III. Some of the Richest Americans Pay Extraordinarily Low Tax Rates
The average tax rate masks the fact that some high?income Americans pay near their statutory tax rate, while others take advantage of tax expenditures and loopholes to pay almost nothing. For example, a hedge?fund manager might characterize his or her compensation as capital gains, thereby paying a fraction of the taxes they would pay if their income was classified as wages, the same as other working Americans. It is these high?income taxpayers that the Buffett rule targets. The Buffett Rule is not an across?the?board tax increase on high?income households; it is a way to ensure that no millionaire is paying less than the middle class.
- Of those making over $1 million in 2009, fully 160,000 households paid less than 30 percent of their income in direct income and payroll taxes in 2009, according to an analysis of the IRS’s 2009 Statistics of Income file by the Treasury Department’s Office of Tax Analysis. (Note that that number is projected to be lower in 2013 when the temporary tax rates on high?income households are scheduled to expire.)
- Of these millionaires, over 22,000 families paid less than 15 percent of income in Federal income and employee payroll taxes — and 1,470 managed to paid no federal income taxes on their million?plus?dollar incomes, according to the IRS.
- The distribution of taxes paid among the 400 richest Americans is particularly striking. One out of every three in this group of the most financially fortunate Americans paid less than 15 percent of their income in taxes in 2008 (see Table 1). And 85 percent of the 400 highest income households paid an effective rate of less than 30 percent.
|Under 10%||Under 15%||Under 20%||Under 25%||Under 30%||Under 35%|
|% of Top 400||8%||33%||61%||74%||85%||100%|
IV. Many High?Income Americans Are Paying Less As a Share of Their Income Than Middle Class Americans
Because some of the richest Americans pay taxes at such extraordinarily low rates, they end up paying less in taxes as a share of their income in taxes than middle?class Americans. To be clear — on average, high income Americans do pay more. That is because the United States has a progressive tax system in which tax rates generally rise with income, albeit not as much as they have in the past.
However, these average trends mask the substantial variation in tax rates, which is even greater for very high?income households. Some of the wealthiest Americans can hire lawyers and accountants to take advantage of tax expenditures and loopholes that enable them to pay a lower share of their income in taxes than average Americans. In particular:
- Nearly one?quarter of millionaires pay less in taxes than millions of middle?class families:
- Twenty?four percent of all millionaires (about 55,000 taxpayers) face a tax rate that is lower than the tax rate faced by nearly 1.5 million taxpayers making between $100,000 and $250,000 (the 90th percentile for this group).
- Twenty?one percent of millionaires (about 50,000 taxpayers) face a tax rate that is lower than the tax rate faced by 3 million taxpayers making between $50,000 and $100,000 (the 90th percentile for this group).
- This is illustrated in Figure 3 which shows the distribution of effective tax rates by income class. This figure shows that, while average rates generally rise with income, a significant portion of the highest income Americans pay less in taxes as a share of their income than middle?class families. The figure also shows that the highest income Americans have much more variable tax rates than middle?class families.
V. The Economic Argument for the Buffett Rule
Economic research has shown that taxes are more efficient (or less distortionary) when taxpayers have fewer opportunities to avoid them. The Buffett Rule would reduce these opportunities for the highest income Americans, limiting the extent to which they can take advantage of inefficient tax shelters or accounting mechanisms to avoid paying taxes.
- In a recent paper, Nobel?prize winning economist Peter Diamond and renowned tax economist Emmanuel Saez note the relatively greater ability of high income taxpayers to avoid taxes, and argue that “the natural policy response should be to close tax avoidance opportunities” (Journal of Economic Perspectives, Fall 2011).
- Research by economist Wojciech Kopczuk has demonstrated that “base broadening reduces the marginal efficiency cost of taxation” (Journal of Public Economics, 2005). Kopczuk also found that the Tax Reform Act of 1986, which broadened the tax base and closed tax loopholes, limited the extent to which high?income taxpayers acted to avoid taxes.
- High?income taxpayers have been shown to avoid taxes by changing the timing of income received. For example, Goolsbee (Journal of Political Economy, 2000) found that the primary response by executives to the 1993 tax increase was to change the timing of their stock options. A permanent Buffett Rule would limit these opportunities for tax avoidance, which would enhance economic efficiency.
- Many tax subsidies are designed to support important goals, many with broader economic benefits, like encouraging and supporting homeownership, retirement savings, and health coverage for the middle class. But these subsidies are often upside down, with the largest incentives going to the highest?income households that often have the least need for them. This not only costs money, it can encourage the perception or reality of unfairness, and is economically inefficient.
The opinions contained in this column are solely those of the writer.
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