[edited 5/30 to correct "one in four" goof]
The IRS recently released another "statistics of income" report. This one has news that should make most ordinary Americans think twice about the GOP agenda of reducing taxes for the rich while cutting back on all kinds of programs that serve ordinary Americans--the fact that a large percentage of the upper crust--one out of every 189 Americans with $200,000 or more in income --pay no federal income taxes whatsoever. See Rubin, IRS Finds One in 189 High Earners Paid No U.S. Taxes in 2009, Bloomberg.com (May 29, 2012).
How does someone with $200,000 or more in income pay no taxes, when ordinary folk with jobs who make $50,000 to $75,000 pay 15% to 25% of their income in taxes?
- As I've often discussed here (see items under charitable contribution deduction), rich folk can easily afford to give away more to charity and they get a tax bonus that is much more than that available to poorer folk when they do so. They get an especially big break if what they give away is appreciated stock that they bought a while ago--and rich folks own most of these financial assets, so they are the ones that get almost exclusive enjoyment of this lucrative loophole: they get to deduct the full value of the stock they donate, without having ever paid taxes on the appreciation. That's one of the boondoggles in the Code that Congress can and should get rid of, no matter what else it does about taxes.
- Another way rich folk pay less in taxes is by ensuring that the income they earn is of a type that isn't subject to tax. Big CEOs generally have rich pension plans and other forms of deferred tax compensation that facilitate lowering their tax bills. Rich folk are the buyers of municipal bonds, which again enjoy a specific tax break in section 103 of the Code that excludes the interest income from the owners' tax returns. This is supposed to help municipalities, since the tax break gives the wealthy an incentive to buy the bonds even though they pay lower rates, since all the interest is tax free. But it is a costly break that provides an advantage only for the rich. Wouldn't it be better to eliminate it and tax wealthy people on all of their interest income at ordinary income rates? Maybe the tax money could also fund programs for important municipal projects--like intracity rail transportation in Detroit, a much needed idea whose time has come.....
- A third way that rich people avoid taxes is by having so many deductions--high-end medical "equipment" (like swimming pools for arthritic patients), lots of interest on mortgages on high-end homes, and other deductions of special value to those who would otherwise pay tax at a higher rate.
As the Rubin article notes, the IRS announced that for 2009 there were 10,080 households with "adjusted gross income" of $200,000 or more who paid no US or foreign income taxes. Adjusted gross income is not economic income--AGI does not reflect items that are excluded from the calculation of income for tax purposes and is reduced by certain "above the line" deductions that are especially beneficial to the wealthy. "Using an expanded concept of income that includes some nontaxable items and looking only at U.S. income taxes, there were 35,061 households, or 0.88 percent, that paid nothing." Id.
The Alternative Minimum Tax was initially enacted to deal with the general unfairness of having extraordinarily well-to-do people be able to avoid tax entirely. As it was modified over time, it came to function as a way to ensure that those who accumulate lots of different deductions nonetheless pay tax, by treating some of those deductions as unqualified preferences for AMT purposes. But the AMT has lost a lot of its punch as Congress has eviscerated its provisions, such as the limitation on foreign tax credits. This is one of the reasons that many progressives have supported two things--elimination of the preferential rate for capital gains (a type of income especially enjoyed by the ultra rich) and adoption of a new type of minimum tax on some high level of gross income (the Buffett Rule). This new information about the number of rich people who end up paying nothing in federal income taxes should result in more people telling Congress that it's time to pass these two proposals.