"The 400 highest earners in the country, by adjusted gross income, earned an average of $271 million each in 2008 (the most recent data available). Most of them paid a federal tax rate of 10 to 20 percent, and by far the largest portion of their income derived from capital gains, dividends and interest."
The data also shows that 56.8% of the AGI of these 400 individuals was derived from capital gains, which in 2008 were taxed at 15% rather than the usual 20% (18% for assets held over five years). That is quite a tax reduction for 400 individuals. Consider that if average AGI was $271 million, then for the group, aggregate AGI was $108,400,000,000. Capital gains represented 56.8% of this amount or $61,571,200,000. Assuming a normal rate of 19% (on average (I'm guessing)), the 4% rate savings resulted in reduced revenues for the fisc of $2,462,848,000 for 2008. Yes, I realize that these are averages and perhaps some sales would not have occurred without the reduced rate.
President Obama's FY 2013 budget or ("Greenbook") includes a proposal to have these 400 and others with income above $200,000 ($250,000 if married) have a 20% capital gains rate. That is projected to generate $36 trillion over ten years.
Additional revenue would be generated from the "upper-income" taxpayers (beyond the 400; roughly 2% of taxpayers) by:
- Restoring the 35% and 39.6% brackets and letting the 2001/2003/2010 tax cuts expire
- Reinstating the limitations on itemized deductions and personal exemptions
- Taxing qualified dividends as ordinary income
- Taxing net long-term capital gains at 20%
President Obama projects that these changes will generate $1,422,059,000,000 (that is $1.4 trillion) over 10 years! He also proposes to tax carried interests as ordinary income to generate $13.5 billion over 10 years.
The New York Times has an article with a good discussion of tax rates and some issues involved - "Working All Day for the I.R.S." by James B. Stewart (2/17/12). (It really should be "Working all day for the fisc" not the IRS.)
Some thoughts:
- A good discussion on how progressive the federal income tax should be and how to get there would be great. It should include discussion of the 130+ tax breaks for individuals and how that lowers the tax liabilities of many individuals. This discussion should also consider which tax expenditures to remove or reduce, how a lower corporate tax rate interacts with the individual rate structure (such as due to dividend and passthrough entitites), and what happens to AMT.
- Why the focus on people making over $200,000 if single and $250,000 if married. Indeed, these are high income individuals representing about 2% of individuals, but these income levels pale in comparison to the average AGI of the 400 top income individuals who had average AGI in 2008 of $271 million! Perhaps there should be more brackets (such as for income over $500,000, over $1 million and over $2 million).
- Complexity - the provisions for upper-income taxpayers have a lot of pieces to fit together. For example, reducing itemized deductions and then being sure they don't also provide a benefit greater than a 28% savings. Can't there just be one cut-back?
- I think most people think the cut back of tax benefits for upper-income individuals is just for itemized deductions. It is not. It would also include exclusions, such as for tax-exempt bonds and employer-provided health insurance, and more. I think this also might cause some complexity and certainly some uncertainty as to exactly what one's average and marginal tax rates are. (See pages 73 - 74 of the FY2013 Greenbook.)
- Given the point in the prior bullet, we should change tax forms to require people to list all of their income and then back out excluded income such as for employer-provided health insurance. This would give a more accurate (and lower) effective tax rate that truly reflects the number of tax expenditures (tax breaks) that all individuals are entitled to claim. It would also be a reminder of all of the various subsidies, tax breaks, pork, or whatever people want to call the $1 trillion dollars of tax expenditures in the federal income tax system.
What do you think?
Comments
Company: TTX
Difficult questions without easy answers. The total income of the top 400, despite massive averages, is small. The fascination with income levels about $200,000 rests on the data...the most income dollars arise between $75,000 and $1,000,000 or sao. The tax systems is designed, foremost, to collect revenues. We have an eternal issue of defining "income", not defined in the Code, and generall constricted in tax practice by an early case requiring income to be realized [in cash] to be subjected to tax. Economists' definitions are dollar denominated measures of "value increments" not always currently realized as cash, For those with very high income the realized gains are the sum of wealth increments and decrements occuring over many years The timing of recognition is elective and can vary widely for reasons that include tax factors and other considerations. The more our tax system relises on this "income", the more unpredictaible and variable tax receipts will become.
The definition of "income" will be an even more heated topic if wer introduce non-cash elements as taxes are alwayrs required to be paid in cash.
Most people do not focus on their tax rate, but the tax due or refundable, followed by their dollar liability. Rate awareness starts usually around income of $150,000 or so.
We can expect certain results from including items like interest on municipal bonds as taxable, as municipal interest rates will rise to compensate, increasing pressure for higher state tax collections.
If we exepct to increase tax collections, that should be clears so we can how to "allocate" that increase to best estimate the economic effects to follow, including price inflation.