Tuesday, September 18, 2012

7,000 Millionaires Paid No Income Taxes in 2011

The White House's new campaign banner/economic principle is the so-called "Buffett Rule," which holds that no millionaire should pay a lower effective tax rate than a typical middle class family. Sound sensible, yes? Of course it does. The tax code is progressive and purposefully so. Marginal income tax rates increase with income. The more you make, the greater share of income you pay. Disagreeing with this general principle puts you to the right of a typical Republican.  

But the Buffett Rule wasn't meant to hold up to strict constructionism. To understand why, consider the 76 million people who don't legally owe individual income taxes in 2011. The vast majority of this group was poor. They didn't owe individual income taxes because they didn't owe a lot of money to start, and various exemptions, like the earned income tax credit, wiped out the rest.

But among families making more than $100,000, there were also half a million tax units -- enough to replace the population of Tucson, Arizona -- that also paid no income tax. Even more surprising, 7,000 millionaires also paid no individual income tax.

Let's focus on these 7,000 tax payers. They help to show why, even if the Buffett Rule is a sensible principle, it wouldn't be a commonsense law.

There are three buckets of factors that can bring taxable income down from $1 million to zero. One is tax tricks. The IRS should crack down more. Two is relying heavily on investments. The administration can try to level taxes for earned income and investment income. Third is great misfortunes. When investments lose significant income, a house or business is destroyed, or a family member gets sick and incurs high medical costs for the self-insured, all these things chop away at taxable income and eventually bring a millionaire's income taxes to zero.

The fact that 7,000 millionaires didn't pay income tax in 2011 is a Rorschach test for the Buffett Rule. Are you outraged by the figure? Then you probably think the rule should be enshrined into law. But if you see the figure as an artifact of a complicated tax code doing its best to account for a varied and complicated country of 150 million tax units, you might not be so outraged. We can, and we should, raise taxes on millions of more Americans, and we should start with the rich, because they can afford to pay sooner. But it's best to see the Buffett Rule as a political tool designed to drive a wedge between the White House and Republicans who have written off tax increases forever.

[Via The Atlantic]

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