Recent media coverage has prompted impassioned calls for Congress to close the “loopholes” that supposedly explain why the 400 richest taxpayers paid an average federal individual income tax rate of 16.7 percent in 2012.
Unfortunately, these calls are based on outdated numbers and an incomplete picture of the tax system.
A few weeks ago, the IRS released new data showing that the average federal individual income tax rate on the richest 400 jumped more than a third, to 22.9 percent, in 2013.
The increase in their tax burden is no mystery. Top income tax rates on both ordinary income and capital gains rose in 2013, at the same time a new 3.8 percent tax on investment income earned by high-income households took effect.
If the 16.7 percent tax burden was the problem, it’s been solved.
Of course, 22.9 percent may still seem too low a tax burden for the wealthy. And many find it troubling that capital gains and dividends face lower individual income tax rates than other types of income.
But, although stockholders pay lower individual taxes on their dividends and capital gains, that income is also taxed at the business level – corporate income tax is taken out before the money reaches the stockholders.
Relieving double taxation is no loophole. Recent computations by the Congressional Budget Office add up the total federal taxes paid by different income groups.
Although CBO doesn’t break out the taxes paid by the top 400, it computes the tax burdens on the top 1 percent and other groups, ranked by the market income they earn before paying taxes and receiving government benefits.
CBO counts the entire payroll tax, including the employer’s half, as part of workers’ tax burdens – that’s the right approach because the employer tax drives down workers’ wages.
CBO’s most recent data, for 2011, show that the average household in the middle 20 percent paid $8,100 in federal taxes, less than 15 percent of its $55,400 market income. The average household in the top 1 percent paid $422,700 in federal taxes, more than 29 percent of its $1,447,500 market income.
CBO also found that the average household in the middle group received $10,700 in federal benefits, $2,600 more than the taxes it paid. The average household in the top 1 percent received $9,600 in federal benefits, a tiny fraction of its tax payment.
Expecting those at the top to pay a bigger percentage than those in the middle makes perfect sense. And, when we finally take steps to address our country’s severe long-term budget imbalance, we'll probably end up asking more from both groups.
But let’s base those decisions on a clear understanding of the federal tax system, not on myths about the rich using loopholes to pay less than the middle class.
Alan D. Viard is a resident scholar at the American Enterprise Institute.