The AP Ponders the “Super Rich”

In honor of Tax Day, the Associated Press stokes the populist flames:

As millions of procrastinators scramble to meet Monday’s tax filing deadline, ponder this: The super rich pay a lot less taxes than they did a couple of decades ago, and nearly half of U.S. households pay no income taxes at all.
The Internal Revenue Service tracks the tax returns with the 400 highest adjusted gross incomes each year. The average income on those returns in 2007, the latest year for IRS data, was nearly $345 million. Their average federal income tax rate was 17 percent, down from 26 percent in 1992. …
The top income tax rate is 35 percent, so how can people who make so much pay so little in taxes? The nation’s tax laws are packed with breaks for people at every income level. There are breaks for having children, paying a mortgage, going to college, and even for paying other taxes. Plus, the top rate on capital gains is only 15 percent.

What we are seeing here is not exactly a mystery. Incomes that average $345 million are nearly all capital gains; no one I know of makes anything like that in ordinary income. The capital gains rate was 28 percent in 1992 and 15 percent in 2007. So, with a capital gains rate of 28 percent, the average overall federal tax rate was 26 percent, and with a capital gains rate of 15 percent, the average overall federal tax rate was 17 percent. In both years, the vast majority of the highest earners’ income consisted of capital gains. (In 1992 the top rate on ordinary income was 31 percent, while it was 35 percent in 2007, which presumably accounts for most of the rest of the variation in total federal taxes paid as a percentage of adjusted gross income.)
It would be interesting to know the stories behind some of those 400 tax returns. There may be a few people who earn nine-figure incomes on capital gains year after year, but there can’t be many. For the most part, those top 400 returns belong to different people every year. Most in that category are no doubt enjoying a once in a lifetime payout, usually by selling a business that represents a life’s work. If we knew who they were, we would congratulate them.
No doubt some who read the AP’s story will conclude that the capital gains rate should be raised to soak the “super rich.” Experience indicates, however, that raising the rate probably would produce less revenue, meaning that the rest of us would have to pay more (or, during the Age of Obama, borrow more from our children). See this paper by the National Center for Policy Analysis, which indicates that when the capital gains rate was dropped from 20 percent to 15 percent, revenue from the tax doubled.
Of course, Barack Obama is on record as believing that the capital gains rate should be raised even if it produces less revenue, thus requiring the rest of us to pay more, just out of spite. No doubt many other Democrats share that view.
Some will say that in the present crisis extreme measures are necessary, so let’s emulate Willie Sutton and take the money from the people who have it– the super rich. Indeed, President Obama suggests, more or less obliquely, that this is his alternative to getting federal spending under control.
To test this proposal, let’s do the math. Four hundred “super rich” times an average adjusted gross income of $345 million equals $138 billion. That is around 1/27 of the current year’s federal spending of $3.8 trillion. Which means that if the Democrats stole every penny of income earned by the super rich, it would fuel the out-of-control federal behemoth for a little under two weeks. Thirteen days into the fiscal year, we would be on our own. And we wouldn’t have the super rich to kick around anymore.

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