Beyond the 1 percent

By David Cay Johnston
October 25, 2011

By David Cay Johnston
The author is a Reuters columnist. The opinions expressed are his own.

The U.S. tax debate tends to focus on the top 1 percent — their share of income taxes and their tax rates. Anti-tax groups encourage this focus, now embraced by the Occupy demonstrators on Wall Street and across America.

Problem is, the top 1 percent is a very misleading measure of who pays federal income taxes. It mixes doctors and billionaires, masking the taxes paid by the middle class and the affluent.

Everyone seems to know that about half of Americans paid no income taxes in 2009 and that the top 1 percent paid about 37 percent of the income taxes.

But how many people know that households making less than $75,000 collectively paid more federal income tax than those making $1 million or more?

Or that income taxed at the next-to-lowest rate, 15 percent, brought in more government revenue than all capital gains taxes plus the two top brackets, which apply only to the top 2 percent of earners?

Or that almost half of the top 1 percent made less than $500,000? Or that five out of six made less than $1 million?

The fact is that the government relies far more on the bottom 99 percent than the top 1 percent for federal income taxes.

In 2009, the income entry point for being in the top 1 percent was slightly less than $344,000. To most Americans that is an unimaginable deal of money. But let’s put that in perspective.

DISPARITY AT VERY TOP
The median income taxpayer — half made more, half less — made slightly less than $33,000 that year (and their average adjusted gross income was under $15,300, or less than $300 per week). The median income taxpayer would need 10.6 years to earn as much as someone at the low end of the top 1 percent.

Far greater disparities exist within the top 1 percent.

The top 1 percent includes people who made many hundreds of millions of dollars and perhaps some with incomes of more than $1 billion, official government data will show when it is released in two years.

Economically, those just entering the top 1 percent have nothing in common with those in the top tenth of the top 1 percent. Someone at the entry point for the top 1 percent would need 29 years to make $10 million, and more than 2,900 years to make $1 billion.

The point is that while all those in the top 1 percent are certainly well off, the vast majority still go to work every day.

Almost half of the top 1 percent, or 1.4 million taxpayers, make $344,000 to $500,000. More than 1.1 million make $999,999 or less.

The bottom half of the top 1 percent rely on salaries for about two-thirds of their income. They get modest income from capital but rely mostly on their labor, giving them more in common with Joe Sixpack than Warren Buffett.

ONE IN A THOUSAND
A much better measure than the top 1 percent would be the top tenth of 1 percent. The government does not break out this group, but Emmanuel Saez, a University of California economist, and others have.

The Saez analysis of tax return data shows that through 2008, the top one-in-a-thousand taxpayers had average income in recent years that ranged between $5.2 million and $7.5 million annually. Just investing that much in corporate bonds will produce enough interest income to keep someone in the top 1 percent.

Furthermore, inside the top 1 percent, those with the highest incomes pay the lowest tax rates.

The top 1 percent paid an average income tax rate of 24 percent in 2009, IRS data shows. That is almost exactly the rate paid by those making $500,000 to $1 million. Those who made $1 million to $10 million paid a higher rate, 26 percent. But those making more than $10 million paid a significantly lower rate, 23.3 percent.

The top 400 taxpayers paid a much lower rate. On an average income of $270 million each, their effective federal income tax rate was 18.1 percent in 2008, the latest year for which we have IRS data. A single worker earning less than $90,000 pays a higher rate than that.

In a country with more than 300 million people, 400 taxpayers is a minute number. Yet those 400 made 1.3 cents out of every dollar of the country’s total adjusted gross income, almost doubling their share of national income since 2002.

Continuing to focus on the top 1 percent will mislead us about who pays federal income taxes. That focus should be on the middle class and the upper middle class, and then on the top tenth of 1 percent. And on whether our tax system is helping create wealth and jobs or destroying them.  (Editing by Kevin Drawbaugh)

27 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

Thanks for another great op-ed. Truly eye opening. Time to join the occupation!

Posted by doggydaddy | Report as abusive

OWS is not necessarily about tax and the 1%. My take is that its about the power of the 1% in government.

Posted by diddums | Report as abusive

> “those 400 [taxpayers] made 1.3 cents out of every dollar of the country’s total adjusted gross income”

So if the USA increased taxes on these 400 super-rich people by a massive 20%, it would make (at most, not counting for increased tax evasion), 0.26% difference to the USA’s tax revenues!

