The Person Behind The Tree

The IRS has recently released statistics on income taxes for the year 2009.  This is always interesting data for a tax and trivia geek like me.

The Wall Street Journal has an op-ed in today's paper entitled "Millionaires Go Missing" after reviewing the data.  It seems that there were a lot fewer millionaires in 2009 than in 2007.  If the goal of President Obama was to redistribute income, the IRS data shows that the economy has done the work for him.

In 2007, 390,000 tax filers reported adjusted gross income of $1 million or more and paid $309 billion in taxes. In 2009, there were only 237,000 such filers, a decline of 39%. Almost four of 10 millionaires vanished in two years, and the total taxes they paid in 2009 declined to $178 billion, a drop of 42%.

This chart shows the effects of the recession on the rich.

Even though the ranks of the millionaires have been depleted they still shoulder a big portion of the income tax burden and those with incomes over $200,000 are paying the majority of income taxes in this country.  This is the top 3% of all income earners.  They actually paid more in income taxes than the other 97% combined!

The millionaires who are left still pay a mountain of tax. Those who make $1 million accounted for about 0.2% of all tax returns but paid 20.4% of income taxes in 2009. Those with adjusted gross income above $200,000 a year were just under 3% of tax filers but paid 50.1% of the $866 billion in total personal income taxes. This means the top 3% paid more than the bottom 97%. Yet the 3% are the people that President Obama claims don't pay their fair share. Before the recession, the $200,000 income group paid 54.5% of the income tax.

To summarize...

• Those making $200,000 comprised 3% of all tax returns
• They earned 25% of total income (down from 33% in 2007)
• They paid 50.1% of all income taxes (down from 54.5% in 2007)

Those with incomes above $1 million earned 16.1% of total income in 2007 but had dropped to 9.5% of total income in 2009 according to the WSJ.  They paid 20.4% of all income taxes even though they represented just .2% of all returns files. 

Which year were the majority of Americans better off?  When the rich had a higher percentage of total income or a smaller percentage?  John F. Kennedy said it many years ago and it still applies today,

 "A rising tide raises all boats"

As the Wall Street Journal points out...

It's an old story: The best way to produce income equality is to destroy trillions of dollars of wealth. Everyone loses, but the rich lose relatively more than the poor and the middle class. By that measure, if few others, Obamanomics has been a raging success.

I looked over the data myself and pulled out a few interesting points of tax trivia.

• Middle class earners between $60,000 and $200,000 comprise 2/3 of all taxable returns
• This group also reports about 50% of all total income earned.  They earn 58% of all salaries and wages.  27% of all dividends. 41% of Schedule C business income.  8% of capital gains. They bear about 36% of the income tax burden.
• On the itemized deduction side, these middle class earners make up 45% of the total amount for state income taxes, 55% for property taxes, 58% for home mortgage interest and 46% of all cash charitable contributions.
• Those reporting over $1 million in income principally make that much money by risking their capital.  Only 32% of their total income is from salaries and wages.  By contrast, 80% of middle class income comes from salaries and wages.  71% of all capital gains income was reported from those making over $1 million in 2009.  I am sure a good portion of this is from one-time events like the sale of a business, farm or investment property that was the reason they were a "millionaire" in 2009.  37% of all dividend income was also earned by millionaires.
• Looking at itemized deductions, millionaires only account for 1% of the mortgage interest deduction, 4% of the property tax deduction, 17% of cash contributions and 20% of the state income tax deduction.  Compare these percentages to the middle class above and you see that itemized deductions are a much greater benefit to the middle class than to the rich.

What can you take out of this?  The biggest difference between the wealthy and the middle class is the investment income they are deriving from risking their capital.  This is really driven by capital gains income.  It is the big differentiator between the rich and the middle class. As my father used to tell me, "You don't get rich working.  You get rich when your money works for you."

Of course, to get your money working for you, you need to put it at risk.   Money is much like seed. Seeds don't do anything if they sit in a drawer,cabinet or bag in the barn.  However, if they are properly planted, nurtured and cared for, one seed can grow into an enormous tree. That tree can begat an entire forest.

Right now we don't have enough people willing to plant seeds.  Is this the time to tax the person behind the tree that has the seeds for the next tree?

"Don't tax me, don't tax thee, tax the person behind the tree"-Senator Russell Long (D) LA

Chairman-Senate Finance Committee
1966-1981