Tax Statistics of the Truly Wealthy

By: Larry Walker, Jr.

“Freedom is not an empty sound; it is not an abstract idea; it is not a thing that nobody can feel. It means, — and it means nothing else, — the full and quiet enjoyment of your own property. If you have not this, if this be not well secured to you, you may call yourself what you will, but you are a slave.” ~ William Cobbett, English political commentator, 1827.

Barack Obama (II) talks a good game, but his reasoning doesn’t mesh up with reality. He rants about the rich getting $100,000 tax cuts while he seeks to jack tax rates on those who can hardly be considered rich. It’s not the family who earns $250,000 who received a $100,000 tax cut, it’s the über-rich.

It’s also likely that the people making $200,000 to $250,000 today were not making it during the 1990s, and have never known a tax cut. These folks were not subject to the 39.6% rates imposed under Bill Clinton. For them, the Obama tax increase of 2011 will be a first. These folks didn’t get a tax cut during the last eight years, they earned their way to this level during the Bush years. After all, incomes are not static. You don’t come out of college and make $250,000 per year on day one, it comes with time. Make no mistake about it — what Obama is proposing is a tax increase.

Instead of manning up and imposing a scaled surtax on people making, let’s say, over $1,000,000, $2,000,000, $5,000,000, $10,000,000 and $100,000,000, Obama has chosen to draw the line at a paltry $250,000. Could this have something to do with the fact that the Obamas personal income was $5.5 million last year? Is this a strategy to keep himself and his buddies on the top while holding the rest of us down? After all, making $5.5 million per year is like making $250,000, 22 times; which is the same as the difference between making $50,000 and $1,100,000. So based on the same theory, should we start taxing people making $50,000 at top marginal rates as well?

If the goal is to tax the “rich”, it would be very easy for Obama to raise taxes on them. All he has to do is add some new upper level tax brackets such as I mentioned above. In fact, such a tiered system existed back in 1921. As outlined in my last post, “Keeping It Real: Obama’s $250,000 Fallacy”:

The Revenue Act of 1921 contained additional tax brackets above the $100,000 level to tax the super rich. They were as follows (in 1921 dollars) : $100,000 @ 56%, $150,000 @ 57%, $200,000 @ 58%, $300,000 @ 71%, $500,000 @ 72%, $1,000,000 @ 73%. Translating this into 2010 (inflation adjusted) dollars would yield the following, respectively: $1,113,139 @ 56%, $1,669,709 @ 57%, $2,226,278 @ 58%, $3,339,418 @ 71%, $5,565,696 @ 72%, and $11,131,392 @ 73%.

Why don’t we do that? Let’s tax Obama and the truly wealthy at 56% to 73%. And let’s go back to the 1926 tax tables and tax people making less than $48,000 per year at 1.4%, and those making $48,000 to $96,000 at 3.0%. Surely, Obama shouldn’t have a problem with this. Democrats either need to put up or shut up. Personally I prefer capping top tax rates at 25% as first implemented under Calvin Coolidge in 1926, but I’m just entertaining Obama’s ersatz logic.

But don’t worry, if you’re currently making $200,000 to $250,000, or aspiring to get there one day, our present progressive federal government will make sure that you never earn your way into the upper-crust. It’s hard enough already, but nearly impossible with the federal government standing by, eager to confiscate 36% to 40% in income taxes, plus another 7.65% to 15.3% in Social Security and Medicare taxes, every year. And soon there will be health care, and possibly energy taxes to boot. Meanwhile, the truly wealthy laugh at the idea of making a petty $250,000. While averaging a cool $1,325,996 per day, and being taxed at essentially the same rate, the über-rich have it pretty good, comparatively speaking.

If progressives want to talk stuff, maybe it would be wise to check the facts first. Do you think that an income of $250,000 is wealthy? Check out the following:

The Top 400: IRS Statistics of Income, Tax Year 2007

The following averages are taken from the IRS report entitled, “The 400 Individual Income Tax Returns Reporting the Highest Amount of Adjusted Gross Incomes in [2007]”. The incomes of the top 400 represented the top 1.59% of all adjusted gross income reported on 2007 income tax returns (the latest available).

