Feb 8 (Reuters) – Paying taxes is bad enough. Finding
out you pay a larger percentage of your income than presidential
candidate Mitt Romney or billionaire Warren Buffet makes it even
But that’s the case for millions of American, who pay higher
rates because most or all of their income comes from a salary
rather than dividends. The capital gains tax rate on investments
currently tops out at 15 percent, while the highest rate for
earned income is more than twice that at 35 percent.
As a result, it’s typical for Buffet — who has volunteered
to pay more and publicly excoriated the government about tax
equity — to have a tax rate of around 17.4 percent, mainly on
capital gains and dividends, while his now-famous secretary pays
a higher rate.
That sore subject has been much in the political news
lately, but now that it’s tax season, it seems much more
personal. But before you start throwing things at your computer
or your accountant, look at the data. The wealthiest Americans
may pay at lower rates, but they pay more in total taxes.
Here are some details about who pays how much in taxes.
Wealthier Americans pay higher taxes than middle- or
low-income earners; according to the latest Internal Revenue
Service data, Americans earning more than $1 million in 2009
paid at an average income tax rate of 25 percent, while the
average rate for taxpayers earning $75,000 to $100,000 was 8
In contrast, Americans making $100,000 to $200,000 paid on
average 12 percent in taxes — but this group paid a quarter of
all income taxes collected in 2009, according to IRS data. Add
in those making up to $500,000 — who paid at a rate of 19
percent — and these two groups contributed 45 percent of all
income taxes collected. Americans earning more than $1 million,
on the other hand, in 2009 paid just 20 percent of total taxes
The richest one-fifth of Americans accounted for 86 percent
of all capital gains and dividend income last year, according to
preliminary projections from the Tax Policy Center, a research
group and think tank. About two-thirds of that went to the
richest 1 percent, and 44 percent went to the top 0.1 percent.
According to IRS statistics from 2009, those who made $10
million or more grossed nearly $70 billion in long-term capital
Both Romney and Buffett are paying their full tax bill due
under the current tax code. As Diana Furchtgott-Roth, senior
fellow at the conservative think tank Manhattan Institute, puts
it, “If you think Romney should owe more, change the law.”
Behind this political back-and-forth is a pressing need for
the United States to raise revenue. The Congressional Budget
Office recently projected a federal budget deficit of $1.1
trillion for fiscal year 2012, and spending cuts alone aren’t
likely to cover the difference. Just how to find new revenue,
though, is controversial.
President Barack Obama has taken action to try to do just
that. At his behest, Democrats in the Senate on Feb. 1
introduced legislation to enact the so-called “Buffett Rule,”
which would require anyone making more than $1 million to pay a
tax rate of at least 30 percent.
Another frequent proposal is to raise the tax rate on
capital gains. In a New York Times/CBS News poll released Jan.
24, slightly more than half of Americans agreed that income from
capital gains or dividends should be taxed at the same rate as
Still, many economists say the favorable rate on capital
gains and dividends is vital to growth.
“Investors are supplying the capital that is needed to spur
innovation,” Furchtgott-Roth says. “They should be rewarded for
the risk they are taking.”
Critics disagree. “Capital gains is just one of the many
ways the wealthy can lower their tax burden that is not
available to most Americans,” says Brad Borden, tax professor at
Brooklyn Law School. “And it is usually at the expense of those
in the middle class.”
Indeed, a 2011 Congressional Research Service report argued
that the capital gains tax has contributed to income inequality
in recent decades as capital gains and dividends became a larger
share of overall income — and were much more unequally
distributed. Borden suggests Congress allow the capital gains
tax rate to rise to at least 20 percent by 2013, as currently
Ending the preferential tax rate on capital gains alone
won’t eliminate the U.S. deficit, particularly given that nearly
half of all Americans will not owe any income taxes at all for
2011, according to the Tax Policy Center.
In addition to longstanding itemized deductions, Congress
during the last two years has substantially increased the Earned
Income Tax Credit and established a host of new credits for
childcare, education and retirement savings. In 2010, not only
did 45 percent of taxpayers not owe income taxes, 90 percent of
that group received government payments through refundable tax
Important to note, the Tax Policy Center says, is that 60
percent of those who pay no income taxes earn less than $20,000,
and 84 percent earn less than $100,000. Also, not paying income
taxes does not preclude owing payroll taxes for Social Security
and Medicare of up to 15.3 percent.
Still, about one-sixth of those not paying income tax in
2010 earned more than $100,000, and a handful escaped payroll
tax as well, according to the Tax Policy Center. That’s because
those households received much of their income from tax-exempt
bonds or from overseas sources for which they receive foreign
tax credits. In exchange, they often accept lower interest rates
from such bonds or they pay taxes to another country.
Some have proposed doing away with the U.S. system of
complex tax credits and deductions and instead installing a flat
tax or raising the marginal tax rate on all income brackets.
Either step would require a full overhaul of the tax code — and
in the end, it may make little difference.
“Top earners will always find ways to shift their wealth
into categories taxed at a lower rate,” says Tax Policy Center’s
Roberton Williams. “Doubling the tax rate won’t automatically
A faster path to increased revenue would be for Congress to
allow tax cuts enacted under the George W. Bush Administration
to expire at the end of 2012. Continuing them, the Congressional
Budget Office has said, would slash revenues by $5.4 trillion
through 2022, forcing the Treasury to increase the national debt
to cover the difference.
“The Bush tax cuts disproportionately benefit a small group
of top-income earners,” says Chuck Marr, director of federal tax
policy at the Center on Budget and Policy Priorities. “And they
are very expensive.”
Ultimately, it is unclear whether any changes to the tax
code can repair the widening gulf between the rich and the poor
in the United States. Tax Foundation economist William McBride,
for one, argues volatility in the stock market has had more
impact on recent income inequality than taxes.
“The Bush-era tax cuts had provisions that benefited both
high and low taxpayers,” McBride says. “By contrast, inequality
rose 12 percent between 1993 and 2000, following two tax rate
increases on high-income earners.”
Marr concurs. “Inequality is a pre-tax phenomenon,” he says.
“Going forward, we just have to decide how much we want to use
taxes to fix it.”