Raphael Thys
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The top One Percent in America earns at least $480,930 per year, according to recently released IRS data that compiled earnings/taxes paid from 2015. While that One Percent of Americans makes about 20% of all dollars earned in America, they pay 39% of all taxes paid to the American government. This disproportionate share of taxes paid is the result of America’s progressive tax brackets: The top One Percent pay a much higher percentage of their income to the IRS: a 27.1% rate for the average One Percenter vs. a 14.34% rate for the average taxpayer.
But the IRS data is fascinating because it does a thorough breakdown within that top One Percent. Imagine the top One Percent is represented by 1,000 people standing in a room. Of those 1,000 people, 100 people (the top 0.1% of all taxpayers), pay 19.5% of all taxes in the United States. So, of the 39% of all taxes paid by the top One Percent as a group, about 50% of that is paid by just one in ten of those people.
And this trend repeats itself. If we again imagine that the top One Percent is represented by 1,000 people in a room, 10 people (the top 0.01% of all taxpayers), pay 8.75% of all taxes in the U.S. — almost 50% of the entire amount paid by the top 0.1%.
If we imagine that just one of those 1000 people represents the top 0.001% of all taxpayers, that single person pays 3.53% of all taxes paid in the U.S. — about 40% of the entire amount paid by the top 0.01%. In absolute numbers for 2015, this top 0.001% reflects only 1,412 of the wealthiest taxpayers in America who made at least $59.38 million dollars that year.
Essentially, 1/10th of each group pays about half of the total taxes paid for that entire group.
Another interesting trend is that the very top taxpayers — the 0.001% — actually pay a lower tax rate than the top One Percent overall. While the One Percent pay an average federal rate of 27.1%, the top 0.001% pay an average rate of 23.93%. This trend has largely been consistent over the last 10 years of IRS data.
Why the lower rate for the very, very few at the top? The answer likely rests in how that group is able to make so much money (at least $59.38 million in annual income). Unlike someone in the One Percent who might make the majority their $480,930 per year through very high wages (highly paid doctors, lawyers, and business and financial executives), the top 0.001% almost certainly derives a large portion of their income from business profits. Whether they are the owners of a large portfolio of public stock, investors in real estate or other private ventures, or direct owners and managers of highly profitable businesses, these owners and large shareholders likely make a large portion of their money as capital gains (which is taxed at a 20% rate instead of the 39.6% individual tax rate then-applicable for top earners in 2015).
Changes in the new Tax Reform and Jobs Act, passed at the end of 2017, may widen this difference in the average tax rate paid by the top 0.001% and the average One Percenter. One reason is that additional cash for American corporations — through new lower corporate tax rates and the ability to bring cash from oversees back into the United States at lower tax rates — may lead to an increase in share buybacks, which raise prices and increase profits for shareholders of American corporations. Another potential benefit to business owners is the 20% tax discount on income generated from pass-through entities (such as income from large real estate investments that some criticized as being a narrow benefit delivered to politicians like President Trump and Senator Bob Corker).
Less money owed by the top 0.001% of taxpayers is not necessarily a bad thing for the overall economy, especially if that saved money is re-deployed through investments in new businesses that stimulate economic growth. However, a survey released this week from the National Association for Business Economics cast some doubt on whether additional stimulus is possible or likely to compensate for rising budget deficits. A majority of economists (52%) now consider the U.S. government’s fiscal policy to be “too simulative” — up 32% since August 2017 (before the Tax Cuts and Jobs Act was passed). Moreover, 86% of economists now think that the most probable outcome of the government’s current tax and spending policies is that it will “increase the deficit share of GDP” when compared to the Congressional Budget Office’s 10-year baseline — i.e., increase the U.S. government’s debt faster than it boosts the overall U.S. economy. This is up 14% since since the NABE survey in August 2017, before the new tax plan was passed, before Congress passed the two-year budged deal that experts expect will result in a $1 trillion deficit in 2019 and before the White House released its proposed budget that may add $7 trillion in deficit over the next 10 years.
In the coming months and years, the debate will likely rage on as to whether, as Treasury Secretary Steve Mnuchin predicted in September 2017, the new tax bill will “not only pay for itself but also pay down the debt” and whether wage earners will see a benefit from the reduction in corporate tax rates or whether those benefits will only be seen by corporate investors and owners. Nevertheless, one can expect that the difference in tax rates for the 0.001% vs. the One Percent overall will increase in the coming years.