Economist and New York Times columnist Paul Krugman is seething over the latest IRS study of the top 400 taxpayers in the United States. He says that while most people pay attention to the group’s relatively low effective tax rate of less than 17 percent, that’s missing the point.
Those 400 people by themselves garnered more than 10 percent of taxable capital gains, Krugman writes. A number of Americans that would fit into a lecture hall at Princeton, where the Nobel Prize winner teaches, realized one-tenth of the stock market’s gains in 2007.
Note: That’s income from selling stock. Many people who held stock that year might have “gained” in their positions but simply kept the investment, including some in the top echelon.
“Conservatives often try to sell the notion that reducing the capital gains tax is about helping small business people,” Krugman complained in his blog. “But you really want to think of the fact that a significant chunk of that tax break is going to just 400 people.”
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It’s a fascinating statistic, but just one. If you were interested in learning how the richest Americans behave, at least in terms of the IRS, there are other hints in the study.
For instance, the top 400 filers:
• Earned very little in the form of a salary, just 0.15 percent of the national total. They know that salaries are taxed more heavily than income from investments so, like billionaire Warren Buffett, they tend to accept compensation in any other form they can. Wage income averaged $29.4 million among them.
• Declared roughly the same amount in dollars in the form of taxable interest income, but that income stream equaled more than 4 percent of all taxable interest tracked by the IRS. Simply put, they have a lot more money working for them in short-term, safe vehicles, like bank accounts and interest-bearing CDs.
• Kept a similarly large portion of their money in dividend-paying stocks. The elite 400 pulled in just over 4 percent of all taxable dividend income. Remember, they did pay taxes on this income but at the lower dividends rate.
• They gave away a lot of money, too. The top 400 accounted for 5.7 percent of total dollar deductions claimed for charitable contributions, averaging $28.5 million in 2007.
Another way to look at it is, on average, the very richest Americans in 2007 gave away their salaries to charity and lived on their interest and investment income.
Once tax rates go up on investment income, however, the charity deduction amount claimed by them is likely to change.
For instance, prior to the Bush tax cuts, the average top 400 filer accounted for as little as 1.03 percent of all charitable deductions.
In dollar terms that was as low as $1.6 million on average in 1992, according to IRS numbers. In that year, the capital gains tax rate on assets held more than one year was 28 percent, compared to just 15 percent in 2007.
Squeezed on dividend, capital gains, and taxable interest income, history shows that — morally right or wrong — increasing taxes on investment income can mean that the richest Americans simply call the government their charity “cause” that year and move on.
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