400 Richest Americans Paid Same Effective Tax Rate as a Family Earning $105,000

The 400 Americans with the highest incomes paid roughly 18 percent of their earnings in federal income taxes in 2010, down from just under 20 percent in 2009, according to the Internal Revenue Service (IRS). Of the 400 elite taxpayers in 2010, 37 paid an effective tax rate of less than 10 percent.

To put this in perspective, middle-class families earning about $105,000 a year paid 18.5 percent of their income in federal taxes in 2011 (the closest year for which data is available), according to Citizens for Tax Justice. These figures include payroll taxes, which would represent an extremely small and meaningless portion of taxes for America’s top 400.

The wealthiest 400 taxpayers – one out of every 790,000 Americans – accounted for 1.3 percent of the total income reported on tax returns that year. They reported $106 billion in income to the IRS, an average of $265 million per taxpayer.

Composite data on the 400 Americans reporting the most income on their tax returns is released by the IRS every year, and the decline seen in this year’s tax rate mirrors a longer-term trend. Back in 1995, the country’s 400 wealthiest paid nearly 30 percent of their income to support public services and investments provided by the federal government.

The IRS lags in reporting the data because taxpayers are allowed to file amended returns for three years after those returns are due. Thus, 2010 data is considered final, with no further amendments to returns allowed.

The most significant reason for the super-rich’s low tax rate is that they receive nearly two-thirds of their income in the form of capital gains, which were taxed at a 15 percent rate, less than half the tax rate for income from work.

The IRS data also provides an interesting glimpse into the changes to those at the top of the income ladder. In 1992, the first year the IRS released data; it took $24.4 million to qualify for the list ($40 million in 2010 dollars). By 2010, the cutoff level had more than doubled to $99.1 million.

Ninety-five taxpayers have been on the list in at least ten of the 19 years for which the IRS has released this data. More than 2,900 taxpayers have appeared on the list at least once.

Last year, President Obama signed legislation raising the highest income tax rate modestly and increasing the capital gains tax rate from 15 percent to 20 percent. But if we are serious about reducing inequality and the wealthy paying their fair share of taxes, it is time we stop privileging income earned from investments over income earned from work. The wealthiest 400 should not have their own discounted tax schedule. Instead, they should pay taxes at the same rates as those who work every day for a living.

Photo by Flickr user PhotoAtelier, used under a Creative Commons license.