How the Super-Rich Scored on Tax Day

April 18th, 2011 at 7:35 am | 16 Comments |

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Historically, the Internal Revenue Service makes an announcement the first week of April that they have arrested a public figure or two for non-payment of federal income taxes. The message is obvious with April 15 upon us.

This year however, the IRS released a different bit of news.  Over the weekend, the AP reported:

The Internal Revenue Service tracks the tax returns with the 400 highest adjusted gross incomes each year. The average income on those returns in 2007, the latest year for IRS data, was nearly $345 million. Their average federal income tax rate was 17 percent, down from 26 percent in 1992.

I always thought the old message was effective in helping people decide to file honest tax returns. The current message won’t accomplish that goal, yet sends an interesting message.

The immediate question that needs to be answered is how canit be that the average tax rate for these 400 highest adjusted incomes each year is only 17%? In a world with an alternative minimum income tax and severe limitations on mortgage deductibility (at an interest rate of 10%, a maximum $1 million mortgage would only produce a $100,000 deduction — and no one is paying 10%), the answer is not found in the complexity of the Internal Revenue Code. While there may be an exception or two for Americans living abroad and paying very significant foreign income taxes, there are only two rules in the Internal Revenue Code that could be in play.

The lower average tax rates must be the result of the maximum 15% rate on capital gains and charitable contributions.

As to charitable deductions, the president has a proposal which would effectively have a taxpayer in the top bracket (his proposal for the maximum rate is 39.6%) pay an income tax of $11,600 on a $100,000 contribution. This would leave the taxpayer with a choice of donating $100,000 and paying an additional $11,600 in federal income taxes or keeping the $100,000 and having $41,400 to spend on whatever. We can debate the ultimate results of such a proposal.

As to capital gains, there are a few things to ponder. First, some conservatives tell us that the ultimate amount of taxes paid declines as tax rates go up and from those economists we would conclude that the total amount of income and income taxes would go down as the sales of stocks to create those capital gains would decline. Second, if the capital gains rate was raised to 20% as proposed last year by the president, this would only produce a maximum additional federal income tax of just under $7 billion. While we could have a reasonable and lively conversation about the wisdom of a fifteen percent capital gains rate with each side scoring meaningful blows, I suspect both sides of the discussion would conclude that $7 billion is barely worth discussing in an economic sense in times of $1.6 trillion dollar deficits.


Recent Posts by Hank Adler



16 Comments so far ↓

  • TerryF98

    So if the GOP reduces the tax rate on the rich to 25% you can expect them to actually pay about 9% while the rest of the middle class gets screwed.

  • balconesfault

    It’s class warfare, my class is winning
    Warren Buffet

  • JP4266

    if the capital gains rate was raised to 20% as proposed last year by the president, this would only produce a maximum additional federal income tax of just under $7 billion. While we could have a reasonable and lively conversation about the wisdom of a fifteen percent capital gains rate with each side scoring meaningful blows, I suspect both sides of the discussion would conclude that $7 billion is barely worth discussing in an economic sense in times of $1.6 trillion dollar deficits.

    Of course why bother taxing these people at a reasonable rate and decreasing our deficit by $7 billion, why not just cut funding to schools more?

  • hisgirlfriday

    What study/research has determined that raising the capital gains tax rate to 20 percent only increases federal income tax revenue of $7 billion? At first blush, I find that figure very hard to believe.

    • balconesfault

      I’m guessing it may have to do with which year’s numbers you’re basing on … if you’re looking at 2008-2009, for example, capital gains taxes were in the crapper. I’m betting that this year the extra 5% would be worth considerably more thanks to the growth in the market.

      • ottovbvs

        balconesfault: I think you’re guessing right. Of course the reason why the top 400 taxpayers are only seeing a overall rate of 17% is all about capital gains which is where much of their income comes from and tax loopholes that allow big players at hedge funds, private equity firms etc to treat carried interest which is really regular income as a capital gain. No doubt JP considers the fact that the wealthiest 400 are paying only 17% overall is barely worth discussing.

  • Churl

    Do we include tax free foundations, like those of the Koch Brothers, in the list of loopholes?

  • dante

    First, some conservatives tell us that the ultimate amount of taxes paid declines as tax rates go up and from those economists we would conclude that the total amount of income and income taxes would go down as the sales of stocks to create those capital gains would decline.

