It is widely believed that the Obama “budget plan” to be announced today will call for an increase in tax rates on the “wealthy.” Wow, what a difference four months makes. As readers of this blog know there are two forms of income received by the “wealthy.” Ordinary income, obtained through personal work and effort and “capital gains and dividend” income, obtained through investments. A fellow blogger, Chad Aldeman of “The Quick and the Ed Blog,” has analyzed the effective tax rates of US top 400 income earners for 2007. This is what he reports:
. . . . [T]hat the super rich have been paying smaller and smaller portions of their incomes to taxes*. The chart below shows the effective tax rate for the richest 400 American filers from 1992 and 2007. The blue line represents the highest income tax bracket, the red line is the tax rate on long-term capital gains, and the orange line is the average tax rate that the richest 400 filers actually paid.
There are two important things to note from this chart. The first, and most visually apparent, is that the tax rates of the rich are far more closely linked to the capital gains taxes than income taxes. Salaries and wages, the source of income taxed at the blue line, represented only 6.5 percent of these filers’ income. Nearly two-thirds of their income comes from capital gains, and this is why you see a much tighter coupling between the orange and red lines.
As provided by the Tax Foundation, taxfoundation.org, in 2008 the total Adjusted Gross Income for all filers with incomes above $380,000 (the top 1%) was $1.685 Trillion dollars. These people already pay about $392 Billion in income tax. Therefore, even if we took 100% of all the money earned by everyone in the top 1% of filers, we would still have a deficit of about $400 Billion for FY2011. As with the effective rate figures for the top 400 income earners in the chart above, the effective income tax rate for the top 1% is far below the 35% maximum rate. In fact it was 23.27% for the entire top 1% in 2007. This is less than halfway between the capital gains/dividend tax rate of 15% and the top income tax rate of 35%. In fact it is only 40% of the way.
What these facts mean, I believe, is that we need to look at increasing the capital gains tax rate (as well as limiting the exclusion from taxation for municipal bond interest) as a means for increasing the government’s take. There is a lot of room here for higher taxes, don’t you think? This is especially true when you understand that higher wage earners pay, in addition to income tax, 12% social security tax on the first $110,000 of earned income and 3% medicare tax on everything they earn from personal work. On the other hand, the capital gain/dividend crowd, the truly wealthy, pay 0% in either “entitlement” category.
I wonder what President Obama is going say about taxes. Maybe he’ll go for goring the capital gains/dividend crowd by 5% more, from 15% to 20%. Well, La Dee Dah. How about proposing that this preferred tax rate rise to it’s Reagan era level of 28%? Or might this proposal hurt Obama sponsors like Mrs. Heinz Kerry, Mr. Soros, Mr. Buffet, Mr. Gates, or even Mr. Gore? Therefore, I doubt very much that Mr. Obama will suggest that the capital gains tax rate should rise to more than the Clinton era’s level of 20%. This, it should be noted, is in stark contrast to the words of candidate Obama who declared that increasing capital gains tax rates was a “fairness” issue. I, of course, would advocate heavy congressional scrutiny of any proposal to increase anyone’s taxes to make sure the increase is not self defeating for the country, however, if we are going to consider raising taxes on the wealthy, let’s consider more than a single aspect of the “taxing the wealthy” issue.
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