One in 189 of those with $200,000 or more in AGI paid no federal taxes in 2009
by Linda Beale
One in 189 of those with $200,000 or more in AGI paid no federal taxes in 2009
[edited 5/30 to correct “one in four” goof]
The IRS recently released another “statistics of income” report. This one has news that should make most ordinary Americans think twice about the GOP agenda of reducing taxes for the rich while cutting back on all kinds of programs that serve ordinary Americans–the fact that a large percentage of the upper crust–one out of every 189 Americans with $200,000 or more in income –pay no federal income taxes whatsoever. See Rubin, IRS Finds One in 189 High Earners Paid No U.S. Taxes in 2009, Bloomberg.com (May 29, 2012).
How does someone with $200,000 or more in income pay no taxes, when ordinary folk with jobs who make $50,000 to $75,000 pay 15% to 25% of their income in taxes?
- As I’ve often discussed here (see items under charitable contribution deduction), rich folk can easily afford to give away more to charity and they get a tax bonus that is much more than that available to poorer folk when they do so. They get an especially big break if what they give away is appreciated stock that they bought a while ago–and rich folks own most of these financial assets, so they are the ones that get almost exclusive enjoyment of this lucrative loophole: they get to deduct the full value of the stock they donate, without having ever paid taxes on the appreciation. That’s one of the boondoggles in the Code that Congress can and should get rid of, no matter what else it does about taxes.
- Another way rich folk pay less in taxes is by ensuring that the income they earn is of a type that isn’t subject to tax. Big CEOs generally have rich pension plans and other forms of deferred tax compensation that facilitate lowering their tax bills. Rich folk are the buyers of municipal bonds, which again enjoy a specific tax break in section 103 of the Code that excludes the interest income from the owners’ tax returns. This is supposed to help municipalities, since the tax break gives the wealthy an incentive to buy the bonds even though they pay lower rates, since all the interest is tax free. But it is a costly break that provides an advantage only for the rich. Wouldn’t it be better to eliminate it and tax wealthy people on all of their interest income at ordinary income rates? Maybe the tax money could also fund programs for important municipal projects–like intracity rail transportation in Detroit, a much needed idea whose time has come…..
- A third way that rich people avoid taxes is by having so many deductions–high-end medical “equipment” (like swimming pools for arthritic patients), lots of interest on mortgages on high-end homes, and other deductions of special value to those who would otherwise pay tax at a higher rate.
As the Rubin article notes, the IRS announced that for 2009 there were 10,080 households with “adjusted gross income” of $200,000 or more who paid no US or foreign income taxes. Adjusted gross income is not economic income–AGI does not reflect items that are excluded from the calculation of income for tax purposes and is reduced by certain “above the line” deductions that are especially beneficial to the wealthy. “Using an expanded concept of income that includes some nontaxable items and looking only at U.S. income taxes, there were 35,061 households, or 0.88 percent, that paid nothing.” Id.
The Alternative Minimum Tax was initially enacted to deal with the general unfairness of having extraordinarily well-to-do people be able to avoid tax entirely. As it was modified over time, it came to function as a way to ensure that those who accumulate lots of different deductions nonetheless pay tax, by treating some of those deductions as unqualified preferences for AMT purposes. But the AMT has lost a lot of its punch as Congress has eviscerated its provisions, such as the limitation on foreign tax credits. This is one of the reasons that many progressives have supported two things–elimination of the preferential rate for capital gains (a type of income especially enjoyed by the ultra rich) and adoption of a new type of minimum tax on some high level of gross income (the Buffett Rule). This new information about the number of rich people who end up paying nothing in federal income taxes should result in more people telling Congress that it’s time to pass these two proposals.
crossposted with ataxingmatter
Actually some of Linda’s examples are of items which would not get to AGI, so this is a little confusing.
Detroit doesn’t need a train, Detroit needs more police and federal agents to clean up the mess.
I’m sorry to hear that any got away with it, but I still don’t think that makes 1/189 a “large” percentage. Maybe that’s a hangover from the “1 in 4” version?
The mortgage (and many other) deduction is phased out as your income goes up, so the line about rich getting a big tax break on their big homes is B.S. This article teaches me nothing. I am sure that the reasons given are not the real reasons why so many people can avoid taxes. Do more research and get back to us.