    The only conservatives saying that are utter and complete morons. Even Laffer doesn’t pretend to know where on the “Laffer Curve” we’re at, and whether tax revenue would go up or down with an increase in tax rates…

    • valkayec

      Dante, et al:

      Speaking of Laffer, his Wall St op-ed, points out all the costs inherent in the tax code, then goes completely off-the-rails as a proponent of Steve Forbes’ flat tax plan that obviously, upon study, reduces taxes on the wealthy while increasing them on people and families which can least afford the increases. As Jon Chiat writes:

      “Supply-side guru Arthur Laffer has commissioned a study, which he summarizes in today’s Wall Street Journal op-ed page, showing the tax code creates massive compliance costs:

      In a study published last week by the Laffer Center, my colleagues Wayne Winegarden, John Childs and I estimate that these costs alone are a staggering $431 billion annually. This is a cost markup of 30 cents on every dollar paid in taxes. And this is not even a complete accounting of the costs of tax complexity.

      You may be wondering what this has to do with reducing tax rates for the rich. Laffer proceeds to explains:

      A tax reform to a simple flat-rate tax with no deductions would significantly reduce the current complexity inherent in our progressive tax system, which is full of loopholes, exemptions and special interest carve-outs. Based on the estimates from our new study, if a static, revenue-neutral flat-tax reform were to reduce the tax complexity in half, the long-term growth in our economy would increase by around one-half of 1% per year.

      Of course, complexity is not “inherent in our progressive tax system.” It’s inherent in any tax system. There’s absolutely no reason to believe that, once the progressivity of the income tax is eliminated, politicians would not continue to create loopholes, tax credits and other deductions. It will probably never be possible to go through a tax day without having right-wingers attempt to convince us that we could make our taxes easier by shifting a higher proportion of the tax burden off the rich and onto the poor and/or middle class.”

      http://www.tnr.com/blog/jonathan-chait/86962/nothing-says-credibility-laffer-center

  • cdorsen

    “So if the GOP reduces the tax rate on the rich to 25% you can expect them to actually pay about 9% while the rest of the middle class gets screwed.”

    The top 1% of earners (earning 20% of income) pay 40% of the taxes
    The top 10% of earners pay 70% of the taxes
    The bottom 50% of earners pay 3% of the taxes

    How are the middle class getting screwed again?

    • think4yourself

      Actually, we’re all getting screwed middle class and wealthy due to our deficit.

      Top earners are paying a greater percentage of the tax collected, but also paying a smaller percentage of their income than ever.

      I favor reverting back to the Clinton tax rate for everyone. Or eliminating the loopholes for everyone (yep, get rid of the mortgage deduction).

      But my heart does not bleed for the super rich. If you made $345M, I suspect you could live with having your effective tax rate go from 17% to 25%. And if you can’t afford it, you probably shouldn’t be super rich.

    • TerryF98

      Instructive how you left out the middle class!

  • sdspringy

    http://online.wsj.com/article/SB10001424052748704621304576267113524583554.html

    In 2005 the top 5% earned over $145,000. If you took all the income of people over $200,000, it would yield about $1.89 trillion, enough revenue to cover the 2012 bill for Medicare, Medicaid and Social Security—but not the same bill in 2016, as the costs of those entitlements are expected to grow rapidly. The rich, in short, aren’t nearly rich enough to finance Mr. Obama’s entitlement state ambitions—even before his health-care plan kicks in.

    The net effect of an increase in the upper rate is effectively meaningless economically but certainly makes the Lib feel better. Raise the rate to 45% and the effect will still not balance any budget. Spending is just too high.

    47% of Americans pay NO income tax at all. This is the result of the Bush tax cuts and involves middle and lower income families and individuals.

    The most effective rate is a straight flat tax for all income levels, on all income types with no deductions. Everyone is involved and everyone will pay more. And then everyone will be concerned with government spending.

    And since it is the Tax Time of Year, a slide show.

    http://www.businessinsider.com/facts-about-taxes-2011-4#the-irs-has-more-employees-than-there-are-people-in-flint-michigan-106k-vs-102k-1#ixzz1JtewLCQN

  • valkayec

    Mr. Adler, here’s a little bit of that story you neglected to post.

    “Over the same period, the average federal income tax rate for all taxpayers declined to 9.3 percent from 9.9 percent.

    The top income tax rate is 35 percent, so how can people who make so much pay so much less than that in taxes? The nation’s tax laws are packed with breaks for people at every income level. There are breaks for having children, paying a mortgage, going to college and even for paying other taxes.

    The top rate on capital gains is only 15 percent.