Posted by matthewslyman | Report as abusive

I’ve crunched the raw data from the IRS as well just for fun, I’ve personally like looking at taxable income versus the adjusted gross income (AGI). I noted that taxable income maxes out at around 86% of AGI (in reality its 85% to 87%), which is for incomes over $500,000. Analyzing the data, the average deduction is around $23,000 for all income levels and maxes out at $4,000,000 for those making over $10,000,000 (average AGI of $29,000,000). I think it’s interesting that going from the $5,000,000 to $10,000,000 bracket to the over $10,000,000 bracket sees an increase in the ratio of deduction to AGI; in general it tends to trend down as income increases, i.e. you can deduct less of your AGI as you make more $$. However, it jumps from 12.56% to 13.91% going to from the $5 to $10 million to the over $10 million bracket. I just wonder why this trend occurs when deductions are supposedly phased out as income increases.

Posted by AnastasiaG | Report as abusive

The influence of those on top whether top 1% of 1/4 of 1%, is not just on the tax structure. It is how much power they wield in both the government and on the economics of all things. A CEO who can cut your pay and add to his is more likely to do so if that CEO can do so with little tax consequence. Back when the top marginal tax rate was 90% there was less incentive in screwing your workers for your sake of increasing your pay package.

Posted by SteveBreeze | Report as abusive

An issue also is that the 51% not paying taxes own less than 3% of country.

Posted by theoilyboy | Report as abusive

matthewslyman: Regardless of my political feelings on this article, I take issue with your math.
18%*1.2=21.6%, hardly a substantial tax increase
During the period of recovery following the great depression, the top tax rate was 63%, or 350% of today’s current rate. That would yield over almost a 4% increase in tax revenue, from 400 people. A 4% increase in revenue from 0.1% of the population is profound.

Posted by tlx | Report as abusive

THe author really does not get the whole concept behind the OWS and other protests.. it’s not about who pays more, but about attributing a fair share of the burden of the economic crisis

Posted by GA_Chris | Report as abusive

The author does highlight the fact that a tax rate increase on the top 1% will not bring in a lot of extra revenue for Uncle Sam, just as Apple wouldn’t benefit much by targeting the 65+ age group in its marketing. I agree with others’ comments that that the political power of the top 1, rather than taxes they pay, is the primary focus of OWS.

To tame speculation on Wall Street and bring in substantial revenue while maintaining a progressive tax code, we need a financial transactions tax. A global authority mandating such a tax, as suggested by the Vatican, would be even better!

Posted by yogahelps2 | Report as abusive

The thing is… the top 400 tax payers do not consume their wealth.

Nobody becomes a billionaire by consuming their wealth.

The top 400 employ their wealth in financial markets as a catalyst for economic growth and are rewarded by our capitalist system with more wealth to employ in the future.

If you tax the top 400 you’re not hitting their consumption, you’re hitting the supply of capital in financial markets.

This is why capitalism is so strange, because within the system somebody has to OWN the capital. If nobody owns it there is no motive for managing it in a savvy manner.

Rather than hit the capitalists at the top of the system with disincentives, why not train more capitalists?

Broaden the pyramid and the disparities will shrink.

Whenever the top of the pyramid starts to pull away, don’t introduce disincentives… introduce competition.

When the top starts to pull away it’s a clear signal that there is plenty of opportunity at the top.

Posted by Stu_ell | Report as abusive

Makes the case for a flat/fair tax don’t ya think?? 65,000 pages of tax code and deductions galore for the wealthy and too many under the table and tax evading!

Posted by DrJJJJ | Report as abusive

Nothing makes the case for a flat tax which raises taxes on the lower and middle class, they get crushed like a steamroller hit them, and lowers it for the rich.
That is why the selfish rich always advocates for them.
Speculating in the markets does not create jobs, period. In our present international economic structure giving more money to the top 0.1% actually costs American jobs.

Posted by elemming | Report as abusive

After almost two months we still have to speculate as to what the hell the Occupy protestors are really protesting? I guess the average straggling American does experience loss of purpose these days, so it seems to be an accurate representation.

Does anyone not get that an 18% tax on $270 million is $48.6 million… more than “Joe six pack” could make in 7 lifetimes (let alone pay in taxes)? That one income pays the equivalent in taxes of 3,240 $50k/year salaries being taxed at 30%. The more money made, the more money paid. Who cares if the percentage is lower? They’re actually paying more than most people will ever even make…. Incidentally, these top 1%ers also have enough money to take their business elsewhere, so there’s a game to be played to keep that income tax around, and incentive on both ends to move yourself to a higher tax bracket: both parties get more money.

Everyone has their complaints about the top 1%, but the fact is they’re just doing the best, and consequently they’re paying the most. If you have a straight-A student in your class that refuses to tutor, that’s their prerogative. But their high grades are making your school look good and keeping it funded… so track them down after class and kick their ass. That makes sense; you can’t do as well… so tear down those who can and feel better.

Posted by moneymoneymoney | Report as abusive

Percentages are a tool to use when reality doesn’t fit the narrative. People who are emotionally involved will only see what they want to, their vision is blurred by their inability to use rational thought.