1. The average adjusted gross income reported was $344,759,000.
2. The average amount of salaries and wages reported was $29,413,000, on 306 returns.
3. The average amount of taxable interest per return was $27,074,000.
4. The average amount of dividend income reported was $24,506,000.
5. The average amount of net capital gains reported was $228,551,000.
6. The average amount of net business income reported was $3,182,000, on 49 returns.
7. The average amount of net business loss was $2,590,000, on 84 returns.
8. The average amount of Partnership and S-Corp income claimed on 202 returns was $83,025,000.
9. The average amount of Partnership and S-Corp net loss claimed on 185 returns was $25,245,000.
10. The average amount of charitable contributions deducted on 389 returns was $28,512,000.
11. The average amount of taxable income per return was $296,241,000.
12. The average amount of income tax paid was $57,311,000 per return.

Should we really be talking about capping incomes at $250,000 while there are people making an average of $344,759,000 and sitting around collecting $27,074,000 per year in interest? These are not so much the small business job creators, but rather people like the Obamas, those who already have it made and are mucking things up for the rest of us. Oh, and by the way, if you divide the average amount of income tax paid by the truly wealthy, by the average amount of taxable income, it only comes up to 19.3%, nowhere close to the top marginal rate of 35.0%.

How would you define rich?

How does $250,000 per year stack up against $344,759,000?

Important question: Can the Obama policy of keeping current tax rates in place for everyone making less than $250,000 be considered the same thing as a tax cut? I didn’t think so. Will this be enough to spark the kind of economic growth and job creation that our economy so desperately needs? Only if nothing equals something.

What we need is less government and more freedom. We need a tax overhaul. We need a tax system that is equitable, one that does not take advantage of a crisis by destroying the hopes and dreams of the people, and one that will spark the kind of economic recovery that we so desire. Yes, we need additional tax cuts, not a tax increase. And no, $250,000 isn’t rich. If you want to tax the rich, then create some upper level tax brackets and do it, otherwise enough of this nonsense.

I agree with the American Independent Party’s (AIP) platform position on the federal income tax:

“We consider the federal income tax to be destructive of our liberty, privacy, and prosperity. Therefore, we are working to bring about its complete elimination and the repeal of the Sixteenth Amendment to the U.S. Constitution. We recommend that the current system be replaced by an equitable, simple, noninvasive, visible, efficient tax, one that does not destroy or even infringe upon our economic privacy and liberty.”

For more on the AIP Platform click here.

References:

http://www.irs.gov/pub/irs-soi/07intop400.pdf

http://www.helium.com/items/879023-slavery-past-and-present

http://www.cesj.org/homestead/reforms/tax/taxjustice.html

http://aipnews.com/talk/forums/thread-view.asp?tid=16673&posts=5#M43279

Legalized Robbery

Collecting more taxes than is absolutely necessary is legalized robbery. ~ Calvin Coolidge

– By: Larry Walker –

The question of the day: Why is making $250,000 a year suddenly considered wealthy? The Obamas made $5.5 million last year. Is that wealthy?

Contrary to popular belief, $250,000 in 2010 had the same buying power as $20,722 in 1926. Annual inflation over this period was 3.01%. An income of $250,000, adjusted for inflation, would have placed a taxpayer in an 11% tax bracket in 1926. In order to have been considered in the top tax bracket back then, in today’s dollars, would have required taxable income in excess of $1,206,419. The 1926 tax tables are shown below along with equivalent 2010 dollar amounts:

So in inflation adjusted dollars, people like the Obamas would have been considered wealthy in the 1920’s and should rightfully be in the top tax bracket today. On the other hand, folks making $50,000 to $250,000 today, would have been barely considered middle class back in 1926.

