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Taxes plunge for the superrich

The average rate for top earners has plummeted from 26% to 17% since 1992, while the average rate for all has fallen from 9.9% to 9.3%. Congress is talking about cutting tax breaks, but which ones?

By MSN Money Partner Apr 18, 2011 12:36PM

This article is by Stephen Ohlemacher of The Associated Press.


Stung by the income taxes you had to pay this month? You'll probably take little consolation in hearing that the superrich pay a lot less in taxes than they did a couple of decades ago. And nearly half of U.S. households pay no income taxes at all.


The Internal Revenue Service tracks the tax returns with the 400 highest adjusted gross incomes each year. The average income on those returns in 2007, the latest year for IRS data, was nearly $345 million. Their average federal income tax rate was 17%, down from 26% in 1992.


Over the same period, the average federal income tax rate for all taxpayers declined to 9.3% from 9.9%.


The top income tax rate is 35%, so how can people who make so much pay so little in taxes? The nation's tax laws are packed with breaks for people at every income level. There are breaks for having children, paying a mortgage, going to college, and even for paying other taxes. Plus, the top rate on capital gains is only 15%.


There are so many breaks that 45% of U.S. households will pay no federal income tax for 2010, according to estimates by the Tax Policy Center, a Washington think tank.


"It's the fact that we are using the tax code both to collect revenue, which is its primary purpose, and to deliver these spending benefits that we run into the situation where so many people are paying no taxes," said Roberton Williams, a senior fellow at the center, which generated the estimate of people who pay no income taxes.


The sheer volume of credits, deductions and exemptions has both Democrats and Republicans calling for tax laws to be overhauled. House Republicans want to eliminate breaks to pay for lower overall rates, reducing the top tax rate from 35% to 25%. Republicans oppose raising taxes, but they argue that a more efficient tax code would increase economic activity, generating additional tax revenue.


President Barack Obama said last week he wants to do away with tax breaks to lower the rates and to reduce government borrowing. Obama's proposal would result in $1 trillion in tax increases over the next 12 years. Neither proposal included many details, putting off hard choices about which tax breaks to eliminate.


In all, the tax code is filled with a total of $1.1 trillion in credits, deductions and exemptions, an average of about $8,000 per taxpayer, according to an analysis by the National Taxpayer Advocate, an independent watchdog within the IRS.


Rep. John Tierney, D-Mass., has introduced a bill to eliminate about $60 billion in tax breaks, mostly for businesses. The bill would require a regular review of all tax breaks to see if they still serve their original purpose.


"Right how they don't even come into the conversation," Tierney said. "We need to get them into the conversation and have the information on which to make a good solid decision."


More than half of the nation's tax revenue came from the top 10% of earners in 2007.


More than 44% came from the top 5%. Still, the wealthy have access to much more lucrative tax breaks than people with lower incomes.


Obama wants the wealthy to pay so "the amount of taxes you pay isn't determined by what kind of accountant you can afford."


Eric Schoenberg says to sign him up for paying higher taxes. Schoenberg, who inherited money and has a healthy portfolio from his days as an investment banker, has joined a group of other wealthy Americans called Responsible Wealth, which is project of the group, United for a Fair Economy. Their goal: Raise taxes on rich people like themselves.


Schoenberg, who now teaches a business class at Columbia University, said his income is usually "north of half a million a year." But 2009 was a bad year for investments, so his income dropped to a little over $200,000. His federal income tax bill was a little more than $2,000.


"I simply point out to people, 'Do you think this is reasonable, that somebody in my circumstances should only be paying 1 percent of their income in tax?'" Schoenberg said.


Sen. Orrin Hatch of Utah, the top Republican on the Senate Finance Committee, said he has a solution for rich people who want to pay more in taxes: Write a check to the IRS. There's nothing stopping you.


"There's still time before the filing deadline for them to give Uncle Sam some more money," Hatch said.


Schoenberg said Hatch's suggestion misses the point.


"This voluntary idea clearly represents a mindset that basically pretends there's no such things as collective goods that we produce," Schoenberg said. "Are you going to let people volunteer to build the road system? Are you going to let them volunteer to pay for education?"


