Why Really Rich Americans Are Paying Quite a Bit More In Taxes

Bush era tax breaks were ended after President Obama was re-elected in 2012.

This being an election year - and a Presidential election year to boot - it seems likely that any new tax breaks for billionaires will probably have to wait. Though if history is any guide, not forever. JL

Jim Tankersley reports in the Washington Post:

The Internal Revenue Service assessment of how much the 400 highest-earning Americans pay in taxes showed that the effective tax rate paid by those Americans jumped in 2013 to nearly 23 percent. When President Obama was re-elected in 2012, he and congressional Republicans cut a deal on taxes to avoid the dreaded "fiscal cliff." Higher rates took effect in 2013, at which point, the tax rate for the top 400 earners rebounded to where it was in the early 2000s.
The New York Times published a long piece documenting a so-called "private tax system" for the super-rich, filled with offshore tax havens and fancy loopholes opened by large amounts of lobbying in Washington. The widely-read story was nicely distilled in these two paragraphs near the beginning of the story:

Operating largely out of public view — in tax court, through arcane legislative provisions and in private negotiations with the Internal Revenue Service — the wealthy have used their influence to steadily whittle away at the government’s ability to tax them. The effect has been to create a kind of private tax system, catering to only several thousand Americans.

The impact on their own fortunes has been stark. Two decades ago, when Bill Clinton was elected president, the 400 highest-earning taxpayers in America paid nearly 27 percent of their income in federal taxes, according to I.R.S. data. By 2012, when President Obama was re-elected, that figure had fallen to less than 17 percent.

On Wednesday, the Internal Revenue Service published an update to its annual assessment of how much the 400 highest-earning Americans pay in taxes. It showed that the effective tax rate paid by those Americans jumped in 2013 to nearly 23 percent.

That's more than half of the drop that the Times noted in its story -- reversed in the span of a single year.

So what happened? How did the government so dramatically reimpose the level of taxation that the super-rich had so sharply curtailed over the last two decades?

Did it close a bunch of loopholes? Add thousands of IRS enforcement agents to bolster a weakened tax-collection operation?

Actually, it just raised taxes on rich people.

Recall that President George W. Bush cut taxes on high earners (and a lot of other people) in 2001 and 2003. His cuts included a reduction of the top marginal income tax rate and a cut in the tax rate for income from dividends and capital gains.

Those cuts helped the super-rich pay less in taxes. As Josh Zumbrun of the Wall Street Journal noted today in his story on the new IRS data, "the top 400 taxpayers disproportionately earn their money through dividends and capital gains. Capital gains are the profits from the sale of property or an investment. In 2013, these 400 households earned 5.3% of all dividend income and 11.2% of all income from capital assets."

Take a look at this IRS table of average effective tax rates on the top 400 taxpayers, from the Bush tax cuts through 2012. When President Obama was re-elected in 2012, he and congressional Republicans cut a deal on taxes to avoid the dreaded "fiscal cliff." The deal allowed the top marginal tax rate to rise to pre-Bush levels, and it raised rates on capital income as well. Those higher rates took effect in 2013, at which point, the effective tax rate for the top 400 earners rebounded to where it was in the early 2000s.

Now, as the Times described in detail, tax avoidance is certainly a strategy employed by many of the wealthiest people in America, and research from the economist Gabriel Zucman suggests tax sheltering is a growing phenomenon around the world. Wall Street has long operated a sophisticated financial engineering machine to turn labor income into capital income for tax purposes, which has contributed to criticism that the financial industry has become too large for the country's own economic good.

But today's IRS report suggests the biggest reason the super-rich paid lower tax rates over the last decade was the fact that Congress lowered taxes on the super-rich, particularly taxes on capital income.

That's an important point to remember as a new crop of presidential candidates debates whether to raise some capital rates (as Hillary Clinton would), lower them (as Ted Cruz and nearly every Republican presidential contender would) or eliminate them entirely (as Marco Rubio would).

And fortunately for voters, it's an issue that is entirely in public view.