The IRS has just released an analysis of the richest 400 American tax filers (.pdf). The top-line finding drawing the most attention is that these 400 earned about $138 billion, collectively, in 2007, the most recent year of data. In contrast, the bottom 90 percent of Americans, over 24 million filers, earned $247 billion.
One less-noticed finding in the report is that the super rich have been paying smaller and smaller portions of their incomes to taxes*. The chart below shows the effective tax rate for the richest 400 American filers from 1992 and 2007. The blue line represents the highest income tax bracket, the red line is the tax rate on long-term capital gains, and the orange line is the average tax rate that the richest 400 filers actually paid.
There are two important things to note from this chart. The first, and most visually apparent, is that the tax rates of the rich are far more closely linked to the capital gains taxes than income taxes. Salaries and wages, the source of income taxed at the blue line, represented only 6.5 percent of these filers’ income. Nearly two-thirds of their income comes from capital gains, and this is why you see a much tighter coupling between the orange and red lines.
The second thing to note is that the overall tax rates are really not that high. Contrary to concerns about socialism or a government takeover, the richest Americans, those earning an average of $345 million in 2007, paid about 16.5 percent in federal income taxes.
This figure is generally not well understood and is certainly not the one we debate in the public sphere. Instead, we generally end up talking about marginal tax rates. The word “marginal” in this context means you don’t actually pay the full rate of the bracket you fall in. So, for example, a single person earning $50,000 in 2009 would technically be in the 25 percent bracket. But they would actually pay 10 percent on their first $8,350 in earnings (the lowest bracket), 15 percent on every dollar between $8,351 and $33,950 (the second bracket), and 25 percent on every dollar between $33,951 and $50,000 (their salary). This works out so that the hypothetical person would actually only pay 17.4 percent of their income in taxes.
The declining tax rates for the richest Americans amounts to real money. An analysis earlier this week from the Urban Institute found that raising the capital gains tax for wealthy Americans from 15 to 20.6 percent would reduce the deficit to 3 percent of GDP, the budget goal outlined by President Obama, by 2019.