The 400 richest Americans and their terrible tax burden

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Back in January, the IRS issued a report (pdf) on the income tax returns of the 400 highest-income taxpayers in the U.S. I missed it when it came out, but I’ve been looking through it and it provides a nice, simple demonstration of the fallaciousness of Ari Fleischer’s argument about the tax burden. Fleischer bemoans the fact that the top 10% of earners in the U.S. have been paying an ever higher share of the nation’s income taxes. The same is true for the top 400 (those making more than $110.6 million in 2006):


But this is a story about the income distribution, not tax rates. The top 400’s share of the nation’s income went from 0.52% in 1992 to 1.31% in 2006—an even bigger increase than its share of taxes paid. When you chart the average tax rate paid by those in the top 400, the picture is nearly opposite:


The most interesting information in both charts may actually be contained in the kinks. In the first, all the flat spots and downward legs coincide with bad years for financial markets. Thus, what Fleischer would call the tax “burden” borne by the 400 top earners appears to be determined almost entirely by what the market does. Sure enough, in 2006, 64% of the adjusted gross earnings of the top 400 came from capital gains. So the current financial disaster must be great news in Fleischerworld, in that it will reduce the tax burden on the highest earners. Yay!

When you look at average tax rates, the big downward swings seem to correlate both with good times in the market and reductions in the capital gains tax rate—which dropped from 28% to 20% in 1997, and from 20% to 15% in 2003. The differential between capital gains tax rates and the tax rate on regular income also explains why those making more than $110.6 million a year pay taxes at a lower rate than those making $300,000 or $400,000 a year—because the really rich get a much higher percentage of their income from capital gains than the HENRYs do.