How much do the wealthiest Americans make, and how much do they pay in taxes?
by Linda Beale
How much do the wealthiest Americans make, and how much do they pay in taxes?
Bloomberg.com’s Ryan Donmoyer has a brief story out on recent IRS statistics of income. See Top Earners Averaged $345 million in 2007, IRS says (Feb. 17, 2010).
Here are the figures cited in Donmoyer’s report (based on Tax Analysts’ data analysis presented by David Cay Johnston on Tax.com):
Average income of top 400 US households in 2007: $345 million (that’s income per year, folks)
Average income of top 400 US households in 2001: $131.1 million (that’s about half)
Average effective tax rate in 2007 for this same group: 16.6% (per Johnston article)
Average effective tax rate in 1993 for this same group: 29.4%
Percent of the top 400 earners in items taxed at preferential (low) tax rates: about 75%
So the richest of the rich managed to do quite well in the artificial boom of the Bush years when most Americans were barely holding even (or actually declining) in wages. They doubled their annual income from 2001 to 2007 in the years after the Bush ta cuts that disproportionately benefited the wealthy.
Johnston adds this comment in his article on Tax.com, noting that the top 400 enjoyed a 27% increase–nine times the increase enjoyed by the bottom 90%:
The figures came at the peak of the last economic cycle and show that widely published reports in major newspapers asserting that the richest Americans are losing relative ground and “becoming poorer” are not supported by the official income data.
These statistics evidence “two long-term trends: that income at the very top has exploded and their taxes have been cut dramatically” says Chuck Marr of Center on Budget and Policy Priorities. Donmoyer, op.cit
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crossposted with ataxingmatter by LInda Beale
When investors purchase municipal bonds, not subject to income taxes, at significantly discounted interest rates this is not in effect taxes paid?
“Johnston adds this comment in his article on Tax.com, noting that the top 400 enjoyed a 27% increase–nine times the increase enjoyed by the bottom 90%:
The figures came at the peak of the last economic cycle and show that widely published reports in major newspapers asserting that the richest Americans are losing relative ground and “becoming poorer” are not supported by the official income data.”
This is an incorrect assertion, as they never prove that the top 400 earning households are the same for each period. Maybe God told them so in a dream. I don’t buy it. What are the odds that someone wins the lottery in both years referenced?
Let’s see, the Buffet family, the Koch family, the Walton family, the Mellons-Scaife, the Petersen family, the Schwartzman family, Mozilla family, the Bloomberg family, the Gates family — well, I think I have made a start here and perhaps others can fill in the rest of the names. A couple of guys are probably out of that pool now, Allen Sanford and Bernie Madoff, but others I think not. And lottery is a good word for it, although I am sure many founders did earn their great wealth due to uncommon acumen, talent, and hard work, most of their kids, nephews, nieces, and descendants got wealthy the old fashion way, they were born to it. Well, I have made a start here, and others can fill in some of the other names. And the whole point of repealing the estate tax is to establish this group as permament oligarchy. By the way Jay, one of the purposes of the AMT was to capture municipal bond income by high income holders, so it is not tax really tax free over a certain income level. Why don’t you do, or find somebody like Greg Mankiw who can show that the upper .01 of U.S. households in wealth and income experiences a significant amount of churning.
Jay and his ilk are apparently more than happy to let the wealthiest Americans slide in regards to their obligation to support their government. Given that their government has structured our economy in such a way as to allow them such a vast accumulation of wealth, oone would hope that the wealthiest Americans would feel a greater sense of patriotism and take part in supporting their America. Maybe he, and those like him, are sychophants of that exclusive club, the One Percenters. Keep in mind that Linda’s post is only focused on the top 400 families. Extrapolate that down a bit to those who are only earning a paltry $5 or $10 million per year. If they are receiving the same prefered tax treatment who the devil is supporting the budget that makes all our useful wars possible?
