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While most of the IRS’s various statistical reports tend to inspire little excitement in the public and media, the agency’s latest report,“Individual Income Tax Returns, 2010” is something of a barnburner, in part because it confirms several troubling trends in the federal income tax.  A few stand outs:

1. Our Income Tax Code Stops Being Progressive at $2 Million of Income

According to the new IRS data, the average effective income tax rate actually drops from 25.3 percent for people making (a mere) $1.5 – 2 million to 20.7 percent for taxpayers making $10 million or more in income. (Those are 2010 figures.) In other words, as a taxpayer’s income surpasses $2 million, their effective income tax rate actually goes down, which is the opposite of what should happen under a progressive tax system.

2. Average Effective Income Tax Rates on Taxpayers Making Over $500,000 Dropped In 2010

While taxpayers making between $30,000 and $499,000 saw their average effective income tax rates go up slightly between 2009 and 2010, taxpayers making $500,000 or more actually saw their average effective tax rates go down. In fact, taxpayers making $10 million or more saw their effective tax rate drop almost eight percent from 2009 to 2010. Looking over a decade (2001 to 2010), the picture is even more dramatic: taxpayers making $10 million or more saw their average effective tax rate drop by almost 21 percent.

3. The Special Low Rate on Capital Income is Driving Effective Income Tax Rates Lower for the Wealthiest of the Wealthy

What explains the drop in the average effective tax rate for people making $10 million or more between 2009 and 2010? The IRS data reveals that these taxpayers saw their reported income from capital gains and dividend income increase to 48.5 percent of their total income in 2010, compared to 35.8 percent in 2009.  That change was driven largely by the economic recovery and rebounding stock market. Because income from investments is subject to a lower preferential rate than wages or salary, the more income taxpayers earn from these sources the lower the effective tax rate they will ultimately pay. As Citizens for Tax Justice has explained, ending the tax preference on capital gains and dividends is critical to ensuring that the wealthiest Americans pay their fair share.