January 30, 2009
A Rich Income in ’06 Was $263 Million
By LYNNLEY BROWNING
The income of the 400 wealthiest Americans swelled in 2006, soaring nearly 23 percent from the previous year, to an average of $263 million, according to data released Thursday by the Internal Revenue Service. Since 1996, this group has nearly doubled its share of all income earned in the United States.
The top 400 paid just more than $18 billion in federal income taxes in 2006, or an average of $45 million, on a record $105 billion in total income — the lowest effective tax rate in the 15 years since the agency began releasing such data.
That compares with nearly $1 trillion paid by all other individual taxpayers in 2006.
The gains for the richest took place amid a booming economy, in which hedge funds and private equity firms blossomed and the subprime lending machine went into high gear.
The rising wealth of the nation’s richest taxpayers will most likely intensify debate among tax and policy analysts about the equitability of the tax code, which analysts say favors the ultrawealthy.
Tax cuts enacted by the Bush administration that benefit the wealthy are set to expire by 2011.
“Until recently, we had a financial system that rewarded investors, and we have a tax system that does as well,” said Robert S. McIntyre, the director of Citizens for Tax Justice.
Now wealthy people, he said, pay income tax rates well below those of working-class citizens because of a myriad of tax breaks. A lower capital gains tax, now at 15 percent, down from 28 percent in 1997, benefits investors with big portfolios.
The average adjusted gross income in 2006 of more than $263 million for the top 400 taxpayers compared with an average of $214 million in 2005. It was three and a half times what they earned in 1996, which was $74 million.
And their average tax rate continued to a 15-year low of 17 percent.
But their contribution to federal coffers rose slightly, to nearly 1.8 percent of total contributions by all individual taxpayers. About 130 million taxpayers file returns each year.
The growth in income came primarily from dividends and interest income, not rising salaries and wages. Capital gains income jumped to 63 percent of the adjusted gross income of the richest 400, up from 58 percent in the previous year.
As a percentage of their income, salaries and wages fell to 7.4 percent of their total income, down from more than 12.5 percent just two years earlier. But taxable interest as a percentage of their income rose to nearly 7.8 percent, the highest level since the dot-com boom era of 1995.
The higher income also came from a sharp rise in claims for foreign tax credits, typically through privately owned entities. Such claims rose in 2006 to an average $2.5 million from $1.7 million the year earlier, and quadruple the level in 1996.
More than half, or nearly 54 percent, of all the itemized deductions taken by the wealthiest were related to their charitable contributions, a figure roughly unchanged since 1996.
And while the top 400 wealthiest earned more deductions from their charitable contributions, such gifts still account for just 5.19 percent of all itemized charitable contributions by all taxpayers.
January 2009 Archives
JANUARY 6, 2009
By JESSE DRUCKER
The main business tax cuts proposed by President-elect Barack Obama are likely to be a windfall for two industries particularly tied to the current economic meltdown: Wall Street investment banks and home builders.
Under the proposal being crafted by the incoming Obama administration and congressional Democrats, companies would be able to use their so-called tax losses to offset taxable U.S. profits earned in the past five years.
Typically, companies can carry back such losses only two years. The Obama proposals likely would mean that companies with enormous losses from last year and this year could use the losses to help wipe out tax obligations from the previous five years and receive sizable tax-refund checks from the Treasury Department. For some firms, that would mean cash payments of billions of dollars.
That tax cut would be particularly helpful to industries that were flying high for the past several years, but now aren't expected to report much profit for the foreseeable future -- such as Wall Street firms, home builders and construction companies.
Typically, such tax losses can still be taken as deductions in the future for years to come. But for companies expecting slim or nonexistent profits for the immediate future, that can mean years before they realize the full benefit of the deductions stemming from the tax losses.
The same break was included in a stimulus package enacted in 2002, and home builders had lobbied Congress for a nearly identical tax break last year -- estimated to cost $6.1 billion -- ultimately without success.
"I think it's ridiculous," said Dean Baker, an economist and co-director of the Center for Economic and Policy Research. "It's rewarding the people who messed up."
Treasury last year granted other tax benefits to banks hurting from losses realized on their loan portfolio, allowing them to use those losses more quickly than currently permitted.
Other industries will benefit as well. In recent weeks, the National Association of Manufacturers has been pushing for a similar tax break.
Another proposal would allow businesses to take larger tax deductions on capital investments they make this year and next, instead of spreading those deductions over several years.
That proposal -- known as accelerated depreciation -- is essentially a two-year extension of a tax break included in an economic-stimulus package passed early last year. Research on a nearly identical tax break enacted in 2002 found little benefit. For example, a sizable 2006 Federal Reserve study concluded that the tax break had "only a very limited impact...on investment spending, if any."
Economists have offered possible explanations for why that break didn't have a bigger impact. One potential issue is that the tax break means businesses are expected to accelerate spending at a time when they are concerned that consumers won't buy their products. As a result, much of the tax break goes to companies for spending money they were going to spend anyway.
The issue with both tax breaks: Will companies use the newfound cash solely to repair their balance sheets, or will they use it to spend money and, in the case of banks, make new loans?
Some argue that a tax break focused on trying to stimulate new lending is a mistake, given that prospective borrowers are companies facing decreased demand and individuals losing jobs or owning homes with rapidly declining values.
"Obama wants to re-create the Bush stimulus package for business," said Robert McIntyre, director of Citizens for Tax Justice, a liberal-leaning tax policy research group that generally is critical of corporate tax breaks. "It's sort of backwards: Businesses aren't investing because nobody's buying theirs stuff."
Write to Jesse Drucker at jesse.drucker@wsj.com