The voices of Tax Policy Center's researchers and staff
F. Scott Fitzgerald: "The very rich are different from you and me."
Ernest Hemingway: "Yes, they have more money."
The statisticians at the IRS quietly updated their fascinating data on the richest 400 Americans in response to a Congressional request. The Wall Street Journal's Tom Herman picked it up and published the tables, which we have posted on the Tax Facts website. [Table 1, Table 2, Table 3]
Bottom line: The uber-rich are doing very well. In 2005, the average tax return in the fabulous 400 reported $213.9 million of income, up from a mere $172.8 million in 2004. They're even doing better than at the peak of the dot.com bubble in 2000, when the top 400 raked in $173.9 million ($197.1 million in 2005 dollars). Overall, this group, which comprised 0.0003 percent of the tax returns filed, earned 1.15 percent of all income reported.
The cool thing about being incredibly well compensated is that you don't have to pay much tax. Their average income tax bill was 18.23 percent of income. Including payroll taxes, their average rate was still under 19 percent (my calculation, assuming all wages and salaries, business income or loss, and partnership income or loss are subject to the Medicare payroll tax).
The IRS reported that only 106 out of the 400 paid an average income tax rate over 25 percent. That is, most of them are paying less than Warren Buffett's famous receptionist, who is subject to a 15 percent income tax rate plus a combined 15.3 percent payroll tax (including Warren's share). Warren, who might well be in the IRS's data, says that his own average rate is 17.7 percent.
Some argue that the gazillionaire list is misleading because it includes many taxpayers who enjoyed a one-time gain. But back in 2003, University of Michigan economist, Joel Slemrod, found that fewer that half of the 400 appeared only once based on nine years of data.
The blessings for these people come from many sources. While their pre-tax incomes have been exploding, their tax rates have been falling. From 1993 to 1996, their average tax rate was 28.8 percent. After tax rates on long-term capital gains were cut in 1997, the rate fell to an average of 22.4 percent from 1997 to 2001. (Capital gains average well over half of income for the 400.) Now, after top income tax rates were cut from 39.6 percent to 35 percent and top tax rates on capital gains and dividends slashed to 15 percent, their average income tax rate is 18.2 percent.
Tax cuts enacted since 1996 cut their average tax bill by over $20 million. And if they die in 2010, they'll avoid the estate tax too.
Yes, the very rich are different from you and me.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.