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The Tax Burden of the Very Rich

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When there is an income tax, the just man will pay more and the unjust less on the same amount of income. ~ Plato, The Republic

The purpose of this piece is to identify for readers how an unjust tax system treats the very wealthy. Once that is understood it is easy to understand Senator Orin Hatch's recent comments.

In a little noted speech the Senator said that the poor need to "share some of the responsibility" for lowering the deficit and observed that the rich are paying too much in taxes." In his remarks he observed that "The top 1 per-cent of the so-called wealthy pay 38% of all income tax, the top 10 percent pay 70 percent of all income tax and the top 50 percent pay almost 98 percent of all income tax."

Those were facts of which many, including this writer, were unaware and it immediately created feelings of compassion for those paying that much. Of course, compassion is slightly tempered when one learns that in 2007 the top 1 percent received between 21 and 23 percent of all U.S. income depending on what studies you read. It is also slightly tempered when one realizes that the bottom 50 percent earned only 12.3 percent of all U.S. income. Nonetheless, the rich are obviously paying too much and that explains why Republicans don't want them to pay more.

IRS statistics released in May of this year reflect that in 2008, the most recent year for which statistics are available, the average income among the top 400 Americans was $270.5 million. In 2008 someone with that income would have paid about $50 million in taxes. (The effective rate on that income is about 18.1%.) Of course, if you are someone who has net taxable income of $60,000, after deductions and exemptions, and are, therefore, in the 25% tax bracket on all your income in excess of $34,500, you may wonder why you are in a much higher bracket than someone who earns $270.5 million. There is a perfectly logical explanation for this seeming (but not actual) inequity.

The main reason that the tax rate in the United States for the rich is low is that being rich, many of the rich do not need to work. It has long been accepted by Republicans in Congress, among others, that unearned income should receive more favorable treatment than earned income. According to the IRS, in 2008 only 8 percent of the income of the top 400 earners in the country came from salary and wages. Close to 10% came from dividends and about 56% came from capital gains. Happy to help those who have prospered, either through their own efforts or through a wise choice of ancestors, Congress decided that people who receive dividends should only pay 15% tax on those dividends. Similarly, Congress thinks that capital gains, subject to a few non-onerous rules, should only be taxed at 15%. There is another group with very large incomes that also pays tax at the 15% rate. Those are hedge fund managers.

Like the VERY RICH, among whom many hedge fund managers find themselves, money that hedge fund managers get from investors for managing their money is treated like capital gains and is taxed at only 15% even though to the unsophisticated observer money paid to them looks for all the world like the sort of money that the typical wage earner gets, except for its considerably larger amount than what most wage earners receive. (One commentator pointed out that if hedge fund managers paid taxes like the people earning $50,000 or even $100,000, the national deficit would be reduced by $44 billion in the next 10 years. In 2008 the top 25 hedge fund managers averaged $1.01 billion in annual income. )

In 2011, the only worker who will pay as low a rate as the folks described above is the worker whose taxable income is less than $34,500. Workers with taxable income between that and $69,675 will find themselves in the 25% tax bracket and from there the rates go up to 35% which is more than twice as much as the rate at which the person with $1.1 billion in dividends and capital gains is taxed. There are, of course, many adjustments made in calculating taxable income and the actual percentages vary taxpayer by taxpayer. But the long and the short of it is that the taxpayer who wants the satisfaction of paying taxes at the same rate as the really rich should keep his or her taxable income under $34,500. For many, that will not be difficult.

It is possible that readers of this column will not understand why Mr. Hatch thinks the poor should do more. It is even possible that they will not find the foregoing an adequate explanation for why Republicans do not think taxes on the wealthy should be raised. They are not the only ones who are puzzled.

Christopher Brauchli can be emailed at brauchli.56@post.harvard.edu. For political commentary see his web page at http://humanraceandothersports.com

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