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What's behind "low" rates for the "rich"?

February 23, 2011

You can have a lot of fun with IRS data, if you're into that sort of thing. Martin Sullivan of Tax Analysts is, and he used IRS data to pin down the effective tax rate of dwellers in Leona Helmsley's old place:

Like so many high-profile Manhattan skyscrapers, the Helmsley building has its own zip code. The IRS tabulates individual tax return data by zip code. So we can see how much income tax was reported on individual tax returns that filed from the Helmsley Building. In 2007 there were 130 returns using the building’s zip code. The IRS data do not reveal whether these returns were filed by individuals using the building as a primary residence, secondary residence, or as a business address. In any case these are not your typical straphangers. Average adjusted gross income per tax return is $1.17 million.

...


As is true for most rich people, payroll taxes are small relative to income taxes. In 2007 the social security portion of payroll taxes (12.4 percent rate) was imposed on no more than $97,500 of wage and self-employment income. The Medicare portion (2.9 percent rate) had no limit. For Helmsley filers estimated payroll taxes added only 1 percentage point to their effective tax rate. Combined income and payroll tax liability tax for this privileged group was only 14.7 percent of AGI.

At Forbes.com, Janet Novack isn't surprised by the "low" rate:

The rich folks’ low tax rate shouldn’t come as too big a surprise. As I pointed out here, because of the historically low 15% rate on long term capital gains (compared to a top tax rate of 35% for ordinary income, like salary) the 400 highest income Americans now pay a lower effective federal income tax rate than the merely well paid. In 2007, the 400 derived two thirds of their average adjusted gross income of $345 million from capital gains and paid an average effective rate of just 16.6%.

The implication is that the "rich" are getting away with murder. Yet this 14.7% number leaves a lot out. First, it's a percentage of "Adjusted Gross Income," before the deduction for state and local taxes. If you live in Manhattan, you pay a lot of that.

Second, it leaves out the amount that's already been taxed elsewhere. The low effective rate is the result of the 15% top rate on dividends and capital gains. The dividends are distributions of income that has already been taxed at a 35% top rate, so you can quickly get to over a 40% combined rate on that income, once corporate taxes are counted.

Capital gains are also deceptive. To the extent they result from the sale of stock, part of that is accumulated income that has been taxed at the corporate level. If the asset has been held for a long time, a big chunk of that taxable gain results from inflation -- in other words, from no real gain at all.

Once all taxes and inflation are factored in, the effective rate is a lot higher than 14.7%.

Related:

Taxing the heck out of the top 400 taxpayers won't help the bottom 20 million

How 'progressive' do we want to be?

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Comments

Dont forget that of all three main sources of federal tax revenue, (payroll, individual income , corporate) about 43 percent is from individual tax revenue, another 43 percent is from payroll tax and the rest is from corporate tax. yes the wealthiest pay the most of the individual income tax but the payroll tax makes up just as much money in revenue as the individual income tax revenue. It used to not be that way. the amount of revenue from payroll has increased while corporate tax has decreased. in fact since around 1965 the amount of revenue from payroll was a bigger source than the corporate tax. I think big companies factor in the cost of an employee in terms of how much it will cost them in tax before the hire and prob consider that in how much they will give the person in salary. also the employer payroll tax is a deduction from income for calculating tax liability. Plus the corporation may not get a preferential tax rate for dividends from investing in other companies but they do get a dividend received deduction to help lower the revenue from that dividend for income tax. As you know social security has a low cap at about 100k and so most of the payroll tax will fall on the 80 percent of the tax payers. Thats why the janitor pays almost the same percentage as the wealthy because they wealthy are not taxed on all their wages only up to 100k. you can read the sources of federal tax revenue from the senate joint committee on taxation. Also dont forget that qualified dividends also got the preferential tax treatment as well. So you dont have to sell your stocks to get a capital gains rate. Utilities usually pay dividends as they are not growth stocks. How many americans making middle class earnings can really afford to invest in the stock market and send kids to school and make enough from the stock market to live well.

harvey
cpa candidate

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