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.
*in the form of federal income taxes. This post does not include state income taxes, Medicare and Social Security taxes, or property taxes, but since these taxes tend to be more regressive than the federal income tax, they likely make the situation worse.
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Ron’s comment is mistaken. The author does not wish to implement a wealth tax but instead wants to tax yearly income progressively. This is exactly what should be done. There is substantial proof that the time during which the greatest job losses in our country have taken place is the time during which taxes for the “job creators” have declined. If the job creators want to move jobs to the lowest cost areas then they must accept responsibility for the welfare of those they have displaced within their own countries.
I keep seeing references to “the wealthiest” interspersed with discussions of the income tax, and especially striking is the first comment, which mentions that “85% of the wealth in this country is owned by about 15% of the population”, without the recognition that wealth and income are not the same thing. 1978’s Proposition 13 in California is a recognition of that, as elderly people on fixed incomes (who paid very little in income tax on their earnings) were being taxed out of their homes, because the house that they had bought for $15,000 in the 1950s was now worth half a million dollars, and no mortgage (because the 20-25 year mortgages of the early post-war years had been paid off by 1978). There were quite wealthy, but had very little income, and essentially no liquidity, because all of their wealth was tied up in their home. Wealth is often accumulated by those who are not conspicuous consumers, by those who live simply and hold on to what they already have, regardless of their income or lack thereof.
What Doug McDougall and some of his ideological compatriots apparently want is a “wealth tax”, which is an altogether different beast than an income tax, or taxes on capital gains, or the alternative minimum tax, or any of the myriad other taxes, fees, and surcharges assessed against income from all sources. It sounds nice to those who rail against inequality, but it effectively punishes those who live within their means, rather than those whose income is spent as fast as it comes in.
I agree with John Vignocchi that all Americans pay too much in taxes. I disagree that the top 10% pay their fair share. The simple fact remains that 85% of the wealth in this country is owned by about 15% of the population, and out of that the top half of the top 1% own a disproportionate share. I pay 38% in income tax, medicare and social security. The IRS disallows most of my ordinary expenses including a work cell phone, my union dues and other employee expenses are only partially deductible. I was out of work for the first half of this year, I will probably earn about $56,000 in the second half, and out of that I will keep about 62% of that. Any potential refund is kept due to an excessive tax levy from an audit of my 1993 taxes which disallowed ALL my business expenses during a year I lived at the poverty level. It resulted in an additional tax of $12,000, and with penalties and interest that amount became $39,000. I have paid over $17,000 in the years since, and the balance is still about $39,000 due to the excessive interest being charged. My house is in foreclosure, I can barely pay my utilities, and have to shop at the $.99 store to buy food. Yes, the wealthy should pay their fair share. If they control 85% of the wealth, they should therefore pay at least 85% of the total tax revenue.
Andrew and Carl are just way off in wrong-field.
First, Carl – The rich pay a higher effective rate on their Adjusted Gross Income – which is vastly less than their Real Income. AGI is after deductions, write-offs, exemptions and loopholes.
Second, Andrew – Capital Gains in not a tax on investment. It is a tax on the Returns on that investment. For example, you invest $20,000 of after tax money into a fund. Say that fund returns 5% in a year. You pay capital gains on $1000 in capital gains income. You don’t pay taxes on the $20k you invested, just on what you get from that investment.
Truth be told that the top 10% of America’s income earners pay 70% of all federal taxes…up from 56% in 1987.
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That’s a great stat. Another great stat is that the top 10% makes roughly 50% of US income, up from 40% at the time. They also control 80% of the financial wealth, up from about 60% in 1989. But it’s not just the top 10%, it is the ultra-wealthy that this article is addressing. It’s interesting to note that the top 1% actually pays a lower tax rate than the next 9% (due to the lower capital gains tax rate). That’s what this article is about. Also, before we shed too many tears for the poor top 400, their net worth increased 100 billion dollars from 2009 to 2010, and another 130 billion dollars last year. Is there any other group who is getting richer over the last couple of years?
They already paid the tax on them. Also, this chart is consistent with what you would find if the income of the richest 400 were declining (hence a stronger correlation with capital gains tax.)
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No, they paid taxes on the capital they used to make the money (most of which was also taxed at the smaller capital gains tax). They didn’t already pay taxes on the gain. Also, the real income of the richest Americans is increasing exponentially, while wages for the working class are flat at best. Don’t be foolish, almost all of the income of the ultra-wealthy is taxed at the capital gains tax rate. I’m not sure why capital gains have to be taxed at a flat rate when income is taxed progressively. Seems like the group that makes most of their money from capital gains might have some special influence over the people who create the tax code.
