Podcast: Tax Trends for the Top 400 Taxpayers
April 13, 2010
In this podcast, we'll discuss trends in income and taxes for the highest-income taxpayers. I'm Michelle Bazie and I'm joined by Chuck Marr, Director of Federal Tax Policy at the Center.
1. Chuck, how have the very wealthiest taxpayers fared in recent years?
Michelle, the federal income tax obligations for the wealthiest 400 people in the country has declined dramatically. On a bottom line basis, this elite group pays income taxes at about half the rate they did 15 years ago. They pay income taxes at less than 17 cents on the dollar.
Moreover, while the incomes of average Americans have stagnated, the incomes of the top 400 have surged, increasing by more than 400 percent over a decade and a half.
2. Why are we talking about the top 400? Why is that specific number special?
Each year, to get an idea of what taxes the highest income people in the country are paying, the IRS does an analysis of the returns of the top 400 people in the country. It doesn't publish their names but it publishes all of their economic and income data.
3. What puts someone in this top 400 category?
To make it into the top 400, a household needed an adjusted gross income of at least $139 million in 2007.
4. Chuck, what led to the steep cut in the tax rate faced by these households?
The main reason Michelle, is that the tax rate on capital gains and dividends has been cut sharply and is now far below the top tax rate on income from working at a job.
Very wealthy people make most of their money from capital gains and dividends - and since these are now taxed at a lower rate - their income tax burden has fallen significantly.
5. What's the tax rate on investment income?
Capital gains are now taxed at a maximum rate of 15 percent. President Obama has proposed to return the rate to 20 percent but this would still be below the 28 percent rate that prevailed under President Reagan.
Dividends are also taxed at a maximum of 15 percent which is far below the 39.6 percent rate of the 1990s.
6. Chuck, how is ordinary income taxed for the top 400?
This income, which includes wage income, is taxed at the top marginal rate, which back in the 1990's used to be 39.6%. That rate was cut during the Bush administration to 35% but the 35% rate will expire at the end of this year and return to the rate that prevailed during the 1990's which was 39.6%.
7. So what's the bottom line?
Michelle, the country is on an unsustainable path with the debt expected to rise sharply as a share of our economy. Lawmakers are going to face some gut-wrenching choices on Social Security and other critical programs. The bottom line is that lawmakers need to seek ways to increase revenues. They should therefore allow the Bush tax cuts to expire for this very wealthy population.
8. But Chuck, some people say that raising taxes on the very wealthy will stifle innovation.
That's simply not the case. In fact, this wealthy group thrived back in the 1990s when their taxes were set at the same rate they will be at the end of this year.
There is no question in my judgment that raising taxes on the wealthiest people in the country must be a part of putting our country back on a sustainable fiscal path. It's going to take more than that - a lot more than that - but that needs to be a part of it.
Thanks for joining us, Chuck.