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The new Fabulous 400

May 11, 2011

The IRS yesterday published "The 400 Individual Income Tax Returns Reporting the Highest Adjusted Gross Incomes Each Year, 1992-2008." The TaxProf summarizes some of the findings:

- The Top 400's average AGI fell 21.5%, to $270.5m (down from $344.8m in 2007)
- The Top 400 received 1.31% of all AGI (down from 1.57% in 2007)

- The Top 400's average net capital gain fell 32.7%, to $153.7m (down from $228.6m in 2007)

- The Top 400's average charitable deduction fell 20.4%, to $22.7m (down from $28.5m in 2007)

- The Top 400's average federal income tax fell 14.6%, to $49.0m (down from $57.3m in 2007)

- The Top 400's average AMT increased 47.5%, to $3.2m (up from $2.1m in 2007)

- The Top 400's average tax rate increased 8.2%, to 18.11% (up from 16.62% in 2007)

To make the cut of the top 400 in 2008 you needed an adjusted gross income of at least $109,736,000. That's a big decline from the $138,815,000 cutoff in 2007, reflecting the onset of the recession.

Articles about the "top 400" taxpayers often are written as if it's the same 400 every year. The statistics show that very few taxpayers make the cut more than once in their tax lives. 3,672 taxpayers have been in the top 400 in the 17 years beginning in 1992; 2,676 of them have made the cut only once. Only four taxpayers have made the top 400 every year since 1992.

That's not surprising when you think about it. Most taxpayers have their biggest income year when sell their business or have some other once-in-a-lifetime capital gain. 56.81% of the AGI of the top 400 in 2008 was capital gain income.

Because so much of the income of the top 400 taxpayers is capital gain, their effective rate tends to be low, as capital gains are taxed at a lower rate (15% instead of 35%). This bothers people like David Cay Johnston, who feel that the "super-rich" are getting over on the rest of us. Yet as long as tax policy favors lower capital gain rates, this will be impossible to change.

Capital gain rates are lower because a significant part of the gains is inflation -- meaning no real gain at all. Another important part of the gain is from corporation stock, the value of which includes earnings that have already been taxed inside the corporation. Many economists believe that low capital gain rates are sound economic policy, and some countries don't tax capital gains at all. A higher tax on capital gains for the highest earners would say that capital gain rates should be low, except when it really matters.

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

How 'progressive' do we want to be?

Tags: David Cay Johnston.tax policy.TaxProf.Top 400.