The Rich are Different
F. Scott Fitzgerald: “The very rich are different from you and me.”
Ernest Hemingway: “Yes, they have more money.”
The statisticians at the IRS quietly updated their fascinating data on the richest 400 Americans in response to a Congressional request. The Wall Street Journal's Tom Herman picked it up and published the tables, which we have posted on the Tax Facts website. [Table 1, Table 2, Table 3]
Bottom line: The uber-rich are doing very well. In 2005, the average tax return in the fabulous 400 reported $213.9 million of income, up from a mere $172.8 million in 2004. They're even doing better than at the peak of the dot.com bubble in 2000, when the top 400 raked in $173.9 million ($197.1 million in 2005 dollars). Overall, this group, which comprised 0.0003 percent of the tax returns filed, earned 1.15 percent of all income reported.
The cool thing about being incredibly well compensated is that you don't have to pay much tax. Their average income tax bill was 18.23 percent of income. Including payroll taxes, their average rate was still under 19 percent (my calculation, assuming all wages and salaries, business income or loss, and partnership income or loss are subject to the Medicare payroll tax).
The IRS reported that only 106 out of the 400 paid an average income tax rate over 25 percent. That is, most of them are paying less than Warren Buffett's famous receptionist, who is subject to a 15 percent income tax rate plus a combined 15.3 percent payroll tax (including Warren's share). Warren, who might well be in the IRS's data, says that his own average rate is 17.7 percent.
Some argue that the gazillionaire list is misleading because it includes many taxpayers who enjoyed a one-time gain. But back in 2003, University of Michigan economist, Joel Slemrod, found that fewer that half of the 400 appeared only once based on nine years of data.
The blessings for these people come from many sources. While their pre-tax incomes have been exploding, their tax rates have been falling. From 1993 to 1996, their average tax rate was 28.8 percent. After tax rates on long-term capital gains were cut in 1997, the rate fell to an average of 22.4 percent from 1997 to 2001. (Capital gains average well over half of income for the 400.) Now, after top income tax rates were cut from 39.6 percent to 35 percent and top tax rates on capital gains and dividends slashed to 15 percent, their average income tax rate is 18.2 percent.
Tax cuts enacted since 1996 cut their average tax bill by over $20 million. And if they die in 2010, they'll avoid the estate tax too.
Yes, the very rich are different from you and me.
Oh well, this is what we call ” the rich becomes richer”, right? They’ve been compensated enough because they are good tax payers? Is that it?
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Why do the mega rich get such lenient treatment? If you or me where to try to pay that type of tax percentage they would put us in jail!
I'm always fascinated that in discussions of the wealthy and taxes, the pro-tax crowd never actually refers to the taxes paid by wealthy taxpayers.
Mr. Burman spends an entire paragraph highlighting the money made by the 400 wealthiest taxpayers, but when it comes to describing the total income taxes they paid? 18.23%. Gee, could you extrapolate on that? Maybe put it in dollar terms? Or calculate how many receptionists Mr. Buffet would have to employ in order for them to contribute as much to the federal government as a single one of these wealthy taxpayers?
And while I'm at it, how misleading can Mr. Burman be when he compares the effective tax rate of the 400 to the hypothetical receptionist? The IRS figures on total income taxes paid show the income tax code as whole has become more, not less progressive since we began reducing the top tax rate in 1981. Mr. Buffet's hypothetical receptionist today pays fewer income taxes than he/she would have in 1980, and its possible that he/she pays no income taxes at all thanks to bracket indexing under Reagan and the Bush refundable child credit and 10 percent bracket.
Moreover, when you're comparing one with the other, what happened to the corporate layer of tax? Mr. Buffet may be an investing genius, but he failed tax policy 101 when he forgot that, as a major shareholder of a public corporation, he shoulders many of the taxes paid by that company even though they don't show up on his 1040. Oops.
The Tax Policy Center puts out extremely valuable work, but slipshod analysis like this puts everything you do into question. Mr. Berman obviously has an agenda that pushes him to write blog entries hopelessly flawed by egalitarian cliche. Perhaps all your work is flawed as well?
Is is most astonishing when these statistics are compared to something like the return from purchasing a large winning lottery ticket. In most cases, the current value (that is, the amount the lotto agency will give you if you take the prize in one lump sum, rather than over a period of years) is significantly than these people get year after year. And lottery winnings are subject to a 27% federal withholding and, in most states, a substantial state withholding.