The Top 400, and the Rest of Us

The Top 400 and the Rest of Us

2/23: I added a postscript to this one ... scroll down!

David Cay Johnston, first known to many of us as the tax reporter for the NYT, and more recently the author of Perfectly Legal and Free Lunch, and as a columnist for tax.com, last week brought to popular attention a story which the IRS posted to its website without the normal fanfare which announces a new piece of information there.  Even more interesting is the fact that it represents a return to the IRS reporting data which was customarily furnished during the Clinton years and suppressed by the Bush administration, who brought us substantial tax cuts for the highest-income Americans -- and for the highest-value (top 1%) decedents.  As Andrew Leonard put it in Salon,
 

This is America, right? We've come to expect shocking statistics on income inequality. They're practically our birth right.

But then came the kicker:

The annual top 400 report was first made public by the Clinton administration, but the George W. Bush administration shut down access to the report. Its release was resumed a year ago when President Obama took office.

Because you know, if you are going to reward the richest Americans with tax cuts, it's best if you keep the rest of us in the dark as to just how much money they're making, and how little they are paying Uncle Sam.

The new information relates to the top 400 income taxpayers.  The data published brings forward the series data, previously published for 1992 to 2000 (See http://www.irs.gov/pub/irs-soi/00in400h.pdf, published in 2003) to 2007.

Here are some of the highlights of the 2007 data:

• The adjusted gross income threshold for being among the top 400 taxpayers rose from $24.4 million in 1992 to $138.8 million in 2007.   In constant dollars, that was approximately a quadrupling in 15 years.
• The average AGI among the 400 taxpayers rose from $46.8 million (192% of the cutoff) in 1992 to $344.8 million in 2007 (248% of the cutoff).
• In 1992, the total AGI of the 400 represented 0.52% of the total AGI for all taxpayers.  In 2007, the 400 represented 1.59% of the total AGI.   In those years, total taxpayers increased from113.6 million to 143.0 million.  The 400 represented .00035% of the households in 1992, and .00028% in 2007.
• Over the same period, the average AGI for the remaining taxpayers increased from $31,781 to $59,798.
• Salaries and Wages represented 26.22% of the Top 400's AGI in 1992; by 2007, that had decreased to 6.53% -- an average of $29.4 million per taxpayer, for the 306 who reported such income.  306 is the lowest figure since 1992.
• All 400 reported Taxable Interest income.   On average, they reported $27.1 million.  In total, their taxable interest exceeded their salaries and wages.   In total, their taxable interest was 4.04% of total US taxpayer interest.
  
• All 400 reported Dividend income, and their average was $24.5 million.  Their dividends were 4.14% of total US taxpayer dividends.
• The vast majority of their reported taxable income was in "Net capital Gains less Loss in AGI": an average of $228.6 million each.  Their capital gains equaled 66.29% of their AGI, and 10.07% of total US taxpayer capital gains.
• Virtually all of their capital gains -- $226.4 million on average --were subject to preferential rates; this means they were "long-term" holdings, and were taxed at 15%.  [And of course none was subject to FICA, on which the vast majority of those who labor pay 14% (more precisely, (7.65*2)/107.65, or 14.2%).] 
• 49 reported net business income, averaging $3.2 million.  More, 84, reported net business losses, averaging $2.6 million -- they represented 3.06% of the US aggregate.  
  
• 202 reported Partnership and S Corporation net income, averaging $83.0 million.  185 reported Partnership and S Corporation net losses, averaging $25.2 million -- 3.52% of the US aggregate.
• Their itemized deductions averaged $49.4 million, 1.46% of the US aggregate; the average itemized deductions limitation was $5.4 million -- they represented 5.4% of the US aggregate.
• On average, they claimed "taxes paid" deductions of $13.9 million, and "interest paid" deductions of $9.9 million.  Their "taxes paid" deductions represented 1.17% of aggregate deductions for taxes paid.
  
