Report: Quarter of millionaires pay lower tax rate than some in middle class

A quarter of millionaires in the United States pay a smaller share of their income in federal taxes than many middle-class families, according to a new congressional analysis that offers fresh support for President Obama’s push to raise taxes on the nation’s wealthiest households.

The report, by the nonpartisan Congressional Research Service, found that when all federal taxes are taken into account — including those on wages, investment income and corporate profits — some households earning more than $1 million a year paid as little as 24 percent of their income to the Internal Revenue Service in 2006.

That’s substantially less than the share paid by many families making less than $100,000 a year that faced a top effective tax rate exceeding 26.5 percent, the report said.

All told, 94,500 millionaires paid a smaller share of their income in taxes than 10 million households with moderate incomes, the report found.

“Most Americans think millionaires ought to be paying a higher rate than middle-class taxpayers, not a lower one,” said Sen. Charles E. Schumer (D-N.Y.), who has long urged policymakers to raise taxes on the wealthiest households. “This report increases the momentum for our proposal to ensure millionaires pay their fair share.”

The report offers the first government analysis of federal tax data since billionaire investor Warren Buffett, a former Washington Post Co. board member, complained that he pays a lower tax rate than the 20 employees in his office, who earn much less than he does. After Buffett wrote an op-ed in the New York Times, Obama argued that policymakers should overhaul the tax code to ensure that millionaires pay at least as large a share of their income in taxes as middle-class families do, a principle the president dubbed “the Buffett Rule.”

Late Tuesday, Senate Republicans rejected a variation on the Buffett Rule — a 5.6 percent surtax on income over $1 million — to cover the cost of Obama’s $447 billion jobs package.

Critics initially blasted the Buffett Rule, arguing that the average millionaire already pays a significantly higher effective tax rate than middle-class families do. The CRS report, by Thomas L. Hungerford, a specialist in public finance, found that to be true: Millionaires, on average, paid about 30 percent of their income in federal taxes, while households earning less than $100,000 paid closer to 19 percent.

But the averages hide wide variations within income categories, Hungerford wrote, with millionaires paying anywhere from 24 percent to more than 35 percent of their income in federal taxes. The lower tax bills are primarily the result of low tax rates on investment income, such as capital gains and dividends.

Although ordinary earnings are subject to payroll taxes as well as income tax rates as high as 35 percent, investment income — which constitutes the bulk of earnings for many very wealthy households — is taxed at no more than 15 percent.

“The current U.S. tax system violates the Buffett rule in that a large proportion of millionaires pay a smaller percentage of their income in taxes than [do] a significant proportion of moderate-income taxpayers,” Hungerford wrote, although “not to the extent alluded to by Mr. Buffett.”

Congressional Republicans have attacked the Buffett Rule, as well as the idea for a surtax on millionaires, as “class warfare.” They argue that raising taxes on millionaires would penalize many small businesses, the primary engine of U.S. job growth. They also oppose raising taxes on investment income, arguing that doing so would discourage savings and risk-taking.

The CRS report offers a withering rebuttal to both claims. Just 1 percent of tax returns with business income have adjusted gross income of more than $1 million a year, the report says, and those businesses are some of the least likely to create jobs.

“Many observers claim that small businesses are the primary creators of jobs,” Hungerford wrote, but “most of the research cited by these observers is from the 1980s. More recent research suggests that small businesses contribute only slightly more jobs than larger business.”

The main difference “appears to be due to hiring by new startup firms,” which “generally do not generate much business income in their first years in operation.” Consequently, higher taxes on millionaires are unlikely to affect them, the report says.

As to savings, the report argues that private savings rates have fallen over the past 30 years even as the capital gains tax rate dropped from 28 percent in 1987 to 15 percent today, suggesting that “changing capital gains tax rates have had little effect on private saving.”

Lori Montgomery covers U.S. economic policy and the federal budget, focusing on efforts to tame the national debt.
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