The Revenue Act of 1921 contained additional tax brackets above the $100,000 level to tax the super rich. They were as follows: $100,000 @ 56%, $150,000 @ 57%, $200,000 @ 58%, $300,000 @ 71%, $500,000 @ 72%, $1,000,000 @ 73%. Translating this into 2010 dollars would yield the following amounts, respectively: $1,113,139 @ 56%, $1,669,709 @ 57%, $2,226,278 @ 58%, $3,339,418 @ 71%, $5,565,696 @ 72%, and $11,131,392 @ 73%.

President Calvin Coolidge, under the Mellon Tax Bill, slashed top rates from 73% in 1921, down to 25% in 1926. The new top bracket was 25% for anyone making over $100,000 ($1,206,419 in 2010 dollars). So under the Revenue Act of 1921, the Obamas would have been forking over 72% of their income to Uncle Sam, but only 25% under Coolidge. What a relief that would have been. The “Roaring Twenties” had arrived, catapulting multitudes into the middle class.

Now let’s bring it up to today. How did the lower tax brackets of 1926 grow from being between 1.4% and 14%, all the way to today’s level of 10% to 33%? And let’s not forget about the 7.65% (15.3% for the self-employed) that we all get soaked for in Social Security and Medicare taxes. Under the Social Security Act of 1935, the FICA tax was set at 1% of the first $1,400 in wages. It’s interesting to note that $1,400 in 1935 is the equivalent of $22,562 today, and yet the rate today (exclusive of Medicare tax) is 6.2% (12.4% for the self-employed) of the first $106,800 in wages. It’s called legalized robbery.

When voters finally drop this left, right bickering and start looking at the facts they are going to wake up one day and realize that we’ve all been bamboozled. We’ve been getting robbed for so long that we don’t even know the difference. The following table compares today’s tax rates with 1926 rates for comparable incomes.

In reviewing our current tax tables, it is apparent that a couple making $250,000 in 2010 would have been taxed at a rate of 11% in 1926, and yet the rate is now 33%. Also, those in the top tax bracket, those making over $373,650, would have had tax rates between 14% (at the low end), and 25% for the super rich, and yet the rate is now 35%. Then along comes Obama proffering to raise the top rate up to 39.6%. The problem is that the whole tax system is out of whack.

Under Obama’s ‘made up’ theory, a couple making $250,000 should be taxed at the same rate as a couple making $5.5 million or more. Is that fair? Should a couple who makes $250,000 be taxed at the same rate as a couple making $11 million or more? Who’s kidding who?

Annual income, as defined in current tax tables, needs to be appropriately adjusted for inflation. Tax rates, on the other hand, should be adjusted back towards the historical lows, not adjusted for inflation (as eventually they would exceed 100%). There is not one section of the Internal Revenue Code that has been consistently adjusted for inflation, neither the standard deduction, nor personal exemptions have kept pace. Tax brackets have been lowered and raised seemingly based on the whims of politicians, and not based on historical inflation adjusted incomes, and that’s wrong. It’s just plain wrong.

It’s time to stop playing games with the American people, and time to start governing honestly. I’m sick and tired of rich Washington politicians, like the Obamas, trying to pretend that they’re on the same level as everyone else. The Obamas are millionaires and should pay accordingly. But let’s be fair about it, making $250,000 a year in 2010 is not rich, it wasn’t considered rich in 1926, and it’s not rich today.

What we need is real tax reform, not more of the same. If you’re not part of the solution, you’re part of the problem, and unfortunately, Obama is part of the problem.

Sources:

http://www.dollartimes.com/calculators/inflation.htm

http://en.wikipedia.org/wiki/Revenue_Act_of_1926

http://en.wikipedia.org/wiki/Revenue_Act_of_1921

Revisiting Static vs. Dynamic Tax Revenue

Comments by: Larry Walker

The Obama Administration’s static view on tax policy can never succeed. We all know that Obama is an ideologue who thinks that people who make more money should pay a higher share of taxes, and yet we already have a progressive tax system. But apparently that’s not good enough for Obama. Under our present system, roughly 40% of those fortunate enough to be employed don’t pay any income taxes at all, while the top 5% of income earners pay 60% of income taxes, and those considered in the top 50% pay 97% of the tax burden. There are some on the other side of the ideological playing field who think this to be unfair, and are promoting a flat tax. But there’s more to the story.