Posted by lucky72 | Report as abusive

I must be missing something. The author states “Almost half of the top 1 percent, or 1.4 million taxpayers, make $344,000 to $500,000. More than 1.1 million make $999,999 or less.” How can there be more people making $344,000 to $500,000 then people making $999,999 or less? Doesn’t “$999,999 or less” include “$344,000 to $500,000″? Should it say that “More than 1.1 million make $500,001 to $999,999″?

Posted by JoeSchmoken | Report as abusive

We Need “20 Brackets to $20,Million”. If our bought off Congress would be so frightened of the 99% movement that they would have to concede a point or two; this is the number one point that would benefit this country more than anything else. If the government needs money to operate(and I believe everyone knows they do), this simple change in the Federal Income Tax law would solve more than 95% of the country’s problems. I propose a simple change of getting rid of all the loopholes, and taxing people with their ability to pay. When 1% of the people have 90% of the money, it’s time to tax those people. As my grandma used to say “You can’t get blood out of a turnip”. Simply put they could still put a large burden on the families of incomes of $70K to $170K. All I’m saying is don’t stop the top marginal rate at $375K when there are so many earners of $1Million or $10Million or $20Million that they have to extend the top Marginal rate to $20Million. I like the idea of starting the new tax code at 3% for families from %0 to $30K, 6% for income of $30K-$40K, 9% for income from $40K-$50K, 12% for $50K-$60K, 15% for $60K-$70K, 18% for $70K-$100K, 21% for $100K-$150K, 24% for $150K-$200K, 27% for $200K-$300K, 30% for $300K-$400K, 33% for $400K-$600K, 36% for $600K-$1Mil, 39% for $1Mil-$2Mil, 42% for $2Mil-$4Mil, 45% for $4Mil-$6Mil, 48% for $6Mil-$8Mil, 51% for $8Mil-$10Mil, 54% for $10Mil-$15Mil, 57% for $15Mil-$20Mil, and 60% for all income over $20,Million. This is exactly what our tax code used to be when our great leaders of the past had control of the country, before our politicians got bought off by Big Business. Now our leaders want everyone to think that our country is broke, when it’s not. The wealth of the country is owned by the top 1%. We the people have to take our country back, by either peaceful demonstrations, or writing our congressmen, or emailing our congressmen. But the bottom line is they have to tax the rich. “20 Brackets to $20,Million” with a top marginal rate of 60% would put this country right back on top within months, not years. We have to take a stand and Demand that They Tax the Rich. God Bless America

Posted by Belleville | Report as abusive

These 1% have already taken their businesses overseas, that’s why we have the high unemployment.

Posted by Belleville | Report as abusive

An excellent analysis that will unfortunately be lost on 95% of Americans since it cannot be summed up in a five word catch phrase or bumper sticker.

Posted by Dilbert314159 | Report as abusive

The higher the income level the higher the tax bracket and the lower the income the lesser would be the tax. Any thing wrong with that?
Everyone knows that when they hit the millions in lottery a big chunk will get taxed. So the tax rate applies to all the winnings and all the incomes, whether the rich gets richer or the poor got rich.
Those that are devious will always try to wiggle their way out of taxes.

Posted by kritik1 | Report as abusive

How does he do it? The Oracle of Omaha earns a lot, and he pays his share of tax and yet he remains ever so cool. And mind you he has a contagious giggle when he laughs.

Posted by kritik1 | Report as abusive

How does he do it? The Oracle of Omaha earns a lot, and he pays his share of tax and yet he remains ever so cool. And mind you he has a contagious giggle when he laughs.

Posted by kritik1 | Report as abusive

something that i think everyone here missed while talking about the occupy movement is that they are against the fiat money/ federal reserve banking system in general. simply put we wouldn’t have as many money problems if we didn’t owe interest on every bit of money in circulation just because its printed by an entity that isn’t our government. that said, many people in that highest bracket also avoided taxes. yes they should be taxed more. but how much will it work? i think many changes need to be made. they make money doing nothing. they earn by denying the profit of labor to the people who do the labor. then they move labor to other countries to make it less costly. because of factors like that i think we need to do alot more than tax the rich more, we need to establish something that will act as a deterrent to outsourcing and fix all the other little issues. like an extra tax on companies based on the percent of their employees that are outsourced. we need to set up incentives for co-op and communally run businesses so that profit can get to laborers and so people have say in industry and so businesses are tied back to our people and communities. we need to eliminate this whole system of a board room of rich people making the decisions that affect everyone while they are too removed from the general populace to even know our concerns. businesses run like this, so does our government. and the biggest problem? that the two intersect too much, ceo’s go into office, mess up regulation, get out of office, and once again ceo, make loads of money off loopholes they created for themselves. it doesn’t matter what anyone wants or how we tax the rich if they are the only people to have power in our country and can change the law to fit their desires and greed. we also need things like initiative and referendum in the half of states that dont have them and we need those things on a national scale so people can have a say in government and law.

and to moneymoneymoney, they aren’t doin the best, they are simply dominating the masses. this is not good, and there cant be more rich people without more poor people in this system. this isn’t like a smart kid doin well on tests, its like the bully stealing lunch money from the majority of the other children… so yes, we should beat him down and take it back.