Can anyone explain to me how changing the effective income tax rate affects job creation? I keep hearing that higher taxes will harm job creation, but I fail to see how changing the income tax of Joe CEO has any bearing on his decision as a CEO to create more jobs at his company. Is the implication that Joe is so greedy that he would raid his own company’s finances, firing employees, exporting jobs or delaying new job creation, to increase his own compensation? That doesn’t seem like a wise business decision nor like a decision made by a true patriot. If anything, a company might be encouraged to create more jobs and build its human capital because expenses like employees reduce taxable profits earned by companies. @mito : If you were effectively taxed 39% with dual income, your AGI would be *at least* in the $200,000 – $500,000 per year range. Congratulations! You make more money per year than 138,074,910 other tax return filers! (i.e. at least 97% of all tax filers in 2008.) If your AGI is more than $500,000 per year, you make more money than over 140 million tax filers, which is greater than 99% of all tax filers (src, cumulative sum on IRS tax data). Please do not claim you are ‘upper middle class’ because you are not, you’re better than that!
Unfortunately the story gives some facts but not all of them. It doesn’t include investment tax credit for those that don’t make a lot of money and also doesn’t include that roughly 45% of people in this country pay NO income tax to the IRS because of all of the protections given the middle class. If you want to force more jobs out of this country, raise taxes on those that create jobs and make the business environment for them to work in less favorable. That’s what is proposed.
I was horrified to discover my effective tax rate for 2010 was 39%. Being in the AMT club means you don’t get to deduct state taxes, property taxes, or most deductions; don’t get the 15 or 20% cap gains rate, etc. I have a high dual-income in an expensive part of the world. I consider myself upper middle class, but the government calls me rich.
My boss just bought a $30m house. He takes a $1 a year salary. His effective tax rate was 19% in 2010. In most of these tax articles they completely miss what happens when you add AMT into the equation.
You need to get Bill Gates and that old geezer, who have been approaching all the rich people in America, and instead of giving 1/2 of their wealth to the poor, give it to the U.S. treasury. Stop sending money out of the U.S.A., because those poor countries have allways been poor, and are used to it! Your U.S.A. poor people see what the rich have on TV and buy guns and try and take some of the wealth away from stores and rich area joggers!
One more thing….
Walter also touches on taxes as a fraction of net worth, which is also known as a wealth tax.
This is NOT the tax structure that exists in the U.S. It is confusing to compare our income based tax system to a total assett based tax system that does not exist here.
This is the logical fallacy of the so-called ‘red herring’, which is basically just introducing a tangentially related idea into and argument to take the focus off of the true point of contention and thus reduce the chance of the weaker side of the argument being exploited and subsequently defeated.
In any event, this wealth tax has been shown to be somewhat ineffective in places like France, where some of the wealthiest individuals moved out of the country in some manner following the introduction of the wealth tax there.
At the risk of beating a dead horse, there is one pointed fact that I really must make very clearly within this discussion….
The upper quintile of earners, especially the upper 10% of earners within that quintile, pay a much higher effective tax rate than any other earning group. Walter’s claim to the contrary is misleading and erroneous.
I quote,
“Yet the wealthy pay far less in income tax as a percentage of income, a fraction of payroll and withholding taxes s a percentage of income …”
This data is routinely published by the congressional budget office.
Here is an example:
http://www.cbo.gov/publications/collections/tax/2009/effective_rates.pdf
It is clear from the official data that the above claim is false. I propose that we strive for factuality and leave emotion and sensationally inaccurate claims out of the discussion.
Every time I hear of a Sales tax or a low percentage flat Tax it is just another way of ripping off the lower incomes. The simple fact is the wealthy demand control of far more resources and use far more resources, then control the property of everyone else. Yet the wealthy pay far less in income tax as a percentage of income, a fraction of payroll and withholding taxes s a percentage of income and pay far, far less in taxes as a percentage of total wealth that you and I pay! Yes it is true that as a group, they pay the most money collected, but it is a fraction of their individual wealth you and I pay more individually as percent of our wealth.
Here are some solutions, since the Rich apologists Cry big tears that “that it is unfair to tax people at different rates!” and are such champions of the flat tax lets just give them their wish. Only this time lets put it around the highest marginal Tax rate with one big deduction for everyone $40,000 and a flat tax rate of 40%. A 40/40 flat tax! No other deductions nothing.
Remember everyone has to pay the same rate. So here is how it works, everyone gets the same deduction, $40,000 dollars, anything above 40 thousand is taxed at 40%, if you only make 38, thousand, you fill out a post car with your W2s and send it in, ( check, no Tax) if you make $60,000 subtract $40,000 that =$20,000, multiply by 40% an you pay $8,000 in tax! About 13% of your total income. For Capital gains Tax use 50/50 50,000 (deductible annually) for short term and 50/15 for long term investment in American companies Tax at 50% for foreign investment.