The mortgage (and many other) deduction is phased out as your income goes up, so the line about rich getting a big tax break on their big homes is B.S. This article teaches me nothing. I am sure that the reasons given are not the real reasons why so many people can avoid taxes. Do more research and get back to us.
The mortgage (and many other) deduction is phased out as your income goes up, so the line about rich getting a big tax break on their big homes is B.S. This article teaches me nothing. I am sure that the reasons given are not the real reasons why so many people can avoid taxes. Do more research and get back to us.
“Rich folk are the buyers of municipal bonds, which again enjoy a specific tax break in section 103 of the Code that excludes the interest income from the owners’ tax returns. This is supposed to help municipalities, since the tax break gives the wealthy an incentive to buy the bonds even though they pay lower rates, since all the interest is tax free. But it is a costly break that provides an advantage only for the rich. Wouldn’t it be better to eliminate it and tax wealthy people on all of their interest income at ordinary income rates?”
Well, no, not really. Because that lower tax rate (ie zero) is fully reflected in the interest rates that munis pay. Kill the tax benefits, sure, why not? Then watch muni interest rates rise. As one would expect in a functioning market. The tax break is already capitalised into the value of the bonds.
And complaining that someone earning $200,000 doesn’t pay tax if they give away $400,000 to charity seems a little odd.
What’s the point? That 1 in 200 don’t pay taxes in a given year? I think this is a very low percentage.
2008 was a bad year, So people had tax losses they could take. This is the system we have. Move on Linda, there is nothing to see here.
Linda,
You do know that you don’t get the full value of charity gifts, right? I think its like 30% and that’s after you take advantage of all the automatic deductions.
You know the Heinz-Kerry’s are one of the biggest owners of Tax-free muni’s don’t you. And there are currently more than 1 in 189 Dems in Obama’s administration who owe back taxes. Even Kerry owes taxes for his Yacht, not like he can’t afford to pay…
And don’t forget that Buffet has been litigating his tax bill for years….
But I do like the AMT – hits affluent Blue state cities the most! people who want higher taxes get to pay them! Karma!
Another ‘I hate the rich’ rant.
Islam will change
Maybe 1 in 189 pays no taxes, but the other 188 pay a lot. The top 5% of taxpayers with AGI > $155K paid 59% of all Federal Income taxes, (the other 95% paid 41% of the total) http://ntu.org/tax-basics/who-pays-income-taxes.html.
The longstanding high-income phaseout of personal exemptions and itemized deductions was something targeted by the Bush tax changes, gradually phasing out completely. As a consequence, it does not apply for 2012. It would come back in 2013 if the entire package of Bush tax cuts were to expire as slated, and of course Obama has included a proposal for a cap to prevent this special boon for the wealthy in his 2013 budget.
Your assertion that my list of items does not explain tax avoidance is simply that, an assertion. And it is wrong. While these may certainly not be all of the items that lead to no taxes for the wealthy, they are ones that figure largely in those returns. For example, read any of the vast materials on municipal bonds and you will find that municipal bonds are bought almost exclusively for their tax-exempt interest, and are most appealing to those with the highest incomes who want to avoid taxation. The mortgage level at which the mortgage interest deduction is available ($1 million) and the fact that it is more beneficial to those at higher incomes with higher rates, means that this very expensive subsidy is of special benefit to high rollers, etc.
You don’t find one out of every 189 a large percentage, given what we are talking about? No–I originally had one out of 189 in the title. Not sure how I slipped up and changed that to one out of four–that was the brain freeze. But one out of 189 seems to me like quite a significant percentage to pay no federal income taxes whatsoever.
Other more fraudulent factors that may enter into zero taxation are basis overstatements or engaging in shelters that convert ordinary income to capital gains and/or create phantom losses or managing to defer the inclusion of income.
Tim
Yes, if you kill the municipal bond tax exemption, municipal bond interest rates would increase. That’s the whole point of the exemption: i.e., it is meant to be a federal subsidy to municipalities. But it achieves that by way of giving a big federal tax break to the wealthy (who are by far the predominant purchasers of munis, and the group that determines what interest rate they can be sold at).
