Recently, the IRS reported the average tax rate of the top 400 highest earning Americans. With average earnings of $200 million per filer, you might think this group paid a tax rate close to the maximum, but you’d be wrong. In 2009, this elite group enjoyed an average tax rate of just 19.9% – closer to someone earning about $75,000 per year.
The numbers are staggering. Last year billionaire investor Warren Buffet enjoyed a tax rate of just 17.4% while his secretary paid 35.8%. Republican Presidential candidate Mitt Romney paid just 13.9% in taxes on his $21.7 million in income.
America’s tax system is progressive – meaning higher tax rates are paid by those who can afford it – so how are millionaires paying the same tax rate as those in the middle class? In an effort to explain this seemingly unfair tax advantage, the nonpartisan Tax Policy Center took a look at the income and taxes of the very rich. Here’s what they found:
- In 2009, the wealthiest Americans got 47% of their income from capital gains.
- The average millionaire (not in the top 400) claimed just 17% of their income from capital gains.
- Most middle class Americans claim a much smaller proportion (if any) from capital gains.
Capital gains, which is income derived from the sale of stock, property, or other capital assets is only taxed at a rate of 15%. Meanwhile salary and wage income – the primary source of income for most middle class Americans – doesn’t enjoy the same tax advantage as capital gains. So a single filer earning $50,000 in 2009 actually paid a higher tax rate than someone who took home $100 million from capital gains.
It hasn’t always been this way. From 1992-2002, the average tax rate of the top 400 filers was higher – about 25%. Then in 2003, the George W. Bush Administration reduced the capital gains tax rate to 15%. The average tax rates of the top 400 plummeted, and have stayed below 20% ever since.
Capital gains rates are set by the federal government – and it’s difficult to predict their trajectory in the future. But many states also levy their own capital gains tax – Washington is one of just 8 states that does not. Last year, a proposal for a capital gains tax from the Washington State Budget and Policy Center was introduced by the state legislature, but failed to advance.
It’s something that deserves a second look. A state capital gains tax would provide much-needed funding for K-12 education, public health, higher education, and infrastructure improvements. It would also ensure more equity in our backward state tax structure, and ensure high-quality services that are crucial to attracting and keeping good jobs.
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