Federal Taxation of Earnings Versus Investment Income in 2004

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How do personal taxes on total investment income compare to taxes on earnings right now? This paper addresses that question. The analysis includes both the individual income tax, which applies in varying degrees to both earnings and investment income, and Social Security and Medicare taxes, which apply only to wages and selfemployment earnings.

The central finding of this study is that, on average, the federal government now taxes earnings at two-and-a-half times the effective tax rate it imposes on personal investment income.

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