Tax Rate for Richest 400 People at Its Second Lowest Level Since 1992

New IRS data released this month reveal that the nation’s 400 richest people paid their second-lowest average tax rate in the past quarter century.

These tax filers paid just 16.7 percent of their adjusted gross income (AGI) in federal income taxes in 2012, the latest year data are available. This means the nation’s wealthiest paid, on average, less than half the top statutory federal income tax rate of 35 percent that was in effect in that year. Since the IRS began tabulating these data in 1992, the only other year the wealthiest paid a lower tax rate was in 2007.

How the very richest paid such a low rate is no mystery. These individuals derived about 70 percent of their income from capital gains and dividends, which in 2012 were taxed at just 15 percent, a fraction of the top statutory rate to which those who get their income from working a 9 to 5 are subject.

Fortunately, tax changes enacted at the end of 2012 as part of the “fiscal cliff” deal, and as part of the legislation enabling the Affordable Care Act, increased top income tax rates on both wages and capital gains starting in 2013, so it’s likely that effective tax rates on the top 400 taxpayers will increase in 2013 to reflect this.

But federal income tax rules still allow a gigantic tax preference for capital gains relative to salaries and wages. The top tax rate on capital gains is now 23.8 percent, well below the 39.6 percent top tax rate now applicable to wages. This means that the best-off Americans still can reduce their effective tax rates well below those facing many middle-income Americans going forward.

For this reason, it makes perfect sense that President Obama’s new budget proposal would scale back tax breaks for capital gains. During his State of the Union address, the president proposed increasing the top capital gains rate to 28 percent for wealthy investors, restoring the rate to where it was through the Bush I Administration and until 1997. But even if Obama’s proposal is enacted, the best-off Americans would still enjoy a double-digit tax break on their capital gains.

Of course hackneyed talking points prevailed among anti-tax proponents after the president announced his proposal: Stifling investment, slowing economic growth, etcetera, etcetera. The fact is these doomsday scenarios have not proven to be true in the wake of previous tax increases, and we should be debating tax policy within the broader context of how to raise enough revenue to fund the nation’s priorities.

As much as some would like to delink tax policy from, say, the condition of roads and bridges or the quality of our public health system, schools, and the quality of public safety services, it’s all intertwined.  And make no mistake, the tax breaks available to just 400 of the best-off Americans absolutely make a difference in our ability to provide these important services. Astonishingly, these 400 individuals enjoyed almost 12 percent of all capital gains income nationwide in 2012—meaning that roughly one in every nine dollars of capital gains tax breaks went to these 400 individuals in that year.

Most Americans no longer need to be reminded that wealth has been concentrating more and more at the top, or that ordinary working people have been economically standing still. But the IRS’s data on the top 400 taxpayers has not lost its capacity to shock, and remains an important reminder that our political institutions, and especially our tax laws, often act to make inequality worse, not better.