As for my point about the charitable contribution deduction. You think it is “odd” to suggest that receiving a deduction for something you haven’t paid for is inappropriate? You seem to miss the point. First, this statistic is for those who make $200,000 AND UP….. the main recipients of the benefits of the charitable contribution deduction for value rather than basis are of course the upper-crust owners of those financial assets eligible for that deduction. Whereas ordinary folk who make a contribution of their after-tax wage income or their old car or whatever will not get a deduction for untaxed appreciation, wealthy folks who give stocks will get a deduction for the untaxed appreciation–not for what they’ve actually invested. That’s what we tax nerds call a windfall. Like the muni interest exemption and the recent reductions of the estate tax, this is a windfall that accrues almost exclusively to the uppercrust.
Buffpilot
So rich Dems own munis and rich GOPers own munis. I’m supposed toadjust my consideration of policy issues to protect rich Dems? Haven’t done that before and won’t doi it now. I don’t think the muni tax exemption makes sense for either group. I’m generally more supportive of Democratic politicians than Republican ones, but I don’t carry partisanship to favoring what seems like bad policy just because it benefits some Dems as well. And while I appreciate Buffet’s efforts to create more recognition of the lopsidedly rich-favorable nature of our current tax system, I don’t therefore expect him to be an angel on all issues of taxation or tax policy. Do you?
By the way, one can argue against tax breaks for the rich without “hating” the rich. (Buffet is a good example–he argues against tax breaks for the rich and clearly hates neither himself nor other rich people!) There are good rich folks and bad rich folks, just as there are middle class and poor good and bad. Good tax policy hasn’t got anything to do with that. It has to do with whether giving a tax break to people that don’t need it makes sense when we are also claiming deficit woes make it impossible to improve infrastructure, support education, and many other things wie shoudl be doing. I say it doesn’t.
The limitations on charitable deductions are rather complex. Charitable contributions to the types of prototypical charities listed in section 170(b)(1)(A) (churches, educational institutions, medical/hospital charitable institutions, publicly supported charities, governmental units, and certain other organizations) are allowed to the extent the aggregate doesn’t exceed 50% of an individual taxpayer’s “contribution base” (almost the same as AGI) in the year, whereas other charitable cotnributions are allowed up to 30% of the contribution base. Further, charitable contributions of appreciated property that allow a deduction up to the full fair market value are limited to 30% of the contribution base, but any excess carries over for 5 years to be treated as deductible (within that same limit) in those years. So yes, there are limitations, but being able to offset 30% of AGI with such “windfall” deductions is a substantial factor in cutting the tax bill of the wealthy. And of course the charities to which these contributions are made are often enterprises that the wealthy particularly enjoy–the opera, elite universities, etc.–and they often receive other benefits from the contribution (name recognition, status, etc.). All in all, it makes this particular charitable contribution deduction highly questionable, and there have been noted commentaries on the inequities involved for at least the lsat 30 years. See, e.g., the 1984 Treasury Department Report to the President, Tax Reform for Fairness, Simplicity and Economic Growth (1984), at 72-74: in this report under Reagan, Treasury noted that this treatment is “unduly generous and in conflict with basic principles governing the measurement of income for tax purposes.”
the top 5% also have “a lot” more of the wealth and income…..
It would be really worrisome if there were so many wealthy taxpayers paying no taxes whatsoever (a problem in itself, as I say in the post) AND the rest of them were NOT paying “a lot” in taxes. The whole point of a progressive tax system is to ease the tax burden on those who have barely enough to get by and to increase ever so slightly the tax burden on those who have more than enough to get by after considerable luxuries. The question of whether they pay “a lot” depends of course on the comparison used to determine what is “a lot.” If you compare the taxes paid by the typical CEO who makes $10 million (much of it deferred) and invests mainly in assets yielding tax exempt income with the taxes paid by a typical worker making one 300ths as much and paying a much higher percentage of their income (compare Romney’s 14% to a typical secretary’s 25%), then even though the amount is more, it doesn’t seem like “a lot.” This is the whole point of most of the fairness discussions these days. Flat taxes are just another example where across-the-board is assumed, a priori, to represent fair, but shows itself as inappropriate and inequitable when examined.