Simple!
Here is another one, now that the black-robed dictators have declare “Corporations are People too” make the corporations pay individual federal income tax and all the pay roll taxes that their employees pay.
Last one, all wealthy pay the same percentage in pay roll taxes and social security, medical, unemployment and insurance no caps!! That should do it. By the way if you made $1,000,000 you would pay $380,000 a rate of 38% exactly at the pre-tax cut rate
For those of you that ring your hands in Ebenezer zeal and rage in Scrooge like voices that Progressive tax “Punish the successful and reward the lazy or non-ambitious!” Let me fill you in on the ‘Dark Secret’ of the Banks and the Wealthy,… Not only do they pay a lower percentage in taxes after deductions and bookkeeping shuffling, own hundreds to thousands of times more capital than you do. They CONTROL YOUR WEALTH!!!! You do NOT! Your Stocks, Your Bonds, Your Bank Accounts, Your Retirement Plans, Your Property!! The Capital that You OWN! Even the Wealth that You Put into your House or Land that you Use as PRIVATE on any lone or advance! They use your wealth for leverage against others For THEIR benefit! Not Yours! You are only given pennies in compensation. This is the real meaning of Collateral Damage.
Progressive taxes or even the mythical “FLAT TAX” that I have propose do not “punish the successful” it helps the Lower and Middle Working Class keep and Use Our Capital to become “Successful” in a bottom up economy, “A rising tide lifts all boats, Trickle Down will sink everything except “Supper Tankers” That is because the mind set of the “Free Market” model is, Capitol is finite and there is NOT enough to go around. The marketer feels that he must crush competition before it becomes a threat to his capital. A True Capitalist knows that, with Capitalism comes responsibilities, that it is the wealth and welfare of those around him that is the source of his riches. Enrich those around you and there is no limit to wealth That the Wealth of a Nation is its Labor, and Without labor there is no wealth. The Free Marketer views labor as an impediment and his neighbors as prey or powerful threats that will feed on him.
The Rich have insisted that the working American pay a higher percentage in taxes than they do right now with their offshore tax havens and tax breaks and tax loop-holes. All I have done is propose that simple flat tax that the Rich have wished for so long. Everyone pay exactly the same tax everyone gets the exact same deduction . The only difference is that WE get to pay a smaller percentage of taxes for Our total wealth rather than the wealthy this time around. They have been sticking it to us for decades, all this does is turn those percentages around on to them.
Maybe the fairest of all taxes is a national sales tax and another tax on non-earned income. There should be no sales tax on food purchased at the grocery store but would be taxed when eating at restaurants and fast food stores. Non earned income would be all income received aside from earnings from employment. There should be a tax on non-earned income and collected by the business or institution that pays this income. Then DO NOT allow any deductions from non-earned income. No one would have to file any tax forms and the government would only have insure that that the appropiate taxes were being were being properly collected and paid.
How about a flat tax of 15% for everyone no deductions at all. Fair really fair!
I find it very interesting that an article that does nothing but present fact gets accused of “hate” and “class warfare”
There was no opinion in the article, just facts and math.
I can’t tell if John Vignocchi is or is not one of the richest 400, but after a google search, I can say that I can’t take seriously anyone who shaves their chest.
And, Stanley, if it IS class warfare, then its the Rich pillaging the middle class. How do you THINK they get their wealth? It just spontaneously appears? No, they mostly exploit those with less cash and take their money.
The PROBLEM is that when all the money is gushing up to the hands of a few, it disappears from the grasp of the larger numbers of us who make up the working class – you know, the consumers. Eventually, there is nothing left down here and the whole economy collapses.
For capitalism to function properly, there must be a Flow of Money. It must go up, be spent and earned back to the bottom and flow back up. Currently, it is gushing upward and trickling down – headed for a top-heavy crash.
“Ethical Capitalism can Save U.S.”
David –
Class Warfare? Thomas Jefferson must have been so envious when he stated that “[a]nother means of silently lessening the inequality of property is to exempt all from taxation below a certain point, and to tax the higher portions or property in geometrical progression as they rise.” (Letter to James Madison Oct. 28, 1785).
I fall within that upper tax bracket (not by much), although I tend to agree with TJ (along with a great deal of other great leaders, such as Lincoln, etc.) over you on this one.
@David:
This is because the “leverage” that makes the rich wealthy is usually the people that do the majority of the work and get the minority of the money. If we taxed every income stream at the same rate including dividends and capital gains this would help make the system more equal. But the only way to really ensure that the workers get paid a fair wage for the work they do is to reform how we give minimum wage or make Unions much easier to start up.
Isn’t class warfare just grand?
How can you possibly justify taking more for the sole reason “because they have more”
Seems like there are allot of envious people out there squeaking away wanting their share of the grease
“This works out so that the hypothetical person [$50,000 per year] would actually only pay 17.4 percent of their income in taxes.”