    There are so many breaks that 45 percent of U.S. households will pay no federal income tax for 2010, according to estimates by the Tax Policy Center, a Washington think tank.

    “It’s the fact that we are using the tax code both to collect revenue, which is its primary purpose, and to deliver these spending benefits that we run into the situation where so many people are paying no taxes,” said Roberton Williams, a senior fellow at the center. [...]

    In all, the tax code is filled with $1.1 trillion in credits, deductions and exemptions, an average of about $8,000 per taxpayer, according to an analysis by the independent national taxpayer advocate within the IRS.”

    And here is what Tom Herman wrote on December 14, 2010 for The Fiscal Times

    “No wonder President Obama is calling for tax reform. More than 10,000 Americans who earned more than $200,000 during 2007 paid no income taxes to the U.S. government. And it’s perfectly legal.

    These high earners, among the estimated 47 percent of all Americans who pay no federal income tax, benefited from numerous popular, time-honored provisions in the tax laws that aren’t likely to go away anytime soon. And the group, while accounting for a tiny sliver of the 143 million income-tax returns filed for 2007, has grown rapidly in recent years.

    How can they do it?

    * Losses from partnerships or S Corporations, typically small businesses whose income and losses flow through to the owners.
    * Investments in nontaxable municipal bonds.
    * Extraordinary medical or dental expenses.
    * A combination of these factors and others.

    ” ‘Some of these are fairly uncontroversial deductions needed to measure net income correctly, such as casualty or theft loss deductions or medical expense deductions,” says Joel Slemrod, a professor of economics at the University of Michigan in Ann Arbor. “Others are conscious, but debatable, policy choices, such as the exemption of state and local bond interest and charitable deductions.’

    For 2007, the most recent data available, there were about 4.5 million individual income-tax returns reporting adjusted gross income of $200,000 or more, about 3 percent of the 143 million tax returns filed for that year, according to an article in an IRS publication by Justin Bryan, an economist. Of these “high-income” returns, a record 10,465 showed no U.S. income-tax liability, about a quarter of one percent of the group, the IRS said. That was up from 8,252 the prior year, a smaller percentage of the group. As recently as 2004, there were only 2,833 high-income returns showing no tax liability.”

    The tax code is so full of loop holes it looks like Swiss cheese, for heaven’s sake. Even today, the Fiscal Times has a story stating that because of all the loop holes, tax breaks, deductions, exclusions, tax expenditures and the lowest tax rates since the 1920s, “For the first time since the Great Depression, households are receiving more income from the government than they are paying the government in taxes. The combination of more cash from various programs, called transfer payments, and lower taxes has been a double-barreled boost to consumers’ buying power, while also blowing a hole in the deficit. The 1930s offer a cautionary tale: The only other time government income support exceeded taxes paid was from 1931 to 1936. That trend reversed in 1936, after a recovery was underway, and the economy fell back into a second leg of recession during 1937 and 1938.”

    The whole GOP spin that “if only tax rates on the wealthy and multi-national corporations were lowered, tax revenues would increase” has exceeded its expiration date. Lowering rates won’t convince people to pay their taxes. They’ll still try to find ways around paying anything. That’s human nature. The best way to increase tax revenues is to eliminate all the junk in the tax code and simply it. Even President Reagan was appalled to learn of wealthy individuals and corporations who paid no taxes, causing him to undertake a comprehensive tax reform effort that actually raised the corporate taxes and closed numerous loopholes that allowed big firms to dodge their tax responsibilities. As part of these reforms, Reagan passed the 1986 Tax Reform Act. This law “raised corporate taxes by $120 billion over five years and closed corporate tax loopholes worth about $300 billion over that same period.” As he said when signing the act, “…vanishing loopholes and a minimum tax will mean that everybody and every corporation pay their fair share.”

  • valkayec

    I’d also like to point everyone to a well researched and documented article in Mother Jones, Only Little People Pay Taxes. Beyond anecdotal evidence, if you read through this article, review the numerous charts, and look at the bibliography, you are forced to come to the conclusion that the wealthy have made out extremely well, through the tax code, for a very long time while the middle class and those lower on the economic scale have not done well. Nor has all this wealth accumulation increased jobs and prosperity for the middle of the nation.

    As Bruce Bartlett has written many times, the GOP has pushed a story line which is not just totally false but resides in the world of fantasy, and Dems, moderates, or even just intelligent, educated people seem unable to counter these false arguments. Well, maybe this article will provide some much needed ammunition.

    http://motherjones.com/politics/2011/04/taxes-richest-americans-charts-graph