“That’s the whole point of the exemption: i.e., it is meant to be a federal subsidy to municipalities. But it achieves that by way of giving a big federal tax break to the wealthy (who are by far the predominant purchasers of munis, and the group that determines what interest rate they can be sold at). ”
Linda, for the sake of argument, assume that the only purchasers of municipal bonds are the wealthy. And as a result they’re getting a “huge tax break”. But the other side of that is that they’re not getting a market-derived yield for the credit risk in the bond that they own. This is why coupon rates on munis are roughly 35% lower than bonds with similar risk profiles and why muni yields are often quoted on a taxable-equivalent-basis. One could just as easily argue that the wealthy contribution to the Federal fisc is massively underrepresented by tax filings and that the federal income tax is much more progressive than most studies assume, because it’s the wealthy paying the subsidy for municpals to borrow at lower rates.
You said “Because that lower tax rate (ie zero) is fully reflected in the interest rates that munis pay.”
This claim is objectively false on the face of it. If what you claim were true, then rich people would have no reason to prefer muni bonds over taxable bonds. The fact is that munis pay higher interest than compensates for the lower tax rate which is why the rich fight so adamently to protect this privilige.
The reason for the higher than normal market rates is that munis have a liquidity premium because the market for munis is limited to the rich. Institutional investors like pension funds and foreigners don’t buy them because they are not taxed. A limited number of buyers means lower prices and higher tax-adjusted yields than for nominal bonds. Munis actually raise the cost of borrowing for municipalities
The better alternative is Build America Bonds in which the Federal subsidy is paid directly to the municipalities instead of the rich bond buyers as tax deductions. This means that the market is opened to all bond purchasers, including institutions and foreigners. The resulting tax adjusted cost of borrowing is lower for municipalities than for normal muni bonds because they don’t have to pay the liquidity premium to the small universe of rich bond holders.
You said “Because that lower tax rate (ie zero) is fully reflected in the interest rates that munis pay.”
This claim is objectively false on the face of it. If what you claim were true, then rich people would have no reason to prefer muni bonds over taxable bonds. The fact is that munis pay higher interest than compensates for the lower tax rate which is why the rich fight so adamently to protect this privilige.
The reason for the higher than normal market rates is that munis have a liquidity premium because the market for munis is limited to the rich. Institutional investors like pension funds and foreigners don’t buy them because they are not taxed. A limited number of buyers means lower prices and higher tax-adjusted yields than for nominal bonds. Munis actually raise the cost of borrowing for municipalities
The better alternative is Build America Bonds in which the Federal subsidy is paid directly to the municipalities instead of the rich bond buyers as tax deductions. This means that the market is opened to all bond purchasers, including institutions and foreigners. The resulting tax adjusted cost of borrowing is lower for municipalities than for normal muni bonds because they don’t have to pay the liquidity premium to the small universe of rich bond holders.
You said “Because that lower tax rate (ie zero) is fully reflected in the interest rates that munis pay.”
This claim is objectively false on the face of it. If what you claim were true, then rich people would have no reason to prefer muni bonds over taxable bonds. The fact is that munis pay higher interest than compensates for the lower tax rate which is why the rich fight so adamently to protect this privilige.
The reason for the higher than normal market rates is that munis have a liquidity premium because the market for munis is limited to the rich. Institutional investors like pension funds and foreigners don’t buy them because they are not taxed. A limited number of buyers means lower prices and higher tax-adjusted yields than for nominal bonds. Munis actually raise the cost of borrowing for municipalities
The better alternative is Build America Bonds in which the Federal subsidy is paid directly to the municipalities instead of the rich bond buyers as tax deductions. This means that the market is opened to all bond purchasers, including institutions and foreigners. The resulting tax adjusted cost of borrowing is lower for municipalities than for normal muni bonds because they don’t have to pay the liquidity premium to the small universe of rich bond holders.
to a typical secretary’s 25%
This is a lie. If you look at Table 1 here http://taxfoundation.org/article_ns/summary-2009-federal-individual-income-tax-data, a “typical” secretary making between $32K and $66K ranks in the 25-50% percentile and pays an average federal tax rate of 5.58%.
