A contributor to inequality is the very rich “investing” their money in the sharemarket and real estate, or letting it sit in the bank. This creates a passive income for them, but doesn’t stimulate the economy at all.
In my book The Rich Cheat, I lament all the ways the rich get richer, while noting how little is done about it. Because inequality is on the rise, clearly existing measures are inadequate. Even so, there are existing measures, and it would be fair to point them out.
The net investment income tax, or NIIT for short, was introduced during the Obama years to pay for health care. It’s a 3.8% surtax on the income of Americans from sources like interest, dividends and capital gains. But it focuses on the rich and only applies if adjusted gross income, or AGI, is above $200,000 for most single people or $250,000 for married couples.
Importantly, it has not yet been adjusted for inflation, meaning more and more people are now earning above the threshold. And because interest rates are on the rise, so is the income from the tax, rising from $16 billion in 2013 to over $60 billion in 2021.
The WSJ makes a great example of how it can be seen to a “small” tax:
“Maybe $114 is a small price to pay when your interest on a “safe” investment of $100,000 rises from $1,000 to $4,000, but it’s there. I joke to clients that the NIIT is the ‘you-make-a-lot-of-money tax,’ ” she says.
And therein lies the point. Inequality will only decrease when taxes on the rich hurt. When your wealth grows by 10%, the takes reduces that down to 9.6%. That’s still your wealth growing without lifting a finger.