The reasoning behind Obama’s economic team, or what’s left of it anyway, would go something along these lines:

“If we cut taxes, our revenue will decrease, and if we raise taxes, our revenue will increase.” “So let’s compromise. Let’s keep taxes the same on the many, and raise them on the few, that way we’ll increase our revenue, and we’ll get re-elected too.”

Sounds smart, but does it work in real life? True, under a static view of revenue, if taxes are cut, revenue will decrease, and if taxes increase so will revenue, but is government revenue the only concern? What about economic growth? What about restoring confidence in a broken system? What about growth of the job market? Will raising taxes on everyone making over $250,000 per year, and keeping taxes the same for everyone else bring about a robust economic recovery? I think we’ve been down this road before. The following report, written in 1996, by the Congressional – Joint Economic Committee, already provides the answer.

Source: http://www.jec.senate.gov/republicans/public/?a=Files.Serve&File_id=9576a929-37b4-497c-9b06-4bf3481f9f0a

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April 1996

The Reagan Tax Cuts: Lessons for Tax Reform

During the summer of 1981 the central focus of policy debate was on the Economic Recovery Tax Act (ERTA) of 1981, the Reagan tax cuts. The core of this proposal was a version of the Kemp-Roth bill providing a 25 percent across-the-board cut in personal marginal tax rates. By reducing marginal tax rates and improving economic incentives, ERTA would increase the flow of resources into production, boosting economic growth. Opponents used static revenue projections to argue that ERTA would be a giveaway to the rich because their tax payments would fall.

The criticism that the tax payments of the rich would fall under ERTA was based on a static conception of human behavior. As a 1982 JEC study pointed out,[1] similar across-the-board tax cuts had been implemented in the 1920s as the Mellon tax cuts, and in the 1960s as the Kennedy tax cuts. In both cases the reduction of high marginal tax rates actually increased tax payments by “the rich,” also increasing their share of total individual income taxes paid. Unfortunately, estimates of ERTA by the Democrat-controlled CBO continued to show falling tax payment by upper income taxpayers, even after actual IRS data had become available showing a surge of income tax payments by affluent taxpayers.

Given the current interest in tax reform and tax relief, a review of the effects of the Reagan tax cuts on taxpayer behavior and tax burden provides useful information. During the 1980s ERTA had reduced personal tax rates by about 25 percent, while the Tax Reform Act of 1986 chopped them yet again.

Tax Rates and Tax Revenues

High marginal tax rates discourage work effort, saving, and investment, and promote tax avoidance and tax evasion. A reduction in high marginal tax rates would boost long term economic growth, and reduce the attractiveness of tax shelters and other forms of tax avoidance. The economic benefits of ERTA were summarized by President Clinton’s Council of Economic Advisers in 1994: “It is undeniable that the sharp reduction in taxes in the early 1980s was a strong impetus to economic growth.” Unfortunately, the Council could not bring itself to acknowledge the counterproductive effects high marginal tax rates can have upon taxpayer behavior and tax avoidance activities.

Since 1984 the JEC has provided factual information about the impact of the tax cuts of the 1980s. For example, for many years the JEC has published IRS data on federal tax payments of the top 1 percent, top 5 percent, top 10 percent, and other taxpayers. These data show that after the high marginal tax rates of 1981 were cut, tax payments and the share of the tax burden borne by the top 1 percent climbed sharply. For example, in 1981 the top 1 percent paid 17.6 percent of all personal income taxes, but by 1988 their share had jumped to 27.5 percent, a 10 percentage point increase. The graph below illustrates changes in the tax burden during this period.

The share of the income tax burden borne by the top 10 percent of taxpayers increased from 48.0 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988.

A middle class of taxpayers can be defined as those between the 50th percentile and the 95th percentile (those earning between $18,367 and $72,735 in 1988). Between 1981 and 1988, the income tax burden of the middle class declined from 57.5 percent in 1981 to 48.7 percent in 1988. This 8.8 percentage point decline in middle class tax burden is entirely accounted for by the increase borne by the top one percent.