The law is packed with tax breaks that help narrow special interests. But many of the biggest tax breaks benefit millions of American families at just about every income level, making them difficult for politicians to touch.


The vast majority of those who escape federal income taxes have low and medium incomes, and most of them pay other taxes, including Social Security and Medicare taxes, property taxes and retail sales taxes.


The share of people paying no federal income tax has dropped slightly the past two years. It was 47% for 2009. The main difference for 2010 was the expiration of a tax break that exempted the first $2,400 of unemployment benefits from taxation, Williams said.


"As a matter of policy, there would be a lot of ways to save money and actually make these things work better," said Leonard Burman, a public affairs professor at Syracuse University. "As a matter of politics, it's really, really difficult."


According to an analysis of 2009 tax data by the Joint Committee on Taxation, these are among the biggest tax breaks:

  • 34.6 million taxpayers reduced their federal income taxes by a total of nearly $77 billion by deducting the interest they paid on their home mortgages.
  • 36 million families saved more than $54 billion from the $1,000 per-child tax credit.
  • 40.7 million taxpayers cut their federal income taxes by $40 billion by deducting state and local income, sales and personal property taxes.
  • 33.5 million households cut their taxes by $21 billion by deducting state and local real estate taxes.
  • 36 million families cut their taxes by nearly $35 billion by deducting charitable donations.
  • 28 million taxpayers saved a total of $24 billion because their income from Social Security and railroad pensions was untaxed.
  • 25.7 million low-income families collected a total of $55 billion from the earned income tax credit.

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Apr 19, 2011 1:27PM
I pay my taxes every year and claim my kids, my house, my interest, and whatever else I can think of.  Changing the tax laws to allow you to claim less I think would be a GOOD thing.  You don't have to raise taxes, just stop making everything a deduction.  The problem is this makes sense and any politician that brings it up will get crucified by the masses.  As the author put it, it makes policy sense, but not political.  This is exactly why our country is in the state it's in.  We give tax breaks to companies who ship jobs overseas and wonder why unemployment is so high.  WAKE UP AMERICA!!!  If you want it better you have got to make some hard choices and start paying for it.  You can't have a capitalist society with federal roadways, parks, and public services, and expect to not pay for any of it.  Get off the free ride and take it seriously!
Apr 25, 2011 9:57AM
orin hatch is an a time when the govt. is broke, how can anyone justify cutting taxes for the ultra-wealthy.  They don't need another tax break.  Sheer stupidity and the republican working class is 'on-board' just because they always vote republican without actually thinking about whether it's right or wrong.
Apr 21, 2011 10:51AM

About 25% of my income was taxed at 15% because it was dividends and capital gains. In other words I didnt do any physical work for this income. It was my  money working for me. 


My parents dont have the income that makes them comfortable to invest so most of thier money is in savings/checking accounts which pay interest. That interest is taxed at thier marginal tax rate which is 25%.


An houlry worker works some overtime to make some extra cash. That extra income is taxed at thier marginal tax rate which is likely to also be at least 25% and they will also have Social Security and Medicare deducted from that overtime pay.


Who is the system built for?

Apr 19, 2011 10:33AM
The Internal Revenue Service tracks the tax returns with the 400 highest adjusted gross incomes each year. The average income on those returns in 2007, the latest year for IRS data, was nearly $345 million. Their average federal income tax rate was 17%, down from 26% in 1992.

Let's see how many jobs are created as a result of these rates.  Based on what my Republican friends tell me, we should see unemployment drop to about 5%.

Apr 20, 2011 12:45PM

It is simple to cut your taxes! Just don't make as much. It don't pay some people including myself to only make so much, that's makes tax free money on taxes you have already paid!

The government can't tax you for raising your own garden, doing your own repair work and oil changes on your own vehicles, adding a room on the house, etc.

Apr 29, 2011 9:48AM
Keep voting Republican. Ryan will make you rich too. Make those dumb poor people pay for your yacht. 
Apr 28, 2011 8:25AM
LOL... i'm sorry guys and gals, but the filthy rich do not and will never pay taxes.. Have you noticed the slow increase in cost of everything? that's the rich preparing for the higher tax rates. As always the so called taxes for those who can afford to pay them filters down to those of us who cant.. the poor who get those refunds are the ones who support this country, they do this by paying the filthy rich mans taxes for him. Any of you who believe the rich (filthy rich. not including  the upper middle class with income in the millions)  will ever pay taxes is either  naive or just plain old blind. you cant raise the taxes on the rich you cant raise minimum wage . without putting a price freeze on every thing before you even mention it to the filthy rich.
Apr 28, 2011 10:40AM

As long as the government can spend whatever they want, raising taxes and reducing deductions will never be enough.


