Dave's Energy

Thursday, January 26, 2012

Honest Data on Tax Rates Paid by Millionaires

OK, this isn't technically an energy topic, but...I am bothered by the way certain politicians mis-use tax data to attack "the wealthy", the latest target being Mitt Romney after his recent tax and income self-disclosures. President Obama recently said that he's not inciting "class warfare", he just wants millionaire's to "pay their fair share" of taxes and doesn't believe guys like Warren Buffet should have a lower tax rate than their secretaries. So, first off, let's recognize that neither Buffet's taxes, nor Romney's, represent the situation for most other wealthy tax-payers, and his secretary's pay isn't likely to bear much resemblance to the "average" middle class worker.

Secondly, let's work with real data, provided by the IRS, the most recent available is from 2009 tax year. Presented at the bottom of this post is a summary of all Federal Income Taxes paid by individuals in the U.S. for 2009 (click on the image to enlarge it so you can read the data). A few observations:

Out of 140.5 Million tax returns filed, there were only 236,883 tax returns in the U.S. with Adjusted Gross Income (before any deductions, exemptions, or credits) in excess of $1,000,000. That is roughly the population of Lincoln Nebraska or Fort Wayne Indiana.

Those 236,883 taxpayers represent just 0.2% (one fifth of one percent) of the taxpaying population, and they paid $177 BILLION of the $865 Billion in taxes collected by the IRS. That is 20.5% of all the taxes paid by individuals. After all deductions and exemptions, 86.2% of their AGI income was taxable, and the $177 Billion in taxes is 24.4% of the $726 Billion they earned. So, while Mitt Romney and Warren Buffet may have pad an effective tax rate of 14%, that is not the case for the average million-plus earning household, which paid at an average rate of 24.4% in 2009.

Go through the table data and notice the rate at which each income level pays taxes. Note things like the people at $1 - $1.5 million paying on average $303,026 to the IRS. Some in politics would have you believe these people get some great tax breaks...but note that same group has taxable income of $111 billion on AGI of $130 billion, so they are paying on 86% of their earnings. The same holds true for all earners above that level until you see a small break at the $10 million and above level (paying an effective tax rate of 22%, due no doubt in part to 15% tax rates on capital gains and certain dividends). So much for tax breaks!! Only 14% of their income gets shielded by any deductions at all.

The middle class, incomes between $50K and $1 million, comprise 33.7% of all tax returns filed, and they paid $627 BILLION in taxes on $5.2 TRILLION dollars in AGI, for an effective tax rate of 12.1%, what appears to be a reasonable rate. The rest of the country (the under $50K in income) pays only 7% of all taxes. Appropriately fair again, in my view...we should not be taxing low wage earners while also supporting with government programs....that is counter-productive. So, 93% of all taxes are paid by earners over $50K, including the highest million-plus earners, while the average tax rate under $50K is 3.5%, after deductions, exemptions, etc.

So, the millionaires are paying at twice the rate (24.4%) of the average middle class worker (12.1%) and seven times the rate of low-income earners. Those 236,883 taxpaying "millionaires" earned an average of $3.1 million in adjusted Gross Income and paid and average of $749,315 in Federal Taxes in 2009.

At a 24.4% effective rate, are the million-plus crowd paying their "fair share"? I would say so. Can they pay more? Maybe, but that isn't the argument made by politicians. If they want to raise taxes on the rich, maybe they should just do so and just call it what it is. This is why President Obama's statements are seen as "class warfare", because they manipulate data to make it sound as if the "rich" are getting away with something. Instead of creating divisiveness among our population, why don't you celebrate the successful, recognize their contribution, and then ask (ok, mandate) for more taxes to be paid. At least they wouldn't feel demonized while also being taxed at high rates.

Last point: given the proposal to increase the effective minimum tax rate to 30% for all income over $1 million, we should ask ourselves what results from that increase. If we take the aggregate taxable income for that group ($626.5 Billion) and increase the rate from the 24.4% they already pay to 30%, that increases total taxes collected (based on 2009 data) from $177 Billion to $218 Billion, a meaningful $40 Billion, or 23% increase in tax collections. For those 236,883 taxpayers, it's another $171,279 in annual taxes on their $3.1 million in AGI.

But wait: $40 Billion is meaningful to the overall individual taxes raised, but what about relative to our annual budget deficit? In fiscal 2010, the U.S. deficit was $1.7 TRILLION dollars (and growing). That is just one year's shortfall of expenses over income. So, $40 billion more would not even knock our annual deficit down to the next round number of $1.6 Trillion. Our problem isn't Federal income, it's Federal spending. Taken to the extreme, you can see that taxing million+ earners at 100% rate (that is, taking their entire $726.9 billion in AGI from them), still wouldn't even cut our annual deficit in half. We cannot tax our way out of this issue based on higher RATES of taxation. We need the entire economy to grow so that the rates we now charge are applied against a larger base. Politicians need to stop fanning the flames of discontent and instead should focus on what we need in this country: jobs, entrepreneurship, and growth.

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