Sources of Income for the 0.4%

I've been studying the IRS sources of income for 2007 for incomes over $1,000,000.  In 2007, such people were 0.4% of all taxpayers, yet their AGI was 17.4% of all AGI.  Salaries, wages, and interest for this class adds up to $445B, about 5% of AGI for all taxpayers, and about 31.7% of all income for this class.   For people making less than $1M, salaries, wages and interest accounted for 78% of all income.

For the .4%, dividends and long term capital gains totaled $595B, about 42.5% of total income for this class, and accounting for 41% of all dividends and 76% of all long term capital gains.  This income is taxed at 15%, irrespective of the tax bracket the payer is in.

The remaining 25.1% of income that the top 0.4% earned comes from a variety of other places, such as short term capital gains.  Most of it is taxed as ordinary income.  For example, business profits:  the 0.4% earned $18B, approximately 1.3% of their earnings, in this category.   This is only 7.8% of all income in this class.--92.2% of business income that is taxed as income comes from people who are NOT making >$1,000,000 a year.   S-Corp capital gains amount to $23.5B, 1.6% of their earnings.

The republican leadership is constantly telling us that raising taxes on the wealthy will hurt the job creators.  These two categories: business profits and S-corp capital gains, are the ONLY categories of business income that would actually be affected by a change in the top marginal rate for individuals.  This is 2.9% of earnings in the class.  It's now taxed at 35%, and it would go up to 39.6%.


The justifications for having low rates on capital gains are somewhat specious:  Let's say you buy a property and hold it for ten years.  If you buy a property and the price of it is carried along with inflation, you're being taxed on inflation. for example, if you buy a house for $100K, hold it for 10 years, during which time there was 5% inflation every year, and then sell it for $163K, you have exactly kept up with inflation.  your capital gains are $63K though.  if you're in a 25% income class, if this were taxed as ordinary income, you'd pay $16.7K tax on this, despite not really having made any ground.  So the IRS instead makes a simple rule: for things held more than one year, they have a flat 15% tax rate--$9.45K for such a profit.  it doesn't matter if you the asset grew $63K in one year or 50., that's the tax rate.    To make this fair, we should adjust the purchase value of the house to reflect inflation when calculating capital gains.  This is called "depreciation",   If the house went up in value relative to inflation, you should pay higher taxes.  if it lost ground, you should be able to take a loss.   As it stands, it's an incentive to hold the asset for the minimum time it takes to get the long term gains tax break.  (the reason it's done the way it is, is because once upon a time, people who trade a lot of stocks and bonds had to work out their taxes by hand, and every asset would have to be deprecated individually.  now that we do this with a computer, it should be no big deal).  

Many of the people who own stocks get a dividend.  For the 99.6%, this is a 1.2% of their total income, and in fact, 84% of it comes goes to people who make over $100K--the top 20%.   Most of them would never notice a change in the tax rate.   But for the top .4%, it's a sizable fraction of their income, and during the GWBush administration, they managed to perpetrate a fraud that gave them a huge tax break.  It's called "Imputed Corporate Taxes".   The idea is that the people who get dividends own a large share of the company.  The company already pays taxes on its profits, called "Corporate Taxes", before it pays the dividend to shareholders.  Were all of the after-tax profits to be distributed as dividends and taxed at the top individual rate, a dollar of profits would be taxed at 35% + .35*(1-.35) = 57.75.   This sounds outrageous, doesn't it?  So they lowered the rate for dividends to 15%.   Now that dollar is being taxed at 35% + .15*(1-.35) = 44.75.   Still seems a lot, huh?

Well, the reason seems so much is because it's being counted twice.  EVERY dollar flows through the economy many times, and each time the IRS or other taxing authority takes a haircut.  The fact that a shareholder can directly account for two of the cycles is no more pertinent than a customer paying sales tax on an item the same corporation is selling.   In fact, very few companies actually pay the full 35% and it's not relevant to the individual taxpayer anyway.  Everyone is connected to some other entity that pays higher taxes than they do.