Tax Rate for Richest 400 Taxpayers Plummeted in Recent Decades, Even as Their Pre-Tax Incomes Skyrocketed
From the title alone, one can guess the conclusion. If not, here is an excerpt.
The top 400 households paid 16.6 percent of their income in federal individual income taxes in 2007, down from 30 percent in 1995. This decline works out to a tax cut of $46 million per filer in 2007, or a total of $18 billion in tax cuts for these households per year.
From this report, certain politicians will continue their lies that "the rich don't pay their fair share of taxes."
Let's look at the data with a bit more intellectual honesty.
- The Top 400 taxpayers represent less than 0.00035% of the total number of taxpayers for the years mentioned, or about three taxpayers out of a million. Other than through political contributions, this group has little power at the ballot box to prevent runaway government spending.
- Indeed, according to the data, the effective tax rate for these Top 400 taxpayers has decreased from a high of 29.93% in 1995 to 16.62% in 2007. Much of this is due to the Bush tax cuts and the decreased tax rates on capital gains and qualified distributions. The effective tax rate on the bottom 50% of taxpayers also trended downward. The CBPP chart above appears more dramatic because the Y-axis origin visually starts at 15%, which happens to be above the average tax rate. The average tax rate does have a slight downward trend over this period.
- However, the effective tax rate for all taxpayers in 2007 was 12.68%, or less than the 16.62% rate paid by the Top 400. However, as reported by CBPP, the Top 400 did indeed pay less as a percentage (but not in absolute dollars) than other groups within the top 10% of taxpayers, as shown in Tax Foundation report (see "Average Tax Rate" in Table 1 and all of Table 6).
- The average federal income tax bill in 2007 was just over $7,900 per taxpayer. The average income tax for the Top 400 was over $57,311,000 ($57.3M) per taxpayer, or 7,200 TIMES the average. The average tax bill for the bottom 50% of taxpayers was just $460. At that price, I certainly hope that the "rich" receive a better government than the rest of us for all that money.
- The Top 400 taxpayers as a group in 2007, all 400 of them, paid nearly $23 billion in taxes. Meanwhile, the bottom 50% of taxpayers, all 70,535,485 of them, paid $32 billion. Think of it, 0.0028% of taxpayers paid an amount approaching that of half of the taxpayer population. At the ballot box on spending issues, this is 400 votes versus 70+ million. Guess who wins.
Congress can raise taxes because it can persuade a sizeable fraction of the populace that somebody else will pay.-- Milton FriedmanA government with a policy to rob Peter to pay Paul can be assured of the support of Paul.-- George Bernard Shaw
- While the effect tax rate for the Top 400 has dropped from a high of 29.93% to 16.62%, the total income tax for Top 400 has increased 214% measured in inflation-adjusted dollars (or 365% without adjusting for inflation). Image that! Lower taxes might actually result in higher revenues. Over that same time period, federal spending doubled (non-inflation adjusted).
- The Top 400 have consistently paid more in taxes than their fraction of the total income. In 2007, the Top 400 earned 1.59% of all income but paid 2.05% of all taxes.
- Despite representing less than 0.00035% of the taxpayer population and despite a descrease in their effective tax rate, the Top 400 pay an increasing percentage of the total tax bill, approaching the amount and percentage paid by the bottom 50%.
- Mathemetically, the Top 400 group is different than the others. It is an extremely small population, less than 0.00035%, meaning that high incomes from a few individuals will greatly skew the data. Similarly, whereas other taxpayer groups, such as the bottom 50%, fit within a defined income range, the income limit for the Top 400 is infinite. Again, extremely large incomes or losses from a few individuals will affect the results for the Top 400.
Multi-billionaire friends Bill Gates and Warren Buffet walk into a bar. A man at the bar yells out, "Bartender, I'd like to buy everyone a round of drinks!" After pouring the drinks and collecting the money, the bartender asked the man why he was so generous. The man replied, "Didn't you know? Now that Bill Gates and Warren Buffet are here, our average income is over a million dollars!"
Reports like the one from CBPP may lead politicians astray. They may buy into one or more of the following fallacies.Fallacy #1: Money is better spent and benefits the society more when spent by the government instead of by taxpayers.
This is perhaps the greatest fallacy of all. Certainly, multi-millionaires or multi-billionaires may squander some of their money on foolhardy exploits. However, the government has not proven to be a virtuous spender either. Do you remember the infamous Bridge to Nowhere or the John Murtha Airport? There are countless other examples. At least the Top 400 taxpayers demonstrated the ability to generate (or hold onto) great wealth. Do we honestly believe that their money in the hands of government will benefit society or the economy more than if it is kept in the hands of the taxpayer?
Fallacy #2: Increasing the top marginal tax rates will increase revenues.
Increasing the top marginal tax rate may indeed increase government tax revenues -- temporarily. All intelligent beings move away from pain. Increasing the pain of taxation will cause high wager earners to take appropriate actions. At the state level, this may mean estabilishing residency in lower-tax states or moving assets overseas to tax heavens. At a minimum, it means employing the best accountants and lawyers to avoid taxation, sometimes by engaging in economically-inefficient activities just to generate tax benefits. Remember, for the Top 400, each 0.1% difference in their tax rate represents over $57,300. Wouldn't you attempt to avoid taxes as much as legally possible?
Fallacy #3: We need a special tax on these Top 400 taxpayers.
We've already tried a similar strategy in the past with the Alternative Minimum Tax (AMT). The AMT was originally created by Congress to target 155 taxpayers (yes, only 155 taxpayers) that "paid less than their fair share" while fully complying with all U.S. tax laws. This ill-conceived piece of -- er, well, let's call it legislation -- was never indexed for inflation and has since affected millions of middle-class taxpayers. The Stimulus bill (ARRA) provided one year's relief for most but it expired at the end of 2009.
Some readers may think, "Well, he must be one of the Top 400 taxpayers." To that I say, "I WISH!!!" I am not a fan of the so-called "progressive" income tax as I believe it to be anti-democratic and encourage excess government spending. Our elections are based on the principle of "one person, one vote" and not "one dollar, one vote". Politicians have a built-in incentive to increase spending in order to win votes. Those that pay the most taxes to fund government spending have the least say at the ballot box.
See also ...
Is Warren Buffett Paying His "Fair Share"?
Who Pays Their "Fair Share" in California?
The Oppressive Progressive Income Tax: California Editionsoquelbythecreek.blogspot.com/2009/07/oppressive-progressive-income-tax.html
Not All Money Is Created Equal
Tax Foundation Data
 "The 400 Individual Income Tax Returns Reporting the Highest Adjusted Gross Incomes Each Year, 1992-2007," Internal Revenue Service
 "Summary of Latest Federal Individual Income Tax Data," Tax Foundation. See Table 1 and Table 4.