The top corporate executives (who for the purposes of taxes, are also considered
to be "employees") usually earn far less as a percentage of their compensation as regular wages (with higher tax rates) than they do with "incentive pay" --- compensation that they earn in the form of capital gains from stock compensation (with a lower tax rate).
The non-executive employees are mostly paid in either hourly wages or bi-monthly salaries (every two weeks) and have all their taxes deducted from their paychecks. They are responsible for paying the "marginal" tax rates according to their annual adjusted income by the end on the tax year --- whereas the top marginal tax rate is much higher than the capital gains tax rate.
According to Forbes, in 2007 a total of $924 billion was earned with capital gains --- which at that time, was the all-time record year for capital gains since 1954.
A mere 315,000 individuals --- out of 315 million Americans (of which there are 151.3 million in the workforce) --- are making about half of all capital gains on the sale of stocks or property (which includes real estate, gold, jewels, art, etc).
These capital gains make up 60% of the income made by the billionaires on the Forbes 400 list. Just the top 20 individuals alone now have a collective net worth of over half a trillion dollars. Imagine the dimensions larger than a football field stacked 5 feet high with $100 dollar-bills. That's half a trillion dollars hoarded.
Paul Krugman once noted that according to the IRS, the top 400 taxpayers paid less than 17% for income taxes in 2007, the lowest on record --- and accounted for more than 10 percent of all capital gains income in America.
In 2011, according to estimates by the nonpartisan Tax Policy Center, the top 1 percent paid a far lower effective tax rate of 18.5 percent --- and when it comes to payroll taxes, the rich paid a far lower effective rate than everyone else – 1.7 percent compared to 7 percent – because any "regular" income that's subjected to payroll taxes is capped. I once estimated that $1 trillion a year in personal income wasn't taxed for Social Security or Medicare.
The only way to push back on the trend by which the 1% has absorbed 25% of the nation’s wealth in the years since 1979 (when the middle-class had peaked) is to make the super-wealthy pay more in taxes --- more in capital gains taxes.
The capital gains tax rate in 1978 was lowered from 35% to 28%. In 1981 it was lowered again to 20%. Under Bush in 2003 it was lowered again to 15%. This year, under Obama, it was raised back to 20%, but also adds a 3.8% surtax for ObamaCare®, making the capital gains tax rate 23.8% (but even still, that excludes regular Medicare and Social Security taxes).
House Leader John Boehner said Obama already got his tax hikes, but 23.8% is still shy of the top marginal income tax rate of 39.6% (the top tax rate on regular hourly wages and salaries). And the top income bracket is now $400,000 to $450,000 --- but the cap for Social Security taxes is only $113,700. So if you earn less than that, you're paying this tax on 100% of your earnings. By contrast, the billionaires on the Forbes 400 list might pay ZERO in Social Security taxes if their only income is solely earned from capital gains.
The Social Security tax imposed on all regular income (meaning "earned income", such as wages, tips, and self-employment income) up to a maximum amount of $113,700 --- but capital gains income (also referred to as "unearned income", "investment income" or "passive income") is totally exempt from all Social Security taxes. Stock options (after being "vested" and "exercised") are capital gains income.
As a general rule, a base salary accounts for just 20 percent of a CEO's pay. The other 80 percent comes from performance-based pay, usually in the form of stock options. (Some CEOs have, at times, taken ZERO for a base salary pay.) There are generally three types of stock options: The most popular are Incentive stock options (ISOs). Then there are Employee Stock Purchase Plan options (ESPPs) and Non-Statutory (non-qualified) stock options.
Last year Bloomberg reported that Apple‘s CEO Tim Cook received $378 million in stock options. (The price was calculated the day the options were awarded). Half of the options vest in 2016 and the other half in 2021. In addition, Cook received a regular salary of $900,000 for 2011, up $100,000 from 2010. (That differs from his predecessor, Jobs, who always took an annual salary of just $1.) Cook also had 237,500 stock awards scheduled to vest in March of last year, netting him about another $100 million in stock. With these new options, and the ever-increasing price of Apple stock, Tim Cook, already at #58 on the Forbes "Most Powerful People" list, may crack the Forbes 400 before long.
Tim Cook recently
kowtowed to the Chinese government made a rare apology to the Chinese consumers, but no one from Apple has ever uttered an apology to the American workers --- whose jobs went to factories like Foxconn, which employs 1.2 million people in China to assemble products for Apple and other firms. But yet companies such as Apple have been pushing for more H-B1 visas to further depress domestic wages when we already have too many unemployed STEM workers. The Economic Policy Institute reports that "recent data shows that no significant labor shortages exist, and suggest that an adequate number of foreign graduates in STEM fields are already remaining in the United States to fill the limited job openings available in the stagnating U.S. labor market."
But back to taxes: Out of pocket business expenses that are reimbursed to these CEOs ("employees") and other company executives related to travel, meals, lodging, entertainment, transportation (or any other costs incurred for "business purposes") are also exempt from all Social Security taxes --- so this is also another indirect and un-taxed form of compensation from the company to the "employee". Many unjustified expenses are used as tax write-offs; but a vastly under-funded IRS does not have the necessary resources to pursue tax evaders, let alone scrutinize all these expense accounts.
Look at the purchase (or lease), the operation and the maintenance of a corporate LearJet for example. It's used as a "time-share" by company executives for business and personal use (because work and play are usually one and the same). This is a also a write-off on corporate taxes (lowering a company's "effective" tax rate), and allows for a greater proportion of the company's profits to flow back to the corporate executives (either in the form of cash/salaries/benefits and/or as a form of stock-option grants), which can also be written off from corporate taxes as "employee compensation".
A prime example of this is Facebook, who recently reported $1.1 billion in pre-tax profits from U.S. operations in 2012, but will pay ZERO in federal and state taxes --- and even receive a federal tax refund of about $429 million. Companies like Facebook are allowed to treat the cost of non-cash compensation, such as stock options, as a business expense that reduces profits, essentially the same way they treat regular wages and salaries for their non-executive employees.
In 1921 the U.S. Secretary of the Treasury Andrew Mellon, the Republican banker of the Mellon Bank of New York, was instrumental in pushing a tax bill through Congress favoring the preferential treatment of capital gains. And ever since then, the tax code has been rigged for the very wealthy for the past 92 years.
Congress (half who are today millionaires themselves, and write the tax laws) have maintained this status quo. So why are we always hearing members of Congress complain of "wasteful and out-of-control government spending" --- and calling for major cuts to social programs? Yet, whenever a member of Congress (on both sides on the aisle) loses an election, most of them routinely loot the treasury before leaving office.
Congress is always screwing us, both coming and going. And that's why your boss under-pays you and is taxed at a lower rate than you.
Unleash the tax experts!!!