• Almost all claimed contributions deductions, averaging $28.5 million -- 5.73% of the US aggregate.  (Interesting that this is roughly equal to salaries and wages, or to dividend income, or to taxable interest income!)
• Their Taxable Income grew from an average of $42.2 million to $296.2 million.  In constant dollars, it increased 376%.  In 1992, their taxable income represented 0.70% of the aggregate; by 2007, theirs was 1.95% of the total.
• Their federal income taxes averaged $57.3 million; in total, the 400 represented 2.05% of the total paid, up from 1.04% in 2007.  [Compare the former percentage to their 1.59% share of AGI, and their 1.95% share of Taxable Income.] Their average federal tax rate was 16.62% in 2007, down from 26.38% in 1992. 
• If we add the amount they claimed as a deduction for taxes paid to their federal income tax, their taxes represented 20.57% of their AGI in 2007, down from 32.12% in 1992.   Their other taxes paid dropped from 5.74% of AGI in 1992 to 3.95% in 2007.
• These 400 taxpayers paid a total of $28.4 billion in taxes, federal and other, in 2007, on AGI of $137.9 billion and taxable income of $74.7 billion.
  
• In 2007, they paid $28.4 billion in taxes, federal and other.  Had their tax rate in 2007 equaled their tax rate in 1992, they would have paid $44.3 billion in taxes, federal and other, or about $110.7 million on average, instead of $70.9 million.
  

Johnston's Tax.com article also points out:

The top 400 reports understate actual top incomes because of deferral rules. For example, managers of offshore hedge funds who deferred their gains may not be counted in the top 400 reports, which are based on the figure on the last line of the front page of Form 1040.

At least three hedge fund managers made $3 billion in 2007. It is not known how much, if any, of their income they deferred.

and

Only 7 of the top 400 have shown up in the report every year, the IRS data showed. Of the 6,400 returns covered by the 16 years of the report, the IRS said that 2,515, or almost 40 percent, appeared one time.

The previous report (before the Bush administration suppressed publication), said that less than 25% of the then 3600 returns appeared more than once between 1992 and 2000.  

A very useful table in DCJ's column shows that the income of the bottom 90% of taxpayers has increased by a mere 13% (in constant dollars) over the 16 years.

The IRS data is in a pdf at http://www.irs.gov/pub/irs-soi/07intop400.pdf

The data prompts a number of questions:

• How much of this income do you think they spent on consumer goods? 
• What do you think they did that helped stimulate our economy?   
• How many people do you think they employed, and what sort of wages did they pay?
• What do you think this year's portion of each fortune will be worth upon the death of the recipient? 
• What do you think they invested their windfalls in?   I'm guessing that a lot of it went into land -- urban land -- and non-renewable natural resources of one kind or another -- that which Will Rogers and others have pointed out is not being made anymore. 
• What industries do you think these fortunes are coming from?  How have these people benefited from the boom-bust cycle which has victimized millions of Americans?  What privileges have we-the-people granted them to reap what we-the-people sow?  To what degree have they benefited from privatizing the commons -- things which rightly belong to all of us?  What sort of contribution do you think these companies have made to pollution, to personal bankruptcies, to concentrating America's wealth in the pockets of a relative few?  How many jobs have they moved offshore?  Are they being paid in shares or stock options that burden their employer's shareholders?   What sort of wages have they paid their employees at various levels on the pyramid?   What sort of influence will they have over our next elections -- Senators, Congressmen, Governors, President, etc., -- and over future decisions to go to war in various resource-rich parts of the world?  They can certainly afford to spend to influence public opinion in ways which benefit their interests, and to guarantee that they won't be taxed heavily, even if workers, who end up with little, are.   

Postscript: See also NYT opinionator blog post, The Great Goldman Sachs Fire Sale of 2008.

The article lists a number of people who will likely be in the 2008 second tier -- not the top 400, but clearly well into the top half percent, based on their selling Goldman Sachs stock; the article isn't clear about what their basis might have been in the stock -- but one sold shares worth $17.6 million plus $55.7 million (he may not be an American).  Another, who ran the merchant banking business, sold $29 million worth.  The article suggests that most of these sellers still have considerable amounts of Goldman Sachs stock; Lloyd Blankfein's 3.3 million shares are now worth more than $500 million.  Should he sell, he'd be well onto the Top 400; the 2007 threshold was $139 million.  

I'm guessing that many on the top 400 list in any particular year are people who have sold a privately held business to a large corporation.   They've paid 15% on the capital gains, and will likely rail against paying an estate tax on the other 85%.