In 2009, a person making just over $106,000 could have an effective tax rate of up to around 37%. A new report issued by the government says that the top 400 richest people in the nation pay an effective tax rate of just under 17%. That is a potential 20% difference between being an upper middle class taxpayer and being one of the wealthiest people in the world. Why?
Selling stock is similar to selling a home. John Mackey is the founder and CEO of Whole Foods, and his base salary is just $1. Why does he continue to work? He owns a large portion of the outstanding shares of Whole Foods stock. Say Mr. Mackey owns $100,000,000 in Whole Foods stock. If Whole Foods stock appreciates 5% due to Mr. Mackey’s management, then Mr. Mackey has “made” $5,000,000 without getting paid anything. Now if Mr. Mackey sells $5,000,000 in stock, he will only pay a maximum tax rate of 15%, or just $750,000 in taxes. If Whole Foods were to pay Mr. Mackey $5,000,000 then he would need to pay a tax rate of over 35% on that income, for a total tax liability of over $1,750,00.