How to Join the "Investor" Class

In discussions of the current tax reform bills, a new buzzword has popped up: “the investor class.” Every time I’ve heard this term on a political talk show, it has been used derogatorily to frame the proposed tax changes as resulting in “the rich getting richer” and the “poor getting poorer.”

In every instance, “the rich” and “the investor class” were used interchangeably. This is no more accurate than using the terms “millionaire” and “billionaire” as if they are the same, which they certainly are not. A million-dollar investment portfolio will safely produce $30,000 a year in income. A billion-dollar portfolio will produce $30,000,000. That’s a big, big difference.

Equating “the investor class” with “the rich” is just as absurd. To illustrate, here is some information from a 2008 poll of 24,000 voters by Zogby International. According to an article by CEO John Zogby, “Who Belongs To The Investor Class,” which appeared in Forbeson February 12, 2009, 38% of those surveyed identified themselves as being in the investor class.

Of this 38%, almost two-thirds had a household income under $100,000, 44% did not have college degrees, 15% were Hispanic or African American, and 15% held blue-collar jobs. This last number is especially interesting because blue-collar workers made up only 21% of the total of those surveyed.

However, the most surprising statistic from the survey was this: of the people who said they were not in the investor class (62% of those surveyed), more than half had money in a 401(k) retirement plan. This means they were investors.

Obviously these folks saw the “investor class” as people other than themselves. My guess is that being an investor has a negative connotation with most Americans, perhaps related to the idea that “investor” equals “millionaire” equals “the rich.”

This is especially unfortunate, because if you don’t become an investor, your future isn’t all that rosy. Becoming an investor is mandatory if you want to provide for yourself in retirement. The alternatives—winning the lottery or eking out a meager existence on Social Security—are extremely unlikely or extremely unappealing.

Ironically, despite claims to the contrary, the proposed tax changes do not even favor the “investor class.” For decades Congress has taxed the profits from investments differently than ordinary income. This tax, the capital gains tax, is generally lower than the income tax rate charged on your earned income.

Neither the House or the Senate bill changes the way the IRS taxes capital gains. Instead, both versions would actually penalize investors. With lowering the ordinary income brackets, there will be cases where investors will actually pay a higher tax on their capital gains than on their ordinary income. I am guessing this may be an unintended consequence of the proposed act. However, it will be part of the new tax law unless the conference committee changes the capital gains tax brackets to match the new expanded brackets.

Regardless of the final version of the tax plan that becomes law, I suggest being skeptical about the term “investor class.” It is not the same as “wealthy.” Anyone using it probably has an agenda rooted in resentment of the rich.

The real investor class is broad and easy to join. You belong to it already if you put even a small amount each month into an IRA or a 401(k) plan at work. Or if you contribute to a 529 college savings plan for your kids. Or if you have any money invested in mutual funds through an online brokerage. If you are wise enough to invest for the future, you are a part of the investor class.