Jay’s point is also a bit of a red herring. Let’s say that there is 100% turn-over among the top 400 incomes every year. That certainly changes the analysis a bit, but it doesn’t overturn it completely. It would still be the case that those who moved into the to 400 slots would be relatively better off vs the rest of the population now than a decade and two decades ago, and that tax treatment of their good luck is more advantageous – on an absolute basis and relative to the rest of us – than in earlier periods.
So Jay’s point is mistaken in many cases – the rich tend to stay rich – but it is also meant to lead us into quibbling over details. This sort of distraction is pretty common among those who are more interested in getting a particular outcome than in examining the facts. So, rather than getting distracted into a debate over whether there is a lot of turn-over among the top 400 or a little, let’s keep our eye on the ball. The top 400 in any given year earn enough to live many lifetimes in comfort, even if they never earn another dime. They are better off relative to the rest of us than in any other recent period, and the tax code is more favorable to them now than in any other recent period. Under those circumstances, I don’t really care about Jay’s quibble.
Linda,
I would support taking away the tax free status for municipal bonds. That certainly would raise more revenue for the government.
And a good question for you is do you want tax free municipal bonds or not. If you support them on the one hand I don’t see the basis to critisize then on the other given they are an investment vehicle sanctioned by the U.S. federal government.
Obvously the rich are not spending the $345 million each year on consumption spending. Rather they are investing it back into the U.S. economy. Now you’re alternative is to have the government tax more of this money and spend it on its priorities. My problem I that I don’t see how that benefits us in the private economy.
So the richest of the rich managed to do quite well in the artificial boom of the Bush
How did the rich manage during the artifical boom of the Clinton years?
I think you missed the meaning of “artificial boom” here–it refers to the fact that there was a boom for the rich and a bust for everybody else!
Cantie, I noted the same phrasing. What a grudging admission that the Bush economy was better than the current. Soon, there will be grudging admission that the Bush stimulus was more effective than “O’s”
Not all muni’s are subject to the AMT. Only private purpose muni bonds are subject to AMT limitations. So theoretically, a rich person could pay nothing in federal taxes if they own only income producing public muni bonds. AMT legislation requires that numerous taxpayer deductions, exemptions, and certain forms of tax-exempt income be dubbed as preference items — to be treated as taxable income. One of those preference items is interest on private-purpose municipal bonds (other than qualified 501(c)(3) bonds) issued after August 7, 1986. (The Tax Reform Act of 1986 called for tax-exempt bonds to be classified into two categories: private-purpose and public-purpose.) Project bonds — those issued to fund housing, student loans, airports, and industrial projects—are classified as private-purpose bonds. The private versus public distinction is critical to those who may be subject to the AMT. Private-purpose AMT bonds have little appeal to an investor who faces the tax for even a short period, since he or she may be subject to either a 26% (on the first $175,000 of income) or 28% tax (on all income over $175,000) on the interest income.
Linda,
I would support taking away the tax free status for municipal bonds. That certainly would raise more revenue for the government.
And a good question for you is do you want tax free municipal bonds or not. If you support them on the one hand I don’t see the basis to critisize them on the other given they are an investment vehicle sanctioned by the U.S. federal government.
Obvously the rich are not spending the $345 million each year on consumption spending. Rather they are investing it back into the U.S. economy. Now your alternative is to have the government tax more of this money and spend it on its priorities. My problem is that I don’t see how that benefits us in the private economy
Um, the rich aren’t spending $345 mln each year, nor are they investing “it”. They are spending some, investing some. It is almost certainly not true that the rich in question here, those in the top 400 spots, “are investing it back into the US economy”. Investing some of it, yes, and some of that in the US economy, while spending some and investing the rest overseas. So the impression of mighty rich investor virtue in Cantab’s text is quite misleading.
More to the point, though, the same money (after taxes) going through middle class hands would end up being split between the same two options. And government, surprisingly enough, faces the same options – spend or invest. If Cantab doesn’t see how that benefits us in the private economy, that is as much a demonstration of Cantab’s lack of vision as anything else. Those who aren’t among the top 400 may fail to see who the growing enrichment of the 400 beneifts us in the less-rich part of the economy.