This is totally out of whack with historical effective tax rates complied and published by the IRS:
Majority under $50,000 income pay less than 5% effective tax
Majority > $50,000 but < $100,000 income pay 5% to 10% effective tax
There are other taxes the Rrch bare other than income and capital gains. I agree with one thing, that we should ALL pay less tax. This get the Rich Man, Old White Man, Big Oil, Big Bank stuff is populist socialist crap spouted by Obama that breeds fear into our nation, holding back our economy and increasing the size of our Big Big Government.
John said, “Truth be told that the top 10% of America’s income earners pay 70% of all federal taxes…up from 56% in 1987.”
And they own a greater share of the wealth and income too. I’ll bet it’s UP more than the increase in tax paid. Look at the chart John.
I’d like to point out that after examining the tax returns of the *richest* 400 Americans, I would come to your same conclusion–I pay more out-of-pocket cash in taxes on my capital gains relative to my wages.
But I am one of the 400 richest Americans…that must mean I’m worth at least $970 million dollars. How many jobs do you know of that pay wages that grow a salary like that? Sure some CEOs make millions of dollars a year…like Jeff Immelt who makes $3.3 million a year in wages. Even if you add $20 million of stock options to his salary, he is not even listed one of the top 400 richest Americans. And Jeff Immelt is the CEO of the one of the largest corporations in the world–General Electric. To put it in perspective, Lloyd Blankfein is even one of the richest 400 Americans and he is the CEO of despised Goldman Sachs.
People on the list include:
Sergey Brin (Google founder, owns a lot of stock) – $15.3 billion
Leon Black (founder of the $14.8 billion private equity fund) – $2 billion
The lowest on the list is Sam Wyly (private equity) – $970 billion
The majority of the richest 400 Americans don’t get paid that much money working like you and I work. They probably have a bunch of their money in investments that they pay capital gains on. So don’t justify using the 400 richest Americans to say “the rich don’t pay their fair share”.
Truth be told that the top 10% of America’s income earners pay 70% of all federal taxes…up from 56% in 1987. http://www.taxfoundation.org/publications/show/23408.html
Don’t tell me the rich don’t pay their fair share. The problem is spending, not taxing. We all pay too much in taxes. It should be much much lower for the realized benefits we receive.
Andrew….. so If I purely made my money off of buying and selling stocks I shouldn’t have to pay tax on it? Does that mean I shouldn’t pay tax on a lottery ticket winnings (if I played AND won, haha)? Gambling winnings? Those things were bought wtih after tax income too.
This is silliness. The money being taxed as capital gains are after-tax dollars anyway. They already paid the tax on them. Also, this chart is consistent with what you would find if the income of the richest 400 were declining (hence a stronger correlation with capital gains tax.)
“This figure is generally not well understood and is certainly not the one we debate in the public sphere.” I couldn’t agree more.
“This works out so that the hypothetical person [$50,000 per year] would actually only pay 17.4 percent of their income in taxes.” … Compared to 16.5% by those earning $345 million? You’re not really resonating with my sympathy strings.
Consider that these rich you hate so much are paying capital gains on money they’ve already paid taxes on and also that these capital gains are largely based on dividends that are net of a corporate tax. I would invite you to do the math, but I don’t think you can. If you’d like to try, remember that these taxes are compounding. Compare the costs you’re loading onto them with the gains from having them invest (wisely if they’re making capital gains) in the capital markets.
You’re just coming up with new ways to tax economic mobility — not actual wealth. How many of the top 400 are congressional members or senators? I double-dare you to do something useful and find out.
Well, we can all thank Pres. Reagan and the tidal wave of selfish ignorance that he rode into the White House. Many of the Wall St. abuses and such would not have been as bad if they knew they would be giving up 70 cents or more on the dollar for every dollar earned beyond, say, $500k.
The Capital Gains Tax needs to be raised, adjusted to a progressive scale, or simply abolished. That way, it would all qualify as taxable income under the income tax.
Additionally, it is a crime that Medicare/Medicaid is a flat tax. That needs to be made progressive. Social Security is even worse – it’s a flat tax, a high tax (about 6.5%, if memory serves), and it only applies to the first $100k of income. On all earnings above that, these folks aren’t paying a dime toward SS!
If SS and Medicare taxes would be made progressive, without any maximum taxable income limits, those programs would be solvent and would actually be able to provide better service with less fraud. It costs money to pay the healthcare professionals and hospitals what they deserive, and it also costs money to hunt down fraudulent claims and prosecute those responsible.
They can use the same brackets as the current Fed income tax does, and both can start at about 3% at the lowest bracket, which would be a net relief to the lower classes compared to the current system.
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