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The fortunate 400: David Cay Johnston
U.S. 1040A Individual Income Tax forms are seen at a U.S. Post office in New York April 15, 2010. April 15 is the deadline for filing taxes in the United States.
Credit: Reuters/Mike Segar
(Reuters) - Six American families paid no federal income taxes in 2009 while making something on the order of $200 million each. This is one of many stunning revelations in new IRS data that deserves a thorough airing in this year's election campaign.
The data, posted on the IRS website last week, brings into sharp focus the debate over whether the rich need more tax cuts (Mitt Romney and congressional Republicans) or should pay higher rates (President Obama and most Democrats).
The annual report (link.reuters.com/vec68s), which the IRS typically releases with a two-year delay, covers the 400 tax returns reporting the highest incomes in 2009. These families reported an average income of $202.4 million, down for the second year as the Great Recession slashed their capital gains.
In addition to the six who paid no tax, another 110 families paid 15 percent or less in federal income taxes. That's the same federal tax rate as a single worker who made $61,500 in 2009.
Overall, the top 400 paid an average income tax rate of 19.9 percent, the same rate paid by a single worker who made $110,000 in 2009. The top 400 earned five times that much every day.
Just 82 of the top 400 were taxed in accord with the Buffett rule, which proposes a minimum tax of 30 percent on annual incomes greater than $1 million.
Let's return for a moment to the single worker who made $61,500 in 2009 and paid 15 percent of his salary in federal income taxes. The top 400 made more every three hours than he did in a year, and yet many of them paid the same or a lower tax rate, according to the data in the report.
On top of his $9,225 federal income tax, he also paid $9,409 in payroll taxes, which include Social Security and Medicare taxes. Half of the payroll tax was deducted from his check. His employer paid the other half, which was really hidden wages taxed at a 100 percent tax rate.
His total federal tax burden was 30.3 percent, exactly 50 percent more than the 20.2 percent tax burden, measured the same way, on the 400 at the top.
TWO TAX SYSTEMS
This comparison illustrates how Congress has created two income tax systems, separate and unequal, burdening millions much more heavily than the few, those with gigantic incomes and a propensity to make campaign contributions.
One system is for wage earners and pensioners, whose taxes are withheld from their checks. This rigorous, efficient system taxes them fully.
The other system is for business owners, executives, managers of hedge and private equity funds, name brand athletes and entertainers, and many others with huge incomes. Congress lets them put unlimited amounts of income in sheltered accounts and put off paying taxes for years or even decades.
Deferral does not prevent these super rich Americans from spending their money. Hedge fund managers and others can borrow against their untaxed wealth, currently at interest rates close to zero. So long as their wealth grows faster than their borrowing their net worth continues to increase.
The IRS report covers only the 400 highest incomes reported on tax returns, not the 400 highest actual incomes, which I am certain are much larger on average because of deferrals. That means the report overstates the tax burdens of the richest Americans pay.
The issue we need to debate is not how much you earn -- make all you can. The issue is that everyone should pay their taxes now, not in some far-off tomorrow, and as you go up the income ladder so should your tax rate.
By what economic, political or moral standard should working stiffs be forced to pay their taxes immediately, while plutocrats pay their taxes by-and-by? And why should anyone who makes more than $200 million live tax-free?
Those are questions to ask candidates on the hustings, insisting they give specific, focused answers.
To give this a sense of scale, the top 400 are financial giants compared to Mitt Romney. It took Romney a quarter century of smart work to build up a fortune that his campaign says is between $190 and $250 million. The top 400 made about that much in one year.
Romney says that those of us who tell these hard facts about the zero-to-low tax burdens of the richest Americans are promoting class warfare. Income inequality, according to Romney, should be discussed only "in quiet rooms."
If you agree with Romney then keep quiet. If not, now is the time to spread the word and encourage robust and thoughtful debate, just as the framers of our Constitution intended.
(David Cay Johnston is a Reuters columnist. The views expressed are his own. Repeating with links to graphics.)
(Editing by Eddie Evans)
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While tax and investment stimulus incentives are supposed to be tools to strengthen economic growth, without the requirement that productive capital ownership is broadened simultaneously, the result will continue to further concentrate productive capital ownership among those who already own, and further create dependency on redistribution policies and programs to sustain purchasing power on the part of the 99 percent of the population who are dependent on their labor worker earnings or welfare to sustain their livelihood. By stimulating economic growth tied to broadened productive capital ownership the benefits are two-fold: one is that over time the 99 percenters will be enabled to acquire productive capital assets that are paid for out of the future earnings (tax-deferred future savings) of the investments and gain greater access to job opportunities that a growth economy generates.
If the employee portion of the payroll tax is dedicated to the wage earner in your example, why isn’t the business or corporate income tax calculated as been paid by the business or capital owner? Doesn’t the capital owner effectively pay this tax as the business income tax reduces the amount of capital that is returned to shareholders (resulting in potentially fewer capital gains and less available to be paid out as dividends)? And why complain about the payroll taxes that a wage earner must pay — the fact is that it is common throught OECD nations for a cap to be placed on income subject to payroll taxes and in most other nations the combined employee/employer total tax is in fact larger than it is in the U.S. Often the payroll tax cap is even lower than it is here in the U.S. — in Canada the payroll tax cap is slightly above the average wage. Do you find it egregious that wage earners in other nations are subject to higher payroll taxes and that high earners pay less proportions of their incomes in payroll taxes that U.S. high earners?
Also, i’d like to point out that in your articles you consistently confuse income and wealth and use the two concepts interchangeably, switching back and forth needlessly. Capital represents wealth, whereas income is the product of deploying capital. Realized capital gains do not increase the wealth of the capital owner, income does. Capital is analogous to a tree and income is the fruit that the tree produces. If I own a tree and sell it to someone else, there is no increase in the national income and no increase in the value of my wealth (in fact the economists at the BEA who tabulate the National Income and Product Accounts that are devised from GDP estimates do not include realized capital gains in their estimates of national income for this obvious reason). On the other hand, the fruit that the tree produces year in and year out represents new income and production. It is far better to tax a portion of the fruit harvest than to tax the tree and hack off a few limbs.
It is standard economic theory that a higher-after tax return on capital will result in a higher market value for the nation’s capital stock — this is why there are so many capital gains accruing in the past 30 years of lowering marginal tax rates on capital. There certainly were far fewer capital gains and paid dividends to tax from 1969-1978 when the top marginal tax rates on realized capital gains was 35 percent and the top rate on dividends was 70 percent. Would you prefer this period of stagnant capital values (decline in real terms)to the past three decades where lots of capital gains have accumulated?
The corresponding effect of lower capital taxes is the greater incidence of realizing those gains — the higher capital gains taxes of 1969-1978 and 1987-1996 led to less inflation-adjusted realized gains for the gov’t to tax.
Including realized capital gains in the estimates of the top 400 or similar top income units is misleading because a)realized capital gains are not part of the national income and therefore not relevant to measuring income shares of various income groups b) realized capital gains are often derived from many years of wealth accumulation and do not often accrue to the same individuals year after year c)for a capital gain (realized or non-realized) to create additional capital gains year-after-year requires the asset to be a risk and assessed a market value that could also result in future capital losses. None of these points are to be found in your opinion piece — instead you gripe about how easy it must be for the super-rich to get even richer, based on some numbers from 400 anonymous tax returns.
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