Three Fact Checks on Myths About Millionaires and the Taxes They Pay

via New Deal 2.0 by Philip Klinkner on 10/4/11


money-and-greed-150Think millionaires aren’t rich and pay more than their fair share in taxes? You may need to think again.

Tax rates may be making news these days, but if you listen to one media report on how much millionaires pay you may hear something completely different than the next. Are millionaires really rich? How do their taxes compare to the poor? And what will it really mean if we tax them more? John Steele Gordon’s recent op-ed in the Washington Post repeated many of the myths and misconceptions about the wealthy in this country. Here are the facts on our fat cats.

Myth #1: Millionaires aren’t rich.

As strange as it may sound, some think that millionaires aren’t actually wealthy. According to Gordon, millionaires aren’t rich because there are so many more of them today than in the past and $1 million dollars in the bank only generates $50,000 in income a year.

Fact: Millionaires are rich.

This confuses income and wealth. Income is what you earn in a year, while wealth is how much you have saved in investments and other assets. None of the proposals to increase taxes on the wealthiest Americans would include taxes on assets, only on income. And those with a million dollars or more in income are a still a rare breed. According to data from the IRS, in 2008 only about 3 percent of tax returns had adjusted gross incomes of over $1 million. Just looking at wealth, in 2010 there were 3.1 million people in the U.S with $1 million or more in investible assets (assets excluding primary home and personal belongings), or about 1 percent of the U.S. population. Even if such investments only earned you $50,000 a year, that is still equal to the median household income in the U.S. And who wouldn’t like to have a solid middle-class income without having to do anything other than checking your bank statements?

Myth #2: Millionaires pay more in taxes than those with less income.

Gordon writes that those with “incomes of more than $1 million paid an average of 23.3 percent in federal income taxes in 2008; those earning between $100,000 and $200,000 paid 12.7 percent; and those earning between $50,000 and $100,000 paid 8.9 percent. Nearly half of American families don’t make enough money to pay federal income taxes at all.” He adds that another reason people might think that the wealthy pay less in taxes is because a disproportionate share of their incomes comes from capital gains and dividends, which are taxed at a maximum of 15 percent, compared to a maximum of 35 percent for earned income. But this is mistaken, according to him, since dividends are doubly taxed, first at the corporate rate of 35 percent and then at 15 percent.

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Fact: Millionaires pay proportionately less in taxes than poorer people.

Let’s start with claims about double taxation. Income is income. Whether I make $100 with my labor or with an investment, I still earn $100. Saying that investment income should be taxed at a lower rate is just another way of saying that the income earned by the wealthy (and almost all capital gains and dividends are earned by the wealthy) should be taxed at a lower rate.

Gordon is correct that the wealthy do pay a higher share of their income in federal income taxes, but he overlooks the regressive burden of other forms of taxes. Looking at the total tax burden, which includes not just federal income taxes but payroll taxes as well as state and local taxes, the top one percent of Americans paid 30 percent of their income in taxes, compared to 28 percent for the bottom 99 percent.

Of course, many will say that even with these numbers, the wealthy are still paying an equal share of their income in taxes. But this is equality in name only, since it’s much easier for Bill Gates or Warren Buffett to pay 30 percent of their income in taxes than it is for someone with a more modest income. This is the whole purpose of progressive taxation. Those with more income can afford to pay modestly higher rates without any real loss to their standard of living, while even very low tax rates have a huge impact on those with modest incomes.

Myth #3: Obama’s “millionaires’ tax” will seriously limit investment.

Gordon cites the Bush tax cuts as proof that tax cuts stimulate the economy and lower unemployment. He writes, “unemployment declined by a third in the four years after the Bush tax cuts were fully implemented in 2003, dropping to 4.2 percent from 6.2 percent.”

Fact: There’s little evidence that raising taxes on the wealthy will hurt the economy.

This claim cherry-picks the data. His analysis conveniently starts in the summer of 2003 when unemployment was at its highest point in Bush’s first term, even though the first Bush tax cuts were enacted more than two years previously.  He also leaves out the final year of the Bush administration. By the time Bush left office, unemployment was at 7.8 percent and climbing fast. One can just as easily (and more accurately) argue that between the time of Bush’s first tax cut and the end of his administration, unemployment rose by 81 percent, rising from 4.3 percent to 7.8 percent.

There’s no evidence that a modest increase in tax rates on the very wealthiest Americans will pose a significant drag on the economy. As Warren Buffett pointed out in his now-famous New York Times op-ed, “People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.”

We would all do well to remember the words of FDR, who, speaking at another time of economic and political anxiety, said, “Social unrest and a deepening sense of unfairness are dangers to our national life which we must minimize by rigorous methods. People know that vast personal incomes come not only through the effort or ability or luck of those who receive them, but also because of the opportunities for advantage which Government itself contributes.” Our tax policy should reflect this reality.

Philip Klinkner is the James S. Sherman Professor of Government at Hamilton College. He is the author (with Rogers Smith) of The Unsteady March: The Rise and Decline of Racial Equality in America and he is currently writing a book on the 1936 election.

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