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.
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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.
[...] The graph presented at http://www.quickanded.com/2010..... presents my point perfectly concerning the effective income tax rates of the truly wealthy as [...]
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.