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Report: One in Four Millionaires Pays Less in Taxes than Some in Middle Class
A quarter of millionaires in the United States pay a smaller share of their income in federal taxes than many middle-class families, according to a new congressional analysis that offers fresh support for President Obama’s push to raise taxes on the nation’s wealthiest households.
A quarter of millionaires in the United States pay a smaller share of their income in federal taxes than many middle-class families, according to a new congressional analysis that offers fresh support for President Obama’s push to raise taxes on the nation’s wealthiest households. (Photo: Washington Post) The report, by the nonpartisan Congressional Research Service, found that when all federal taxes are taken into account, including taxes on wages, investment income and corporate profits, households earning more than $1 million face an average tax rate of about 30 percent — significantly higher than the roughly 19 percent rate paid by households earning less than $100,000owever, the average obscures a great deal of variation within income categories, the report says, with some millionaires paying rates as high as 35 percent and others paying rates as low as 24 percent. Using 2006 IRS data, the CRS found that about 94,500 households making more than $1 million a year paid a lower rate than the most heavily taxed households earning less than $100,000 year. About 10.4 million moderate-income families paid more than 26.5 percent of their earnings in federal taxes.
However, the average obscures a great deal of variation within income categories, the report says, with some millionaires paying rates as high as 35 percent and others paying rates as low as 24 percent. Using 2006 IRS data, the CRS found that about 94,500 households making more than $1 million a year paid a lower rate than the most heavily taxed households earning less than $100,000 year. About 10.4 million moderate-income families paid more than 26.5 percent of their earnings in federal taxes.
The prime culprit, according to the report by Thomas L. Hungerford, a CRS specialist in public finance, is low tax rates on investment income, such as capital gains and dividends. Although ordinary earnings are subject to payroll taxes as well as income tax rates of as much as 35 percent, investment income — which constitutes the bulk of earnings for many very wealthy households — is taxed at no more than 15 percent.
This disparity has been brought to public attention by billionaire investor Warren Buffett, a former Washington Post board member, who complained that he pays a lower tax rate than any of the 20 employees in his office, who earn much less than he does. After Buffett wrote an op-ed in the New York Times, Obama argued that policymakers should overhaul the tax code to ensure that millionaires pay at least as large a share of their income in taxes as middle-class families do, a principle Obama dubbed “the Buffett Rule.”
The CRS report demonstrates “that the current U.S. tax system violates the Buffett rule in that a large proportion of millionaires pay a smaller percentage of their income in taxes than a significant proportion of moderate-income taxpayers,” Hungerford writes, though “not to the extent alluded to by Mr. Buffett.”
Congressional Republicans have attacked the Buffett Rule — and a separate proposal by Senate Democrats to impose a 5.6 percent surtax on income over $1 million — as “class warfare.” They argue that raising taxes on millionaires would penalize many small businesses, which are the primary engine of U.S. job growth. They also oppose raising taxes on investment income, arguing that it would discourage savings and risk-taking.
The CRS report offers a withering rebuttal to both of those claims. The report notes that just 1 percent of tax returns with business income have adjusted gross income of more than $1 million a year. And those businesses are some of the least likely to create jobs.
“Many observers claim that small businesses are the primary creators of jobs,” the report says, but “most of the research cited by these observers is from the 1980s. More recent research suggests that small businesses contribute only slightly more jobs than larger business.” And the main difference “appears to be due to hiring by new startup firms rather than to existing small businesses.”
Start-up firms “generally do not generate much business income in their first years in operation; consequently, most small business owners of startup firms are not in the top income categories and would not be affected by tax policies that observe the Buffett rule.”
As to savings, the report notes that private saving rates have fallen over the past 30 years while the capital gains tax rate has fallen from 28 percent in 1987 to 15 percent today. “This suggests that changing capital gains tax rates have had little effect on private saving.”
While some argue that lower capital gains rates boost investment in high-risk projects, the report argues that most venture capital “is supplied by pension funds, college endowments, foundations and insurance companies — sources not associated with the capital gains tax. In 2003, only about 10 percent of investors in venture capital funds were individuals and families.
“Capital gains tax rate increases appear to increase public saving and may have little or no effect on private saving,” the report concludes. “Consequently, capital gains tax increases likely have a positive overall impact on national saving and investment.”
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12 Comments so far
Show AllThe rates are one thing however what is equally if not more important is the income that is not taxed. There are many loopholes for the wealthy that aren't taxed at all like municipal bonds, supposed business use of boats, luxury cars and airplanes, political contributions, charitable contributions, the list is endless. It sounds crazy but I really think a sales tax would be more equitable as it would force many to pay something. The tax on financial transactions is really a sales tax for instance.
Good example, however, sales taxes are regressive and far easier to evade, especially for the wealthy (the number of yachts per capita registered in states having no sales tax is exponentially higher than other states, for example). Shifting from income tax to sales tax will result in lower tax collections.
The estate tax (that the wealthy keep trying to kill) is a very unfair tax as it doesn't tax capital gains on asset appreciation that occured prior to the death of the parent.
The heir pays capital gains tax only on asset appreciation that occured after the date of inheritence. No tax will ever be collected for any previous appreciation.
