurship in recent years.

Consider, as Exhibit A, the Bush tax cuts. Bush did cut the top tax rate on earned income from 39.6 to 35 percent, a 12 percent reduction. But he cut the rate on capital gains from 21 to 15, a 28 percent reduction; he cut the rate on dividends from 39.6 (because dividends were previously taxed as ordinary income) to 15, a reduction of more than 60 percent. And he put the estate tax on a path toward zero — a 100 percent reduction.

The estate tax made a partial comeback thanks to the awkward fact that a Democrat was in the White House, and there have been some tax hikes on capital income. The point, however, was that Bush tried to give people living off wealth, inherited wealth in particular, much bigger tax cuts than he gave high earners.

The divide between high-earners and those who are already wealthy and living off of their holdings is somewhat murky and probably not politically exploitable. After all, most high-earners – even those who’ve started from nothing – see themselves on the road toward establishing the kind of familial wealth that never goes away. I’m not sure that Krugman’s differentiation will ever become meaningful in the larger debate about inequality.


Favoring Wealth Over Work (New York Times)

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