Posted by wilki | Report as abusive

Hi

You have to really look at the authors use of the 2009 tax tables to see the political bias. Think about the way he deceivingly present the numbers. IF the top 1% pay about 37% in taxes —> he then shows a chart that indicates about 67% of all taxes are paid by the BLUE or MIDDLE CLASS (ME– I make $110K and work very very hard for it) SO, heres the rub. —-> The middle class apparently includes everyone from those paing NO taxes all the way up to 1%. Wow…. the top 2% is considered MIDDLE CLASS. BAD DATA. PRESENTED WITH BIAS. Most all tax income comes from the top 20% of income earners ANY WAY YOU CUT IT. AND WE ARE THE JOB CREATORS. GET OFF OUR BACK.

Posted by greencapitalist | Report as abusive

Was the article intended to enlighten or confuse? If to enlighten, then present the numbers in a table that is complete, accurate and capable of being cross-footed to verify that all the data is used appropriately. Nonetheless, if I correctly interpreted the data provided, and added some other information publically available, then parsing the top one percent into their respective income categories, and assigning them the effective tax rate of the middle class, the result in added taxes would equate to about $500 per middle class household. Since one could surely assume that this amount would not be a “give-back” to middle class households, then it would not be a stretch to guess that it would simply be used as handouts to the non-working, non-taxpaying underclass that would be more than happy to vote for a socialist president.
Edward Kalbaugh

Posted by GEK2 | Report as abusive

greencapitalist – I think you misunderstand Johnston’s point. He is saying that we typically talk about the “1%” as “the rich” who should be taxed more, but in fact around half of that 1% have more in common with the other 99% than they do with those above them. In fact, it is the top tenth of 1% that we should be talking about when it comes to tax fairness.

You complain about those who pay no federal income tax, but do you know _why_ they are not paying? Most of them don’t pay because their income is so low that with the exemption and standard deduction, their AGI is below the taxable minimum. In 2010, for example, a married couple filing jointly didn’t have to pay any income taxes if their income was less than $18,700. But here’s the thing, if you with your $110K income also filed as a married couple filing jointly, YOU didn’t pay any taxes on your first $18,700 either. Plus, you may have done even better than that. Few people with incomes under $18,700 own a home so they cannot, for example, take advantage of the mortgage deduction. You may have had enough deductions that you itemized rather than using the standard deduction and so paid no taxes on an even larger portion of your AGI. But, hey, if you resent paying taxes so much, why not take a job that pays only around $18,000. It’s possible–but not a sure thing–that you won’t have to work as hard as you do in your $110K job (or maybe you won’t have to work as hard, but what you do do will be a lot less pleasant or interesting or rewarding), but, well, hey, you won’t have to be part of that poor top 20 percent of income earners and will instead be a “lucky ducky” at the bottom. Go for it!

Posted by ChristieJones | Report as abusive

Attacking Rich peoples money with more taxes is nonsense!!! The Rich have more lawyers & Accountants per capita than the Federal Gov’t.What we want from the rich is the same we want from the Federal Goverment!! JOBS!!! More incentives must be created for the Rich to invest in US jobs. Tax them sure but beat them at their investing game by forcing them to produce more 50k+ perminant US jobs with full benefits!This can be done with Gov’t.
contracts for road, bldg.,bridge etc. work.
Be creative? Tax deductions for jobs created??? There you go Abama – get started doing not talking!!! Galleyos

Posted by Galleyos | Report as abusive

My beef is not with the 1%. 1% of the adult population is TWO MILLION PEOPLE!

Narrowing our focus to the 1% of the 1% – looking at the 20,000 richest adults in America might be the way to go.

There is only one problem with taxing the super-rich, and it is an elephant in the room that nobody has mentioned.

The super-rich can afford TO LEAVE.

They can move their money overseas and invest it so that the taxman cannot get his grubby paws on it. Or, like Rod Stewart, Sean Connery, Richard Branson and others, they can just move themselves out of the country completely.

And I can’t blame them.

So the Government does what it can; taxing those who cannot afford to leave – and that’s why the Middle-class will always pay the lion’s share of the taxes. The poor can’t afford to pay taxes; the rich can afford not to.

We may not like it, it may not be “fair”, but who can blame them?

Posted by WizardPrang | Report as abusive