I think a lot of this is again missing the point and that is the effective tax rate. There are likely no lottery winners in the 400 top families either in 2001 or 2007. There are very few jackpots of that size and most are won by groups not a single family. Even if they were won by a single family, the taxes would be way more than 16%. That is the key figure and while there are likely some tax free bonds in the portfolios, the biggies are dividends and capital gains. Now on the notion that if the government taxes the money it is not available for investment, I note that somehow with a 29% starting tax rate in 1993 we enjoyed 8 years of growth, low unemployment and a balanced budget–I know there were tax cuts as well as tax increases under Clinton, but lets see what happened under Dumbya. Much larger tax cuts on investment income, anemic growth, decent unemployment numbers, but stagnant wages, horrible deficits without even putting the wars in the budget. The super high income people certainly did better, but the average American at best held his or her own. ultimately, the Dumbya economy turned out to be a bubble economy, but on the bright side it has certainly curbed illegal immigration.
My guess is that most of the income of the top 400 is from their substantial ownership in a business entity (income from pass through earnings or divdends). Bill Gates owns 660.9 million MSFT shares. Just from dividends on his MSFT stock, that amounts to $343.7 million a year in income. Warrne Buffet’s income (about $48 million) is actually pretty low compared to his net worth, and that is mainly becuase Bershire Hathaway pays no divdends. Warrne Buffet does make major investmnets as does Bill Gates. I bet they invest far more than they spend. As all of Bershire’s retained earnings are invested.
Unfortunatly, the governmnet spends almost half of each discretuionary dollar on teh Military. I hardly call Iraq a wrothwhile investment, compared to many of Buffet’s or Gates investments. Tax the rich like Bill Gates more – sure (I do not care unless it hurts investmnet). But, do not tell me our goevernment will spend the taxes it wisely, becuase they continously prove otherwise for teh discretionary budget.
The rich have been waging class warfare against the poor from the begining, although they try to keep it under the radar, to throw the schlub’s off the scent.
The creation of surplus labor via legal and illegal immigration has benifited the rich and impoverished the poor.
It is past time we raised the taxes on America’s wealthy.
“My problem is that I don’t see how that benefits us in the private economy”
That’s a bit off the mark. There is opnly a opublioc economy occupied by both private and public entities. Whatever they may do as participants in that economy has a similar effect.
And what they do is not the issue. The government structures the economy through the legislative process concerning both domestic and international activities, and through its maitnenance of the infastructure of the country. That requires its own investment which is equally as valid as economic acitivity as what ever a private party or corporation may do. Granted that expenditures on wars are a total waste of economic activity. Unfortunately I haven’t noticed any serious debate amongst the super rich, or jsut the extremely rich, concerning the cost of war.
Governments serve the purposes of those in control and to a very large extent those are the wealthiest Americans. Serving a useful purpose, as noted above, requires investment and expenditures. When will we stop hearing all the whining abouot paying the bill for a government that protects your personal resources, unfortunately too often in a differential manner. Even in that regard the very wealthiest benefit the most.
Well for me, this is an argument for a flat tax on teh rich – with no exemptions. All income treated the same (e.g. no muni exemptions). At least then we all know the score, and income cannot be shifted or sheltered as easily.
Of course, quick back of the envelope math. For 400 people averaging $345 million income, that is a total of $138 billion. If you capture 10% more of that, then we are talking just under $14 billion in additional taxes, which is not much to write home about. If if you confisctae it all, we still run a big budget deficit.
Kharris,
I don’t make deceptive posts for the simple fact that I don’t desire to deceive anyone. Your ranting and raving along with jack, and run have gone way past tiresome at this point.
Anyway, mcwop showed that a top reasonable upper bround for going after these people might raise about $14 billion in additional taxes. However, the politicans and FED want to be relevant players in the economy so they create tax shelters. This allows them to be like impresarios directing investment in the United States. I would like to eliminate these distortions to our economy. However, the result is that the government would lose some of its influence over the economy. And since when did Washington want to make itself irrelavent.
Mcwop,
True enough, but you’re leaving out the .09% just below that super, super rich category. Those are the people making the paltry $1 million and more. A billion here, a billion there. Soon we’ll be talkin’ abouot real money.