Meanwhile the top 1% pays an average tax rate of 24%, and the top 5% pay an average of 20%. So the richer both pay a higher rate and more in total taxes on average.
Now it may not be as progressive as YOU might like, but it is DISHONEST to characterize the situation as you do. You are a college tax professor for gosh sake.
The rate is set so that the benefit to the wealthy who buy them of the interest income and non-taxation of that income is greater than the benefit of higher interest at their rates of taxation. So yes, they are getting a subsidy through the system. Not market yield, but with the tax break, a better deal than without the break.
to a typical secretary’s 25%
This is a lie. If you look at Table 1 here http://taxfoundation.org/article_ns/summary-2009-federal-individual-income-tax-data, a “typical” secretary making between $32K and $66K ranks in the 25-50% percentile and pays an average federal tax rate of 5.58%.
Meanwhile the top 1% pays an average tax rate of 24%, and the top 5% pay an average of 20%. So the richer both pay a higher rate and more in total taxes, on average.
Now this is obviously not be as progressive as YOU might like, but it is DISHONEST to characterize the situation as you do. You are a college tax professor for gosh sake.
A key reason why Detroit needs more police and federal agents to clean up the mess—that is, why Detroit is such a mess—is that it has no regional, or even citywide, rapid transit (rail or light rail) system. Is there really any doubt that Detroit is at a huge disadvantage in attracting young professionals and companies that employ them, as against even such rust belt cities as Pittsburgh, not even to mention cities such as Denver and Salt Lake City that have relatively recently-built light rail systems? Detroit is having some success now, finally, in developing a young high-tech “scene,” through incredible giveaway-type programs, but it’s mainly confined to a small area in the city. Bring in a region-wide light rail system and a few international-baccalaureate schools or a few good private schools, and—voila! Suddenly Detroit would become gentrification heaven. And the whole metro area would be rejuvenated soon, too.
“The longstanding high-income phaseout of personal exemptions and itemized deductions was something targeted by the Bush tax changes, gradually phasing out completely. As a consequence, it does not apply for 2012.”
I suspect that very few non-high-income folks even know this. It’s something Obama should talk about–a lot.
Wealthy people own more of all types of asset classes than non-wealthy. And because of the yield disparity, there’s no reason for investors who aren’t subject to the highest marginal tax rate to own muni bonds. So of course relative to the non-wealthy, the wealthy have a higher mix of muni bonds – what you describe as “prefer”. But the existence of this “preference” does not demonstrate that the tax equivalent yields of munis are higher or a “better break”.
The rich “fight [to maintain] this privilege” because if it went away, the value of the munis they currently own would collapse in value as the market yield on the tax-free munis rose to the yield on comparable taxable bonds. It also insulates them to a much greater extent from changes in tax policy or tax policy rhetoric every 4 years.
And there’s plenty of institutional investors that own municipal bonds – specifically insurance companies.
and how much of their total income is left for disposable
Linda:
35,000 of those making > $200,000 AGI paid no federal income tax which is a far greater percentage than what led to the AMT. It does not matter whether they experienced faux – losses Jed and Tim, they had far greater disposable incomes before and after the losses.
Sammie:
and how much of their total income is left for disposable? I would be careful who you call a liar as your analysis is on thin ice as it is. Ad hominems and personal attacks are not tolerated here. You should have learned this by now.
I also don’t find 1 of 189 a “large percentage”. I cannot imagine what understanding of “percentage” would lead one to think it was “large”.
I would imagine that, given the year in question, a major factor was the use of carryforwards from 08 losses, or even losses in 09. If someone was pulling in >200G from investments in 07 and earlier, or even if worked at say Bear Stearns or Lehman, or even Fannie, Freddie, GM or Chrysler, or at many of the LBO’d companies that tanked in 09, not only would 2009 income go down but they may well have had substantial capital losses in 08 that carried forward into 09. They may have sold stock in 08 & 09 to fund living expenses but incurred no taxes because taking into account prior period basis, they had no gain. As well, mortgage deduction and state taxes and exemptions and various exclusions may have offset reduced 09 income.
But in any case 1 out of 189 is probably about the 750,000th most important problem in the world.