by Jon N. Hall 1/31/16
On Dec. 29, the New York Times ran “For the Wealthiest, a Private Tax System That Saves Them Billions” by Noam Scheiber and Patricia Cohen. The article’s blurb was: “The very richest are able to quietly shape tax policy that will allow them to shield billions in income.”
Is that a fact? Doesn’t Congress have something to say about “tax policy”? Also, the “very richest” have been saddled at times with personal income tax rates of over 90 percent. Scheiber and Cohen focus on the top 400 income earners in 2012, “the last year for which final data is available.”
According to the IRS tables the article links to, there were 144,928,472 income tax returns filed in 2012. So the top 400 are one in every 362,321 personal income tax filers, or 0.000276 percent of the total, or 2.76 percent of 1 percent of 1 percent. You’ll get a shade over 400 by multiplying the number of returns filed in 2012 by 0.00000276. (Let’s get medieval on these people.)
According to the article, “the top 400 earners took home, on average, about $336 million in 2012.” That means the top 400 had an aggregate income of $134B. Congress could have taxed those 400 folks at a 100 percent effective rate and the federal deficit in fiscal 2012 would still have been almost a trillion dollars. And for 2009, 2010, and 2011 (Nancy Pelosi’s last three budgets), $134B of added revenue would have left each of those federal deficits well above a trillion.
Scheiber and Cohen report that in 2012 “the 400 highest-earning taxpayers in America paid … less than 17 percent” “of their income in federal taxes.” That might rankle those not in the top 400 who paid the IRS at a higher rate.
The tiniest sliver of taxpayers that I’ve looked at lately is the top 0.1 percent, i.e. the top tenth of the top percent. In a 2014 article, I reported that in 2010 and 2011 the top 0.1 percent of income tax filers had a lower effective rate than the rest of the evil One Percenters. And for 2012, the Tax Foundation reports that the average effective income tax rate for the top 0.1 percent was 21.7 percent, but for the top 1 percent was 22.8 percent (see Figure 2).
To get into the top 0.1 percent in 2012, a taxpayer needed an adjusted gross income (AGI) of $2,161,175, (see Table 7). That’s a handsome income, but $2M is paltry when compared to the top 400’s average of $336M, and some of those folks at the very top have incomes in the billions, (see my 2014 article).
When it comes to the federal individual income tax, forget about the 99 percent sentimentalized by the Occupy Wall Street crew. Millions of the 99 Percenters don’t even pay income taxes. Where there’s a legitimate reason for resentment is in the bottom 99 percent of the One Percenters, who’ve been paying the IRS at a higher effective tax rate than the top 400 earners.
But that situation should have been fixed by the “fiscal cliff” deal passed into law at the beginning of 2013, when the top statutory rate went up 4.6 percent and when long-term capital gains rates also rose. This latest data from the Tax Foundation shows that for 2013 the top 1 percent and top 0.1 percent were paying at 27.08 percent and 27.91 percent, respectively (see Table 8). If those numbers aren’t revised downward, then what’s the problem? Scheiber and Cohen report:
At stake is the Obama administration’s 2013 tax increase on high earners — the first substantial increase in two decades — and an I.R.S. initiative to ensure that, in effect, the higher rates stick by cracking down on tax avoidance by the wealthy. […]
The combination of cost and complexity has had a profound effect, tax experts said. Whatever tax rates Congress sets, the actual rates paid by the ultra-wealthy tend to fall over time as they exploit their numerous advantages.
We don’t know what the top 400’s effective tax rate currently is. But if we look at the IRS tables that Scheiber and Cohen link to, and look on page 13 at the table for “Income tax,” we see that the “average tax rate” for the top 400 had been trending down since 1992. The highest rate was 29.93 percent in 1995 and the lowest was 16.62 percent in 2007. But notice that from 1998 through 2001, the years we had balanced budgets, all of the rates were less than 23 percent.
What tax rate(s) should the folks at the very top have?
Progressives, of course, would like to take the full 39.6 percent that is the top statutory rate; they’d be comfortable with taking even more. But if one thinks that all earners, even billionaires, should be able to keep (at least) half of their income, then 39.6 percent is just too high. That’s because if the feds take 39.6 percent in income tax alone, it leaves only 10.4 percent for other taxes without getting into the “taxpayer’s half” of the taxpayer’s income. State, county, and city, as well as other federal taxes would have to make do on 10.4 percent; that seems too little. Already, some states have income tax rates above 10.4 percent.
And there’s the question of who gets first bite: we have dual sovereignty in these United States. If the feds feel free to have a 94 percent personal income rate, as they once did, is there any reason why the states cannot also have a 94 percent income tax rate? (Isn’t a 94 percent tax rate fascistic?) There are few limitations on taxation in America, and it’s way past time that some are created.
Scheiber and Cohen’s article outlines the “income defense industry”; i.e. the tax dodges used by the ultra-wealthy, like routing money “to Bermuda and back.” The last section, “A Hobbled Monitor,” is about the IRS and particularly worth reading. It costs a fortune for the IRS to police the perfectly legal tax avoidance schemes of the super-wealthy. The agency’s budget has been cut “by almost $2 billion,” which resulted in cutting “about 5,000 high-level enforcement positions.” (The authors present this as though it were a problem; I’d say it’s a good start.)
This is all so insane: Congress sets confiscatory tax rates, but creates special tax avoidance schemes so taxpayers can avoid those rates, which results in taxpayers hiring teams of people, at great expense, to avail themselves of the schemes, which forces the IRS to make sure taxpayers aren’t abusing the schemes, also at great expense. It’s absurd. Just eliminate all the exceptions in the Tax Code and give everybody new low rates and be done with it.
But the professional politicians in Congress don’t like the sound of that. You see, they want the One Percenters’ money. Not for the treasury (for that, they’ll just borrow), but for themselves, as contributions for their next campaigns.
The people whose hindquarters Americans need to be getting “medieval on” are not the One Percenters, nor even the top 400; it’s government. It’s the professional politicians who are creating tax avoidance schemes, not private citizens. And it is those exceptions that have allowed the top 400 to pay at a lower rate than those below them.
The presidential candidate who understands the corruption of the Tax Code most clearly is Carly Fiorina. If we “close every loophole,” as Fiorina advocates, we could downsize the IRS much more. And wouldn’t the One Percenters appreciate such a system? After all, they could fire their lawyers, accountants, and lobbyists, and focus on making more money, not just protecting the money they already have from a predatory government.
Jon N. Hall is a programmer/analyst from Kansas City.