Too Much
If Americans ever really digested the sort of statistics that appear regularly in the IRS research quarterly, the resulting storm of protest might make the rage over AIG seem about as fearsome as a tantrum from a toddler.
Of all the people in the United States, 99.99 percent have never perused the pages of the Statistics of Income Bulletin, a research journal the IRS publishes four times a year. For the power suits on Wall Street, that’s a good thing. If more Americans ever really digested the sort of statistics that appear regularly in this journal, the storm of protest from average Americans might make last week’s rage over AIG seem about as fearsome as a tantrum from a toddler.
The latest edition of the SOI journal popped up earlier this month, with a lead article that looks at who made what back in 2006 — and who paid how much in federal income taxes.
But this article goes on to offer a good bit more than income and tax stats for 2006. The IRS authors have, rather thoughtfully, placed the 2006 income and tax data in a neat historic perspective. They go back 20 years, essentially a generation, and, in the process, tell a gripping story of greed and grasping.
Back in 1986, affluent taxpayers needed to report the equivalent of $118,818 to enter the ranks of the nation’s highest income 1 percent. Average affluents in this top 1 percent, 20 years ago, paid a third of their incomes, 33.1 percent, in federal income tax.
In 2006, by contrast, an annual income of $118,818 wouldn’t get you within shouting distance of the elite top 1 percent. In that year, a taxpayer needed $388,806 to hit the income ladder’s top rung.
But the rich in today’s top 1 percent aren’t just making much more than top 1 percent households made 20 years ago. They’re paying much less of that income in federal income tax. In 2006, the top 1 percent paid a mere 22.8 percent of their incomes to Uncle Sam, down from that 33.1 percent in 1986.
America’s rich have, in effect, seen their tax burden shrink a third since 1986.
Over this same period, the top 1 percent have doubled their share of the nation’s income, from 11.3 percent of the total in 1986 to 22.1 percent in 2006.
And the rest of us? The bottom 90 percent of American taxpayers took in nearly two-thirds of the nation’s income, 64.9 percent, in 1986. The bottom 90 percent’s share in 2006: 52.7 percent, or just over half.
How to explain this vast shift in income from average Americans to Americans at the top? Are rich Americans working harder or longer or smarter than they did two decades ago? Or has their growing wealth simply translated into growing political clout, the power to bend the rules that regulate — or fail to regulate — how our economy operates?
You won’t find an answer to these questions in this latest IRS Statistics of Income Bulletin research. But you will find plenty of reasons to ask them.
Sam Pizzigati edits Too Much, the online weekly on excess and inequality.
According to John Arensmeyer of Small Business Majority, fewer than 2% of small businesses would be affected by the provision in Obama’s budget to trim the Bush-era tax cuts that have benefited the wealthiest Americans. Read the Center on Budget and Policy Priorities’ recent report.
WARREN BUFFETT knows there’s something very unfair about the American tax system. He’s often complained that while his 2006 tax rate (for federal income taxes and Social Security withholding) on $46 million of income was 17.7 percent, his secretary’s combined tax rate was 30 percent.
There are effectively two tax systems in America: one for the very rich and one for the rest of us. Income from stock dividends and capital gains, which makes up a disproportionate amount of the earnings of the very rich, is taxed at 15 percent. But the bulk of what the rest of us earn — wages and interest from savings accounts — is taxed at up to 35 percent. Though President Obama’s recent tax proposals are progressive and comprehensive, his reforms don’t do nearly enough to address this significant disparity.
Yes, President Obama’s plan would eliminate the loophole that has allowed hedge fund titans, whose income comes in no small part from management fees, to be taxed at just 15 percent instead of the ordinary income tax rate.
Families earning more than $250,000 and singles earning more than $200,000 would likewise see taxes on their wages and interest increased to a top rate of 39.6 percent from 35 percent. And the rate on both capital gains and dividends on the sale of stock would increase, but only to 20 percent from 15 percent. These changes lessen the unfairness in our tax system; they don’t eliminate it.
The gap between the tax rates for the rich and the rest of us is relatively recent. Until 1921, capital gains were taxed at the same rate as ordinary income. Then Congress enacted a law that taxed capital gains at 12.5 percent while ordinary income was taxed at as much as 58 percent.
In the decades since, the tax rate on capital gains varied — sometimes it increased, sometimes it decreased. But with the exception of a brief period in the late 1980s, it was always lower than the tax on ordinary income. That was not the case for stock dividends, which were taxed like wage income and savings account interest — that is, until President George W. Bush and Congress in 2003 gave dividends the same preferential treatment as capital gains. The Bush tax cuts moved our tax system too far in the wrong direction.
There is a flip side to raising the tax rates for dividends and capital gains. In this market, there won’t be too much capital gain to worry about. So how should we treat capital losses?
Under current law, capital losses that exceed capital gains can be deducted up to $3,000 (losses above that limit can be carried forward indefinitely into future tax years). If we increase the tax rate on capital gains, then a more generous limit on capital losses should almost certainly be allowed. During the presidential campaign, Senator John McCain proposed increasing the $3,000 offset against ordinary income to $15,000. It’s an idea worth dusting off.
The question of how to tax capital gains and dividends is one of fundamental fairness. Why should tax law treat income from savings accounts differently from income from a diversified stock portfolio? Either we push up the rates on corporate dividends and capital gains or we lower the rates on wages and interest: it’s all income and it should all be taxed at the same rate.
Dorothy Brown is a professor of tax law at Emory University. This article appeared as an opinion column of the March 9, 2009 edition of The New York Times: http://www.nytimes.com/2009/03/09/opinion/09brown.html?_r=1&ref=opinion