Tuesday, June 12, 2012


The top 400 1040 filers reported an average of $202.4 Million of AGI in 2009 -- a 25% drop from 2008, according to the latest report from the IRS Statistics of Income Division.  The average federal income tax liability for these 400 was about $41 Million, about $8 Million down from nearly $49 million the year before.

The average effective tax rate – total tax liability divided by AGI – on the top 400 was 19.9% (up from 18.1% for 2008).  About 40% paid an effective rate of more than 25%, and about one-third paid an effective rate below 15.

Are the rich not paying their fair share of taxes?  Is the answer to all our problems, quoting from the Democrat’s script, to tax the rich?

What contributes to a relatively low effective tax rate for the wealthy?

One of the reasons is the fact that many higher income taxpayers make a lot of their money from investing in the stock market.  Long-term capital gains and qualified dividends are taxed at a maximum rate of 15%, as opposed to 35% for “ordinary income” such as wages.  BTW, lower income taxpayers pay a tax rate of 0% on capital gains and qualified dividends.  Investing in the stock market helps the economy, doesn't it?    

And high income taxpayers claim far more itemized deductions for charitable contributions, which is allowable under both AMT and “regular” tax, than those in the middle classes.  In 2010 Mitt and Ann Romney donated nearly $3 Million to church and charity (actually $2,983,974).  That is 13.8% of their 2010 AGI.  For 2011 their charitable deduction on Schedule A was 19.24% of their AGI ($4,020,572/$20,901,075).  Most of my clients are average, middle and upper middle class taxpayers, and, however charitable they may be, except for a very few unique situations I never see charitable contributions anywhere near these percentages on their returns.  More like 2% or 3%.     

The IRS statistical report also indicated that 6 of the richest Americans owed no income tax.  In total, 42 percent of all filers (or 58.6 million taxpayers, or 1 in 2.4 taxpayers) paid no U.S. income tax in 2009, and did so by taking advantage of the deductions, credits and loopholes in the Tax Code.  Obviously the majority of these “tax non-payers” are on the lower end of the income scale.  Many lower income taxpayers actually make a profit by filing a tax return, thanks to refundable credits.  Yet there is minimal outcry about this fact. 

If it is ok for a person with $50,000 of income to take full advantage of the existing tax laws so as to avoid paying taxes, why is it not equally ok for a person with $1 Million of income to do the exact same thing? 

The top 1% of taxpayers, based on AGI, paid 36.73% of federal individual income tax for 2009.  The top 5% paid 58.66% and the top 10% paid 70.47%.

The answer to our financial situation is not to increase tax rates on the rich – but to substantially reduce the “tax expenditures” that make our Tax Code the mucking fess it is.  By doing so we can actually have lower tax rates.  Under the dreaded AMT many deductions that are allowed under “regular” income tax are not permitted – and the top AMT rate is 28%, less than the top “regular” tax rate of 35%.   

And my final question - why should higher income individuals pay a higher % of their income in tax than the rest of us just because they can?   


Terry Pratt said...

I have a simple proposal which penalizes neither the rich nor the poor:

A flat tax on all discretionary income, and I would accept some nominal minimum tax to ensure everyone ays something.

Merchant Account Provider said...

It's quite debatable, actually.

If you look at Warren Buffet, he believes that he should be paying more in taxes.

However, I believe strongly that high taxes serve as a disincentive for the brightest minds in the country to keep the economy on track.

The rich should pay more taxes than the poor, but it should still be proportional. It's not fair otherwise.


Joe Ramsay.