How The Rich Avoid Paying Taxes
It is a nice object lesson in how a couple of obscure changes in the tax law can save a few people a lot of money. The IRS has reported that the number of those earning $200,000 or more who paid no taxes rose sharply in 2005. More than 7,300 of these worthies avoided U.S. income tax entirely, two-and-a-half times the year before. About 85,000 paid worldwide taxes of less than 10% of their income.
The study, by the IRS’ Brian Balkovic, cites two big reasons for this plunge in tax liability. One was a 2004 law that let individuals use foreign tax credits to reduce their Alternative Minimum Tax. The other, passed in response to Hurricane Katrina, opened a temporary window for people to make big cash charitable contributions without facing the normal limits on how much they can deduct. The 2005 tax return data are the most recent available.
The impact of just these two changes was stunning. Balcovic reports that in 2004, 412 of 3 million high-income taxpayers reported about $16 million in foreign tax credits. In 2005, more than 3000 wealthy filers took nearly $450 million in these credits. The increase in reported charitable contributions was also dramatic.
Of course, these were not the only reasons the wealthy were able to cut their tax liability to zero or near-zero. They also relied on such golden oldies as tax-exempt bond interest, large casualty losses, and deductions for investment interest.
To be fair, the study also shows many high-income folks paid hefty taxes. While 2.4 percent of the $200,000-plus crowd paid little or nothing, one-third paid effective rates of 20 percent to 25 percent and nearly one-quarter paid 25 percent or more.
Of course, it is worth remembering that a $200,000 earner in 2005 was very different than one 30 years ago. In 1977, only 53,000 taxpayers reported adjusted gross income of $200,000 or more. In 2005, that rose to more than 3.5 million. To put it another way, you might say that $200,000 of 30 years ago is the new $700,000. But even if you adjust for inflation and look at it in 1976 dollars, the pattern is the same, Many of these folks are hardly super-rich, but they have accountants and can figure out how to take advantage of a loophole-ridden tax code.
Thanks to Pete Davis over at the blog Capital Gains and Gamesfor pointing out the study.