12/08/2012 @ 12:01PM |72 views

Gucci Match: Fiscal Cliff Tax Fight Pits The 2% Against The 0.1% And The Richest 400

To hear House Speaker John Boehner (R-Ohio) tell it, he has agreed to President Barack Obama’s demand that the rich pay more tax, and their dispute is only over how much more and whether higher marginal tax rates should be used to extract some of that extra revenue. As Boehner put it during a House Republican leadership press conference held to blame President Obama for the continuing stalemate: “There are ways to limit deductions, close loopholes and have the same people pay more of their money to the federal government without raising tax rates, which we believe will harm our economy.” (Emphasis added.)
The same people? Not really. “It’s not even the same income group or the same income distribution,’’ says Eric Toder, co-director of the nonpartisan Tax Policy Center and a former Treasury Deputy Assistant Secretary for Tax Analysis. A close look at the numbers shows that increases in tax rates (particularly on dividends and capital gains) extract more from the very rich, while limits on deductions shift more of the tax burden onto the backs of the somewhat rich and the arguably rich (that’s my term for those well-off families who may think of themselves as merely upper middle class because they live in high cost areas, but who earn five to 10 times the $50,000 national median family income, making it absurd to call them middle class.)

Obama wants to use both rate hikes and deduction limits to extract $1.4 trillion in additional income tax from upper income folks over the next decade; Boehner says he’s ready to raise $800 billion, but only with deduction limits and loophole closers.

Consider this: If as Obama proposes, the Bush 2001 tax cuts are allowed to expire for families with adjusted gross income of more than $250,000 and singles earning more than $200,000, the top rate on ordinary income will climb from 35% to 39.6% and the top 0.1%—the 117,000 families earning more than $2.7 million—will pick up 55.8% of the tab, according to a fiscal cliff analysis by TPC. The rest of the top 1% (the 1.1 million families earning between $506,210 and $2.7 million) would pick up 41.8% of the bill, leaving just 2.4% to be paid by the arguably rich in the 98th percentile. (Note that the actual threshold would be higher than $200,000/$250,000, since the threshold is in 2009 dollars and would be indexed for inflation, with a standard deduction and exemptions allowed before higher rates kick in.)

Even more dramatically, if the Bush 2003 tax cuts are allowed to expire for high earners, as Obama insists they should, the top rate on capital gains will rise from 15% to 20%, the top rate on corporate dividends will jump from 15% to 39.6%, and the top 0.1% will pick up 62.5% of the tab. (Those rates are before the extra 3.8% Medicare surtax on investment income that kicks in on January 1 as part of ObamaCare.)

Obviously, the very rich have a much greater share of their total income subject to the tax hikes—a $500,000-a-year family would have less than half of its income taxed at higher rates. But the uberrich also receive a disproportionate share of the income that benefitted from the 2003 cuts. According to new Internal Revenue Service statistics, in 2010, 11,264 tax returns (that’s 1 in every 12,686) reported income in excess of $10 million. These families reported 4% of the nation’s total adjusted gross income, but an outsized 21% of qualified corporate dividends that benefitted from the low 15% rate which would jump to 39.6%. Long term capital gains are even more concentrated; as a result, the 11,264 tax returns with income over $10 million reported nearly half of all income that benefitted from special low rates on gains and dividends in 2010. (The IRS hasn’t issued its annual report on the top 400 earners in 2010 yet, but in 2009, the 400 booked a stunning 16% of all net capital gains reported on 140 million tax returns.)

Yet when all of Obama’s proposals to squeeze more from the rich are scored, including his proposed limits on the rate against which the wealthy claim their deductions are considered, the share paid by the top 0.1% falls to just 32.4%, according to the TPC. (Under Obama’s proposal, even though high income families would pay a top tax rate of 39.6%, their deductions would only be credited against a 28% rate. Moreover, certain exclusions from income, including the interest on tax free municipal bonds and pre-tax contributions to retirement accounts and health savings accounts, would also be allowed only at a 28% rate.)

While Boehner hasn’t said exactly how he would limit deductions to raise $800 billion over a decade, Republican aides have pointed to a November paper from the Committee For A Responsible Federal Budget that offered three possible models. One of them, for example, would cap itemized deductions at $25,000, leaving the top 0.1% to pick up just 28.5% of the total, according to TPC’s analysis.

The fact is, itemized deductions are simply less significant for the very rich, particularly if deductions for charitable contributions are excluded from the limits—as it seems likely they would be. My calculations, based on the IRS’ 2010 numbers , shows that taxpayers earning $250,000 to $500,000 collectively claimed itemized deductions equal to 16.2% of their AGI, and 13.9% when charitable contributions are excluded. By contrast, taxpayers earning $10 million plus claimed deductions equaling 13% of their AGI, but just 7.6% of AGI when charitable contributions are excluded. In other words, non-charitable deductions were almost twice as valuable to the arguably rich than to the very rich.

The TPC’s Roberton Williams notes that in theory, one might be able to design a tax increase that simply limits deductions and has the very wealthy paying as big a share as they would from a tax rate increase. But, he adds, it would be so complex, “that it’s beyond what I want to think about. It’s bad enough to have to think about the terrible tax policy we have now.” Williams cautions against a “meat ax approach” to limiting deductions, which could have an immediate effect on house values, and would hit, for example, an elderly couple that is now allowed a big medical expenses deduction because one is receiving expensive nursing home care. “We’d be getting rid of a whole lot of things people like and that we’ve built into a lot of markets,’’ he warns.