Several conclusions follow from these data. First of all, reduction in high marginal tax rates can induce taxpayers to lessen their reliance on tax shelters and tax avoidance, and expose more of their income to taxation. The result in this case was a 51 percent increase in real tax payments by the top one percent. Meanwhile, the tax rate reduction reduced the tax payments of middle class and poor taxpayers. The net effect was a marked shift in the tax burden toward the top 1 percent amounting to about 10 percentage points. Lower top marginal tax rates had encouraged these taxpayers to generate more taxable income.

The 1993 Clinton tax increase appears to having the opposite effect on the willingness of wealthy taxpayers to expose income to taxation. According to IRS data, the income generated by the top one percent of income earners actually declined in 1993. This decline is especially significant since the retroactivity of the Clinton tax increase in that year limited the ability of taxpayers to deploy tax avoidance strategies, temporarily resulting in an increase in their tax burden. Moreover, according to the FY 1997 Clinton budget submission, individual income tax revenues as a share of GDP will be lower during the first four years of the Clinton tax increase, which include the effects of the 1990 tax increase, than under the last four years of the Reagan tax changes (FY 1986-89). Furthermore, according to a study published by the National Bureau for Economic Research,[2] the Clinton tax hike is failing to collect over 40 percent of the projected revenue increases.

Incidentally, the claim that unrealistic supply side Reagan Administration revenue projections caused large budget deficits during the 1980s is false. Nonetheless, this false allegation is often used against current tax reform proposals. The official Reagan revenue projections immediately following enactment of ERTA did not assume huge revenue increases, and were actually quite close to the CBO revenue projections. Even the Democrat-controlled CBO projected that deficits would fall after the enactment of the Reagan tax cuts. The real problem was a recession that neither CBO nor OMB could foresee. Even so, individual income tax revenues rose from $244 billion in 1980 to $446 billion in 1989.

Conclusion

The Reagan tax cuts, like similar measures enacted in the 1920s and 1960s, showed that reducing excessive tax rates stimulates growth, reduces tax avoidance, and can increase the amount and share of tax payments generated by the rich. High top tax rates can induce counterproductive behavior and suppress revenues, factors that are usually missed or understated in government static revenue analysis. Furthermore, the key assumption of static revenue analysis that economic growth is not affected by tax changes is disproved by the experience of previous tax reduction programs. There is little reason to expect static revenue analysis to evaluate the economic or distributional effects of current tax reform proposals much better than it evaluated the Reagan tax program 15 years ago.

Christopher Frenze

Chief Economist to the Vice-Chairman

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Endnotes:

1. Joint Economic Committee, The Mellon and Kennedy Tax Cuts: A Review and Analysis, 1982.

2. Feldstein, Martin and Daniel Feenberg, The Effect of Increased Tax Rates on Taxable Income and Economic Efficiency: A Preliminary Analysis of the 1993 Tax Rate Increases, NBER, 1995.

If this is the right direction — I would rather be wrong than right.

Compiled by: Larry Walker, Jr.

I was looking over the Consumer Metrics Institute’s New Growth Index and some of their other charts (here) and almost fell out of my chair. While every left-wing pundit, Obama, and his inept administration are boldly declaring that we are headed in the right direction, the facts beg to differ.

Who should I believe, the facts or the White House?

Their Conclusion: “As such, the prospect of a double-dip recession, something that’s happened only once since the Great Depression, remains a distinct possibility. That earlier double dip was a 6-month recession from January 1980 to July 1980, a 12-month recovery, and a 16-month of recession from July 1981 to November 1982. The one bit of good news for that earlier period is that the second dip coincided with the end of a secular bear market and the beginning of an 18-year cycle of accelerating growth.”

“The charts below focus on the ‘Trailing Quarter’ Growth Index, which is computed as a 91-day moving average for the year-over-year growth/contraction of the Weighted Composite Index, an index that tracks near real-time consumer behavior in a wide range of consumption categories. The Growth Index is a calculated metric that smooths the volatility and gives a better sense of expansions and contractions in consumption.”

