If you go from wealthy to su­per wealthy, your fed­eral in­come tax rate ac­tu­ally goes down.

The Washington Post Sunday - - BUSINESS - BY CHRISTO­PHER IN­GRA­HAM christo­pher.in­gra­ham@wash­post.com

Oneof the cor­ner­stones of Amer­i­can in­come tax pol­icy is that taxes are pro­gres­sive. Peo­ple who make more money de­vote a higher share of their in­come to fed­eral in­come taxes than peo­ple who make less money. That al­lows for a re­dis­tri­bu­tion of wealth that low­ers in­equal­ity. At least, that’s how it’s sup­posed to work. But new data out this spring from the In­ter­nal Rev­enue Ser­vice give us a closer look at how such taxes work at the pin­na­cle of the in­come dis­tri­bu­tion— not just the top 1 per­cent, or even the top 0.1 per­cent, but among the rar­i­fied realm of the 0.01 and even the 0.001 per­cent. Those lat­ter two cat­e­gories are new in the IRS re­port this year, re­flect­ing a grow­ing public in­ter­est in the ul­tra­wealthy and their ef­fects on the econ­omy.

The IRS found that as you go from be­ing merely wealthy (the 1 per­cent) to su­per-duper wealthy (the 0.001 per­cent), your av­er­age fed­eral in­come tax rate ac­tu­ally goes down. The pro­gres­siv­ity of the fed­eral in­come tax starts to fall apart at the up­per reaches of the in­come dis­tri­bu­tion. Take a look at the chart above for a snap­shot of this.

The av­er­age tax paid across the top half of Amer­i­can earn­ers was 14.33 per­cent in 2012, ac­cord­ing to the IRS. Climb­ing up the in­come lad­der, the tax rate in­creases to 22.83 per­cent for the top 1 per­cent of earn­ers.

But when you start to slice that group fur­ther— all the way up to the top 0.001 per­cent — you’ll no­tice that the ef­fec­tive tax rate falls steadily to 17.60 per­cent at the very top.

In other words, a per­son in the top 0.001 per­cent in­come bracket (who would have an ad­justed gross in­come of at least $62 mil­lion) pays the nearly same ef­fec­tive tax rate as some­body who makes $85,000 in ad­justed gross in­come.

That’s not how fed­eral in­come taxes were, at least orig­i­nally, de­signed to work.

To­day the su­per-rich pay a rel­a­tively low rate for a va­ri­ety of rea­sons. They ben­e­fit from a whole host of de­duc­tions— like the mort­gage on a yacht, for in­stance — and other tax benefits that many peo­ple don’t qual­ify for.

Chief among th­ese is the lower tax rate on cap­i­tal gains, or in­vest­ment in­come. That maxes out at about 24 per­cent when you fac­tor in a Medi­care sur­tax that ap­plies to some in­vest­ment in­come. Wages, on the other hand, are taxed at a top rate of 39.6 per­cent. Since many of the su­per­rich get most of their earn­ings from in­vest­ments, they dis­pro­por­tion­ately reap the benefits of that lower cap­i­tal gains tax rate.

In the year this data was com­piled, 2012, the top cap­i­tal gains rate was lower still, at 15 per­cent. So it will be in­ter­est­ing to see what im­pact the re­cent cap­i­tal gains rate hike — up to a max­i­mum of 24 per­cent— has on th­ese trends.

Some politi­cians, most no­tably Sen. Bernie San­ders (I-Vt.), have called for higher tax rates on the very rich­est Amer­i­cans. San­ders has said he would like to see the top in­come tax rate rise to 90 per­cent, where it was in the 1940s and ’50s.

But the num­bers above sug­gest that sim­ply ratch­et­ing up the in­come tax and ig­nor­ing cap­i­tal gains won’t take a huge bite out of in­equal­ity. If pol­i­cy­mak­ers wanted to re­ally take more from the ul­tra-rich, they would tax in­vest­ment in­come much more pro­gres­sively.


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