The point is not the total increase in taxes collected. It is also about equitable taxation. The people who benefit the most are paying a relatively minor amount. Patriotism requires accepting one’s share of the burden, whether it is on the battle field of war or the need to support the economy of the government. Paying taxes is part of the process.
Kharris,
I don’t make deceptive posts for the simple fact that I don’t desire to deceive anyone. Your ranting and raving along with jack, and run have gone way past tiresome at this point. And how is it Linda is not focusing on tax shelters and especially municap bonds.
Anyway, mcwop showed that a top reasonable upper bround for going after these people might raise about $14 billion in additional taxes. However, the politicans and FED want to be relevant players in the economy so they create tax shelters. This allows them to be like impresarios directing investment in the United States. I would like to eliminate these distortions to our economy. However, the result is that the government would lose some of its influence over the economy. And since when did Washington want to make itself irrelavent.
I don’t make deceptive posts for the simple fact that I don’t desire to deceive anyone. Your ranting and raving along with jack, and run have gone way past tiresome at this point. And how is it Linda is not focusing on tax shelters and especially municipal bonds. To me that’s deceptive.
Anyway, mcwop showed that a top reasonable upper bround for going after these people might raise about $14 billion in additional taxes. However, the politicans and FED want to be relevant players in the economy so they create tax shelters. This allows them to be like impresarios directing investment in the United States. I would like to eliminate these distortions to our economy. However, the result is that the government would lose some of its influence over the economy. And since when did Washington want to make itself irrelavent
Cursed,
The Mexicans and other illegals are jumping the fence to make money, its not a conspiracy by the rich. And we need many of the legals especially in high tech since not enough Americans seem willing to hit the books hard enough to qualify for these jobs.
I am less concerned with the equitability first and foremost. I think if the taxes on the rich are set at a fair level, does not destroy investmnet, AND most importantly the governmmnet spends it wisely, then a more equitable situation will follow.
Jack,
“Unfortunately I haven’t noticed any serious debate amongst the super rich, or jsut the extremely rich, concerning the cost of war. “
I would add the political class to a lack of serious debate. The war has been overwelmingly supported by both Dems and Reps since 9/11. Heck even Obama is on board with expansion in Afghanistan and victory consolidation in Iraq.
I did notice the lack of any ideas about wealth taxes. You could raise the income tax to 90% on Gates and not touch his wealth….
Islam will change
cantab and CoRev,
I also noted that phrasing. And don’t forget the mention in positive terms of the Clinton dot-com bubble years.
So when is Obama and the Dems going to deliver at LBJ levels like I have been promised?? And where is the pony!?!
Islam will change
Terry,
Clinton’s economy turned out to be a bubble economy – or did you miss the recession that Bush inherited?
Also, I will point out that the bulk of Clinton’s Presidency was with a Rep congress. Note how the wheels started coming off the economy after the Nov 2006 elections put the Dems back in charge of the nations checkbook….
Islam will change
Certainly there was the so called dot com bust, but it did not affect much of anybody except people who foolishly invested excessive parts of their portfolios in the dot com start ups. As to 1996 and thereafter some bad things did happen including the repeal of Glass Steagall and some tax cuts, but those were GOP ideas that the Democrats foolishly went along with. The repeal of Glass Steagall set the stage for the banking crisis and the tax cuts contributed to the overheating that did occur late in Clinton’s presidency. The better argument for you to make would be that Clinton benefitted from the revolution wrought by the pc and the internet. I can not argue with that and there is a lot to be said for needing an innovation like that or railroads or the automobile/interstate highway system to stimulate real, significant growth. Unfortunately, those sorts of revolution do not just occur on request and the issue as I see it being posited is how we apportion the tax burden when outflows exceed inflows. The GOP always argues for cutting taxes because in the past there have been occasions where lower taxes have stimulated economic activity and/or shrinking the size of government. Of course no thinking person wants to shrink the size of government to the extent that they benefit from the government and all except the most diehard Rand fans will pretty quickly realize that they benefit from the government in various ways ranging from medical breakthroughs to releatively safe food to law enforcement to the interstate highway system to the internet to cheap electricity to parks to substince when they lose their job or get sick to all kinds of subsidies to their corporate emploers etc. That really leaves the fairness of increasing inflows–the ability to borrow against the future being limited and the article points out that while the some households have done very, very well at a time when most Americans have not, the people who have done very very well are paying a lower percentage of their income in federal income taxes than my wife and I did in 2009 and our combined income was about one 1700ths of the average made by 400 richest households. And that does not count the social security and medicare taxes both we and our employers paid or the fact that we are in a high tax state where we pay a large amount of state income taxes and property taxes which serve to reduce our federal income taxes. Do not get me wrong–I do very well and would willingly pay more in taxes if it would make the country better for my children, but I am not an idiot who thinks it is fair that I pay more taxes because I and my wife depend on wages for most of our income so that those who clip coupons or manage inherited wealth can pay less.