“The 91-day period is useful for comparison with key quarterly metrics such as GDP. Since the consumer accounts for over two-thirds of the US economy, one would expect that a well-crafted index of consumer behavior would serve as a leading indicator. As the chart suggests, during the five-year history of the index, it has generally lived up to that expectation. Actually, the chart understates the degree to which the Growth Index leads GDP. Why? Because the advance estimates for GDP are released a month after the end of the quarter in question, so the Growth Index lead time has been substantial.”

View source, updates and more information here, or go directly to:

http://www.consumerindexes.com/

Congress needs to quit spending, and cut taxes – now. If you’re not part of the solution, you’re part of the problem.

Related posts:

Obama: The Era of Flimflam Economics, Part II ; Are We Heading In The ‘Right’ Direction?

That depends on the meaning of the word right. Right?

By: Larry Walker, Jr.

If growing the national debt faster than gross domestic product is the right direction, then the Obama Administration is correct. If the goal is to reach a 100% debt to GDP ratio, as quickly as possible, then the Democrats are correct. If doubling-down on the failed part of Bush policies (i.e. deficit spending) is the right direction, then Democrats are up to par.

However, if the term ‘right direction’ means that we are heading towards a Conservative resurgence in November, then that would be an honest assessment. Every time I hear Democrats make this declaration in the coming weeks, I’ll be thinking about the Conservative resurgence. The chart below shows the direction we are heading.

Tax Cuts: The Right Direction

In May of 2003, tax cuts were enacted. The tax cuts were responsible for the creation of 7.3 million new jobs beginning in August of 2003 and lasting through the end of 2007 (source: http://libertyworks.com/bush-tax-cut-myths-and-fallacies-1/). Tax cuts are the only proven method for bringing an economy out of recession. The deeper the tax cut, the greater the expansion.

As Liberty Works so aptly reminds us, “President Obama and the Democrat Congress have implemented a series of measures that defy the lessons of past recessions”, especially that of 1981, which was by some measures worse than this one. The chart below shows, “the job market recovery is faltering at best, after 31 months of Bush/Obama policies. There are 8 million fewer Americans now employed than in December, 2007.”

The results in the next chart, speak for themselves. “Reagan’s policies turned the job market around after 16 months of losses. The Reagan economy grew continuously for 90 months, creating a total of 21 million new jobs, or a 24% increase in the number of Americans who were employed.”

Right Means Right

If the goal is to grow the economy, create jobs, and increase tax revenues, then tax cuts are the right direction. However, if the goal is something more sinister, then one must brainwash their constituents into believing that ‘tax cuts cause recessions’; that we are somehow heading in the right direction, and that a tax hike will further this trend.

The facts show that the 1983 and 2003 tax cuts brought us through successful business cycles. In 2008, the housing bubble burst, credit markets froze, and we fell into a deep recession, but tax cuts didn’t cause the recession. If you listen closely, a year ago, Obama was saying the recession was caused by the ‘lack of affordable health insurance’, and today he’s saying that it was caused by ‘tax cuts’. I suppose next he’ll be saying the recession was caused by climate change.

It’s sinister enough to take advantage of a (manufactured) crisis in order to pass unwanted legislation. It’s entirely another matter to purposefully prolong a (manufactured) crisis, to the detriment of every American: black, white, red, yellow, and brown; Democrat, Republican, and Independent. Obama’s play book is little more than the old tried and failed policies of FDR. In an article entitled, “FDR’s policies prolonged Depression by 7 years, UCLA economists calculate“, you will find the following conclusion:

“We found that a relapse isn’t likely unless lawmakers gum up a recovery with ill-conceived stimulus policies.”

Are Democrats doing anything other than gumming up this recovery with ill-conceived stimulus policies? Are we really heading in the right direction?

Congress needs to quit spending, and cut taxes – now. If you’re not part of the solution, you’re part of the problem.

Credits: Photo via sapientsparrow.wordpress.com charts via USGovernmentSpending.com and LibertyWorks.com.