Republicans, its not complicated why the rich get richer.

In the  previous Republican debate last night there seemed to be a lot of confusion about wealth inequality.  Why it occurs and how to fix it.  And it is so very simple ... 

Ordinary people get their income from wages.  Income tax is progressive and takes away more money has one moves from poverty to middle class.  It is like a rubber band, the further you get away from poverty, the income taxes pull you down harder.  Top rate is 39.6 %. 

Rich people get their income from capital gains ... increases on the value of their stocks and investments.  Capital gain taxes are less progressive.  Top rate is 20%.  The rubber band is looser.  And here is the real kicker.  It is only charged when you sell the stock or asset.  So, if you sit on an investment for 20 years it accumulates tax free all those years ... with the power of compound interest.  Rich people like Buffett buys and holds a stock forever.  If he needs some money, he simply uses the stock as collateral, and buys some more stock/assets.  And in his case, he usually picks winners and companies that turn out good cash flows.  The cash can pay back the loans, keeping the original stock earning cash tax free. Its a money machine untouched by our tax system.

For example, the average return on the stock market is 7%. One billion dollars invested at this rate doubles in ten years. The rich now control 10, perhaps 20 trillon dollars, that is doubling mostly without taxation every 10 years. Unless they have invested in a dog, in which case they sell their stock paying little to no taxes since there was little gain, and buy a new stock and restart the wealth accumulation without taxes.  For the rich, there is little need or motivation to sell their stocks/assets.   

Of course, Buffet will die one day and his heirs will pay an inheritance tax, or death tax. This tax tends to be higher when Democrats are in power and lower when Republicans are in power. Currently,  the rate is 40%.  I'm guessing Buffet et al, have trusts set up to avoid these taxes, or has all his assets held offshore.  I'm getting my lawyers on this to understand how it works. Wait, I don't have enough left on my credit card to pursue this now.

Automation is compounding the impact of how capital gains taxes are making the rich, richer.  As machines take over jobs less people have good jobs or any income at all.  Automation makes companies more profitable,  their stock prices rises faster, capital gains rise faster. The gap between rich and poor opens at an ever accelerating rate.  The only bug in this equation is that as we destroy workers we are also destroying customers. Soon we have rich people living in a sea of impoverished slaves. It's simple mathematics.  Of course, one day the pions should revolt, but we are a decade or so away from a true bloody revolution.

Of course,  anyone in Congress for more than a few terms is rich via book or speaking deals, etc.  Obama has got two libraries at a half billion each in the planning and as already started planning his $150,000 per speech speaking tour.  And yes, the Clintons did it, too. The Saudi's helped the Bushes out.  In short, they are part of the system.

So, what are the odds of getting a more progressive capital gains tax?  Perhaps some will listen to a voice from the past? During Reagan's term, the top income tax rate and the top capital gain tax was the same 29%.  While this does not remove the impact of compounding without taxation, it is at least a move in the direction of restoring equality.

Of course the other half of the equation is what politicians do with the taxes collected from capital gains.  If the funds are not used to invest in America's future in digital and physical infrastructure,  in education and development of the impoverished and the outdated, in the development of our weakest and brightest, then fixing the tax code will be an exercise in futility. Finally, we must use funds to retire our 20 trillion in debt which will become unmanageable as interest rates rise starting now.

So, if we do nothing with capital gains taxes, the rich will get richer, the poor will get poorer.  It is just mathematics.