Why It Irks Me To Hear the Wealthy Complain About Tax Rates

I get really tired of hearing intelligent people harp on the taxes paid by the wealthy.  Why?  Because they usually use this argument: "The wealthiest 1% of Americans pay 40% of all the taxes." They're right, but guess what? The wealthiest 1% also have seen their adjusted gross income increase at a much greater rate than the bottom 99%.  Oh, and the wealthiest 400 housholds in the US?  Their effective tax rate has plummeted from 30% in 1995 to 16.6% in 2007.  

How do the wealthiest peoples' income tax rates compare to the Average Joe?  Check out this story comparing the income tax rates of the average resident of the Helmsley Building in New York to the average janitor or security guard.  

Why are effective tax rates on the wealthy so much lower than you might expect?  It really comes down to how they get their income. From one of the articles linked above:

The low effective tax rate for the top 400 filers is largely due to the fact that capital gains and qualified dividends are taxed at much lower rates than ordinary income. In 2007, the top 400 filers derived 66 percent of their income from capital gains and dividends, compared to 22 percent for filers making between $500,000 and $1 million and just 2 percent for those making under $50,000. It is not surprising that two of the largest reductions in effective tax rates for the top 400 filers occurred in two two-year periods (1996-1998 and 2002-2004) that coincided with the capital gains tax cuts enacted in 1997 and 2003 (and, to a lesser extent, the dividend tax cut enacted in 2003). [2] Additionally, these households benefited from the reduction in the top two marginal income tax rates enacted in 2001.

Currently the top marginal tax rate on capital gains and dividend income is 15 percent, less than half the top rate on wages and salaries. The Obama Administration’s FY2011 budget proposes to raise this rate to 20 percent for high-income households, still well below the 28 percent capital gains tax rate enacted under the Reagan Administration and in effect for most of the 1990s. For dividends, at 20 percent the top rate would be roughly half of what it was during the prosperous 1990s. Under the Administration’s proposal, therefore, the very highest-income filers would continue to pay income tax at very low effective rates.

In a nutshell, when it comes to income taxes, if the vast majority of your income is reflected on the W-2 your employer gives you then your hosed.  First off, you most likely are paying a good percentage of your income in payroll taxes which are only applied to the first $106,800 of income. So if you're paid $100,000 then the payroll tax applies to your entire salary, but if you're paid $200,000 then the payroll tax doesn't effect the last $93,200 you make and that brings down your effective income tax rate significantly. Secondly, you can't really fudge the income you report to the IRS since your employer is sending a copy of your W-2 to them stating exactly how much you made.  The wealthy, on the other hand, can afford to pay for all kind of tax "shelters" that keep a good chunk of their income from being touched by the IRS.  Let's put it this way: I have a feeling that the 16.6% effective tax rate reported above did NOT include income that the IRS knows nothing about.  I think it would be a very safe bet that the real tax rate would actually be much lower if you included the "sheltered" income of the wealthy. And last, as the excerpt above made clear the wealthy don't get most of their income in wages which means they don't income tax rates on much of their income and they pay the lower capital gains rate.

So yes it irks me greatly when I hear the wealthy complain about high income taxes. I have no problem with arguments about cutting the size of government in order to keep taxes down, because to me that's a valid philisophical debate about the appropriate role of government.  But when I hear these arguments about the wealthy paying more than their fair share in taxes I start to see a little red; does it not occur to anyone that even if they do pay an outsize share in terms of gross dollars, they also enjoy an outsize share of wealth in terms of gross dollars?  

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