Elected officials must be held accountable for the financial decisions they make while in office.  Especially when those decisions can affect the economy for years after they leave, unfortunately that's usually when they're dead from old age.  SERVE TWO TERMS, IF YOU CAN, THEN GET OUT AND TRY TO MAKE IT IN THE REAL WORLD!!!


Soaking the rich with higher taxes is a short term solution at best as long as the government doesn't have to stick to even a marginal budget.  A better long-term solution is for our government to be more responsible with our trust and the tax revenue we provide.  I want to see the government held to the same full disclosure we have to make each year when we file our tax returns.  Sure there might be a bucket of expenditures that we have to wait to get the details on, but they should at least have to openly declare the amounts of money they're spending.

May 4, 2011 11:59AM
This post is not a defense for not raising taxes on the rich.  It is only a statement of fact that it will not come anywhere close to solving the deficit.  We have a spending problem, not a revenue problem.  Anyone can review the IRS data themselves as it is publicly available in any level of detail that you want.  If the top 5% of wage earners (meaning that you make more than $159k per year) were to have 100% of their income taken over what is already taken for federal, state and local taxes (meaning they have no money to live on), the annual federal deficit would still be in excess of $500 billion.  We would need to collect all of the income of about the top 20%  of wage earners (those above about $70K) to eliminate the annual federal deficit at its current level.  Adding a few more percent to the tax rate paid by the rich is like giving more 5 gallon buckets to the Japanese to deal with the Tsunami!
Apr 22, 2011 12:08PM

Have you heard O'bamas recent statement.  "I will not sign another tax cut for the wealthy".  Well, Mr. President, why did you sign the first one?  You signed the one that continued the Bush era tax cuts for the wealthy, didn't you?  Don't worry Mr. President, I don't think you are going to get the chance to again.  The one you signed will not expire until after your term is up.  I hope the idiots, of this country, are not stupid enough to vote for him again.  I also hope you lazy Americans who will not get off your couch, and leave that TV set long enough to go to the polls, and vote this time around.  This is what we get when people do not exercise their right to vote.  Some would rather sit, comfortably at home, and watch it on TV.  Then there are those who believe the lying Liberal media, and stay home because the news exit polls has already called certain states, being won already by the Liberal candidate.  These are the sheeples who believe everything they hear and everything they see.  If the news anchor says it, it must be true.  What a bunch of do nothings.  These are the same ones, who complain the most about their government, that they did not participate in helping to elect.  If someone tells me they don't vote, I tell them, don't argue politics with me than.  Apparently, you do not care, so why I should I argue with you?  As far as exit polls, they should not be permitted by Federal Law.  The Liberal news media has already proven that they try to influence voters.  They called the State of Tennessee pre-maturely for Gore, his home state, as well as the State of Florida.  This kept hundreds of thousands from even going to the polls as they felt it was a waste of their time.  They deliberately did this to keep Republicans, which are usually older than Liberals, from going to the polls in those critical swing states.  Luckily, enough Repubs did go to win those states, and that is why Bush was elected.  If their plan would have worked, Gore would have been President.  Even then, it had to go to the Supreme Court, before Florida was called.  The Libs fought it to the hilt, there was fraud involved, and they did not want to count our armed forces votes that were still out on ships and had not arrived yet.  They were afraid of those service men votes because, Dems cut military spending, and Repubs support military spending.  As a result, our servicemen usually swing to the Republican side.  Maybe it is because they are more American than the Liberals are?  Isn't this why they join the service?  The Dems were out signing up all the Hispanics and Blacks, that they could, and even went as far as to sign up incarcerated prisoners.  They also offered buses to get the poor, social program people, a way to get to the polls.  These people were willing because they are all for social programs and the Dems are known for supporting socialism.  How desparate were these Liberals?  You think about it and decide.












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