” I think if the taxes on the rich are set at a fair level,” That’s what equity is all about, a fair level for all involved.
“How much do the wealthy make and how much do they pay in taxes?”
2007 IRS Data (not including Social Security/Medicare)
Top 1% (AGI = $410K+ per year,) pay 40.4% of Federal Income tax (avg rate = 22.45%)
Top 5% ($160K+) pay 60.6% of the Federal Income Tax (20.5%)
Top 10% ($113K+) pay 71.2% (18.79%)
Bottom 50% ($33.8K-) pay 2.9% (3%)
http://www.taxfoundation.org/taxdata/show/250.html
The only thing taking away the tax exemption on munis would do is raise expenses for the states and local governments involved. Muni rates would go up immediatly to the rate on taxable bonds, so that while the federal government would be better off the states would be worse off. So you raise taxes for all by doing this, since property taxes would have to go up, as well as sales taxes (since thats how a lot of local government is funded).
The exemption is really a form of federal revenue sharing. The other way is to have the feds pay the states/localities an offset fee, which doesn’t help the federal government.
Municipal bonds are taxed indirectly by providing lower yields than equivalently rated/similar maturing corporate bonds. Munis also aren’t held to the same disclosure standards as corporates, which is one reason why their is a muni insurance market that had been much more robust prior to the creation of the CDS.
After a quick persusal of Schwab, currently, shorter duration munis yield 65-70% of similarly rated corporates and longer duration munis yield ~80% of similarly rated corporates. So while the rich may be investing in these and not explicitly paying taxes, they are implicitly funding government through their acceptance of lower yields.
Municipal bonds are taxed indirectly by providing lower yields than equivalently rated/similar maturing corporate bonds. Munis also aren’t held to the same disclosure standards as corporates, which is one reason why there is a muni insurance market that had been much more robust prior to the creation of the CDS.
After a quick persusal of Schwab, currently, shorter duration munis yield 65-70% of similarly rated corporates and longer duration munis yield ~80% of similarly rated corporates. So while the rich may be investing in these and not explicitly paying taxes, they are implicitly funding government through their acceptance of lower yields.
The top 400 income earner are not your “typical” top 1 % payer of income taxes IRS collect. Most of those “top” 1 % are very successful small businesses, professionals, and entrepreneurs.
In order to tax the truely wealthy, you have to increase consumption tax or capital gains tax. But it’s a double edged sword. Consumption tax will be fair, but hurt the lower income families. Capital gains tax will affect investment patterns. There is no good solutions. If you raise the top income tax level, you will affect small businesses and the bottom line is…. the middle class gets hit with more taxes…
Remember, the truly wealthy like those top four hundred earner will like very high income taxes, because they are mainly subjected to capital gains tax. With a high income tax, it creates a oligarchy just like in Europe, a very high structured progressive society. The rich stayed rich, the rest have very limited competitive capacity to become wealthy…
Terry,
“The better argument for you to make would be that Clinton benefitted from the revolution wrought by the pc and the internet. “
I have made that argument many times here at AB. Clinton had everything literally fall in his lap. A perfect storm. We had the end of the Cold War and the peace dividend, Perot ran and let Cliton get elected, Bush Sr raised taxes after his “no new taxes” pledge (which BTW I give him credit for honesty – Bush Sr is easily one of the under appreciated Presidents of the 20th century), then you add the US transitioning into the information age. Then you add the fiscal conservative Rs win in 1994 (after killing the budget busting Hillary-Care) and Clinton ran from the center and had a fairly successfull presidency.
