Bass ackwards: How America’s tax code hurts the middle class and coddles millionaires

November 30, 2011 | Economic Opportunity Institute

By David Cay Johnston, excerpted from Reuters:

Everyone seems to know that about half of Americans paid no income taxes in 2009 and that the top 1 percent paid about 37 percent of the income taxes. But how many people know that households making less than $75,000 collectively paid more federal income tax than those making $1 million or more?

Or that income taxed at the next-to-lowest rate, 15 percent, brought in more government revenue than all capital gains taxes plus the two top brackets, which apply only to the top 2 percent of earners? Or that almost half of the top 1 percent made less than $500,000? Or that five out of six made less than $1 million?

The fact is that the government relies far more on the bottom 99 percent than the top 1 percent for federal income taxes.

(click to enlarge)

(click to enlarge)

In 2009, the income entry point for being in the top 1 percent was slightly less than $344,000. To most Americans that is an unimaginable deal of money. But let’s put that in perspective.

DISPARITY AT VERY TOP

The median income taxpayer — half made more, half less — made slightly less than $33,000 that year (and their average adjusted gross income was under $15,300, or less than $300 per week). The median income taxpayer would need 10.6 years to earn as much as someone at the low end of the top 1 percent.

Far greater disparities exist within the top 1 percent.

The top 1 percent includes people who made many hundreds of millions of dollars and perhaps some with incomes of more than $1 billion, official government data will show when it is released in two years.

Economically, those just entering the top 1 percent have nothing in common with those in the top tenth of the top 1 percent. Someone at the entry point for the top 1 percent would need 29 years to make $10 million, and more than 2,900 years to make $1 billion.

The point is that while all those in the top 1 percent are certainly well off, the vast majority still go to work every day.

Almost half of the top 1 percent, or 1.4 million taxpayers, make $344,000 to $500,000. More than 1.1 million make $999,999 or less.

The bottom half of the top 1 percent rely on salaries for about two-thirds of their income. They get modest income from capital but rely mostly on their labor, giving them more in common with Joe Sixpack than Warren Buffett.

ONE IN A THOUSAND

A much better measure than the top 1 percent would be the top tenth of 1 percent. The government does not break out this group, but Emmanuel Saez, a University of California economist, and others have.

The Saez analysis of tax return data shows that through 2008, the top one-in-a-thousand taxpayers had average income in recent years that ranged between $5.2 million and $7.5 million annually. Just investing that much in corporate bonds will produce enough interest income to keep someone in the top 1 percent.

Furthermore, inside the top 1 percent, those with the highest incomes pay the lowest tax rates.

The top 1 percent paid an average income tax rate of 24 percent in 2009, IRS data shows. That is almost exactly the rate paid by those making $500,000 to $1 million. Those who made $1 million to $10 million paid a higher rate, 26 percent. But those making more than $10 million paid a significantly lower rate, 23.3 percent.

The top 400 taxpayers paid a much lower rate. On an average income of $270 million each, their effective federal income tax rate was 18.1 percent in 2008, the latest year for which we have IRS data. A single worker earning less than $90,000 pays a higher rate than that.

In a country with more than 300 million people, 400 taxpayers is a minute number. Yet those 400 made 1.3 cents out of every dollar of the country’s total adjusted gross income, almost doubling their share of national income since 2002.

CONCLUSION

The U.S. tax debate tends to focus on the top 1 percent — their share of income taxes and their tax rates. Anti-tax groups encourage this focus, now embraced by the Occupy demonstrators on Wall Street and across America. Problem is, the top 1 percent is a very misleading measure of who pays federal income taxes. It mixes doctors and billionaires, masking the taxes paid by the middle class and the affluent.

Continuing to focus on the top 1 percent will mislead us about who pays federal income taxes. That focus should be on the middle class and the upper middle class, and then on the top tenth of 1 percent. And on whether our tax system is helping create wealth and jobs or destroying them.

(Editing by Kevin Drawbaugh)

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Posted in Tax and Budget

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