Yeah, but the heir pays cap. gains tax (at 15%) on anything they inherit, if they sell it. Anyway, that's kind of academic for most people. I think the threshold where federal inheritance tax kicks in is $3,000,000. The Republicans are trying to abolish the inheritance tax entirely. That would help to create a hereditary class of monied aristocrats.How Ancien Regime. States, however, have inheritance taxes that apply at a lower threshold.
You're right, a sales tax does sound crazy, because it _is_ crazy if the intent is to create an equitable tax. Sales taxes inherently favor the wealthy, since the better-off among us spend far less of their income. Working people, who spend almost all, if not all, of their income bear the burden of sales taxes. You will notice that nowhere in the article above are sales or property taxes mentioned. When these are factored in, lower income classes pay a higher percentage of their income in total taxes, hands down, compared to wealthier classes.
For more on equitable taxation, go to www.itepnet.org. This site was introduced to me in the pages of CD by another poster, to whom I am extremely grateful.
As an illustrative case, consider Kansas. http://www.itepnet.org/wp2009/ks_whopays_factsheet.pdf
You will notice that even as the income tax rate increases as income rises, the upper income groups pay less in terms of percentage of income. That's because the percent of income that goes to sales tax and property tax drops dramatically as income rises.
As the author currently being researched so eloquently put it during the peroid of the S&L bailouts..."Even those who favor the prevailing free-market dogma may well remember that a democracy that lacks effective and informed public debate during times of crisis is not longer master of its own fate, but an organism at the mercy of outside forces." Brooklyn Law Review, Vol 60, No 4 , Transformation of US Banking and Finance: From Regulated Competition to Free-Market Receivership by Timothy A Canova (at 1354) (Winter 1995) pdf available online
Most people don't understand tax. They have their tax returns prepared for them. My contention is that tax rates of the wealthy are a straw man. Tax rates of the wealthy are not the true injustice. The injustice is that the wealthy are allowed to shelter income from IRS reporting. Most people get a W-2. Their income is reported to the IRS for them. The wealthy report their income to the IRS through their army of tax accountants and attorneys.
Case in point: American's second favorite billionaire Warren Buffett made the news just today. Warren claimed that he made $62 million income last year. Forbes reports Warren as being worth $50 billion dollars. Warren's $50 billion is invested. A $62 million dollar ROI on a $50 billion dollar investment portfolio is about one tenth of one percent (.00126). Warren could have gotten 2% at the bank! Warren and friends pull this every year. Their capital increases year after year but, their capital increase is not reported as income and is never really taxed. They get the millionaires credit from the IRS (wink, wink).
If you doubled the tax rate on the $62 million he reported it would still be a small price to pay on a $50 billion dollar portfolio. Rates are a red herring. Income of the wealthy magically morphs into capital year after year and is never really taxed. Once their wealth has taken the form of capital, then they cry 16th amendment and say you can only tax income.
It is time to once again tax capital itself. It's been done in the past.
This just adds to the notion that "making money is far more easier than to hang on to it." Simply put, the successful investor is just some one whom is able to avoid the tax that we were unable to avoid. To right this unbalanced ship, just change the tax laws.
I tried to get hold of the actual report. From what I could see, ordinary mortals like you and me don't have access.
In addition to mostly belonging to the wealthiest 1% of the population, our Congressional "representatives" are privy to information denied the rest of us.
File a FOIA Freedom of Information form.
How about headlining with the correct wording? Don't you mean 'tax rates' instead of 'taxes'? Some people may not read the article and get the wrong idea.
Regardless, I support keeping capital gains rates at current levels. Investment capital has already been taxed once. There is a risk of loss that is not inherent in wages and salaries, so a lower rate is warranted. Current tax law limits losses to $3k per year so the system is not fully exposed to losses. The tax rate on Buffet's wages are the same as ours, but he doesn't collect a salary.
If the purpose is to have less concentration of wealth, then stop bailing out Wall Street and bond holders. The biggest redistribution of wealth has been the citizenry paying for investors' losses in unregulated CDS instruments. The capital gains rate has little to do with concentration of wealth.
"Investment capital has already been taxed once." - Not so. Income of the super wealthy magically morphs into capital without ever being taxed. That's the problem. Tax theory - income is taxed and capital is not. That would be double taxation. Today, the double taxation argument has been short-circuited because income is sheltered and never taxed in the first place. Instead of double taxation we now have no taxation. Once income has morphed into capital it then hides behind the double taxation and 16th amendment arguments. The only people who are paying tax are W-2'd employees. Joe the Plumber is buying all those drones not Warren and Bill. To add insult to injury, Bill and Warren have figured out how to take it with them and won't chip anything in to support the commons at death. The wealthy have no intention of ever paying taxes.
The people who work for a living don't do so at risk. Are you kidding me? Tell that to the millions who have lost their jobs.
Anyone who can deal and wheel in the market can take their bumps and risk, and pay for their greed by paying more in taxes cause they just sit on their ass and really don't do a damn thing except yak on the phone and watch a ticker tape. I know this because I was married once to that sort of moronic lazy money grubbing sleeze ball.