Yes, the dot-com bubble came along and popped right as he left office. This, plus 9/11 dropped a bundle of unanticipated crap on Bush Jr’s lap. But we recovered fairly quickly until the wheels came off the next bubble in late 2008. If the crash had waited only 6 more months it would have fallen purely on Obama’s lap as oppossed to hitting at the transition.
But according to cactus only the party of the Presidency means anything. Well we have a ‘D’ in office so I’m waiting for my LBJ style growth and my pony…
Islam will change
Cantab
I think I’d rather the US assist state and local governments directly (which we do anyway) and eliminate the indirect way of doing it through munis, which provide a benefit only to the very wealthy who are the purchasers–as noted, the rate on munis is set so that the wealthy will have more after taxes with the munis than with taxable interest.
But your point about the wealthy investing their weallth here just doesn’t hold. They may well be investing overseas. Some is spent on conspicuous consumption. etc. The fact that their money goes back into the global economy one way or another doesn’t make it all right for our tax code and system of rewards to create an oligarchic class. If we care at all about “liberty” and the democractic institutions that make our personal liberty possible, in the day-in and day-out ways that it really matters, we also need to care about preventing the continuation of the trend towards income concentration in the hands of a very few.
No matter what, it is simply obscene that anyone could earn in half a day what the average American struggles to earn in a full year of hard work. Something is wrong and values and prices are completely out of whack when that can happen.
Remember, AGI does not include all of the income of the wealthy…..
All this suggests that the best tax reform would be to eliminate the preferential rate for capital gains and let the Republican-written estate tax law take place as written–ie, a return to the pre-2001 Bush tax bill exemption levels and rates in 2011.
Bush didn’t inherit a recession. The recession started in March of 2001. Nice try though!
Yeah, everythinf fell into his lap. It had nothing to do with his tax policy in 1993 before the regressives to control of congress.
The Bush years were the lowest in terms of job growth since the great depression, but Bush did a great job!! I thought those tax cuts were supposed to be a big boon for business and job creation.
Do you know how much disposable income the bottom 50% would have to spend if they paid higher federal taxes???? I like how you conveniently ignore SS and medicare, which they do pay.
Someone making 30k per year paying 30% in fed taxes would have less than 20k to spend on necessities like umm oh I don’t know shelter, food, clothing.
Funny how know one brings up corporations like Exxon making over 30 billion last year and not paying a dime in taxes to the U.S. Yeah, let’s beat up the poor!
I believe the important info missing from your post is what occurs to the cash following it is taxed. There appears to be a knee-jerk assumption that cash from taxes automatically will probably be spent in great and meaningful methods.
http://www.forexkillersecrets.com
“No matter what, it is simply obscene that anyone could earn in half a day what the average American struggles to earn in a full year of hard work. Something is wrong and values and prices are completely out of whack when that can happen.”
You might think it’s a moral outrage, but I think it’s great we live in a country where you can earn that much. American is one of the few countries where you can rise from rags to riches. Why is that bad? What is wrong with someone being a millionaire especially if they have a unique talent or business acument that no else has coupled with hard work that very few people can do or are willing to do? A lot of millionaire’s in the United States started out poor or as average middle class people, but had a drive, vision and talent that most of their peers didn’t have. Steve Jobs and Steve Wozniak started Apple in Job’s garage and I think that’s beautiful, but you want to destroy that kind of entrepreneurial spirit. That is obscene and wrong and completely out of whack when someone like you wants to limit an individual’s potential and their income because you think it’s wrong that someone makes more money than someone else even though they did it legally and ethcially and didn’t take it from anyone else.