Although it sounds like a stock-car race, the IRS 400 is the four hundred largest Adjusted Gross Income tax returns. Of course the IRS does not actually publish the names, but every so often they publish the year-by-year statistics for that elite group of individuals. The latest publication covers from 1992 to 2008. For 2008 it took an AGI of at least $109,736,000 to join what only can be termed the elite of the elite, a drop from the 2007 cutoff of nearly 138 million dollars.
The top 400 taxpayers earned 1.31 percent of all the Adjusted Gross Income reported on tax returns for 2008. That is up from just over a half of one percent of all AGI in 1992.
Obviously the IRS 400 had big tax bills. However, if you are a middle to upper middle class taxpayer who earned most of your money by wages, bonuses, partnerships, Schedule C, or similar means, the chances are very good that they paid a smaller fraction of their income in federal taxes than you. The IRS 400 had an average federal tax rate of 18.11 percent in 2008 and just 16.62 percent in 2007. FICA and Medicare taxes were on top of this, but for those in the rarified strata of the 400 these contributions maxed out millions of dollars ago and as a percentage of their total AGI, represent a tiny fraction of one percent.
So what kind of hotshot accounting trick did the IRS 400 pull off to so effectively stave off the maximum 35 percent tax rate? In fact only 143 of the IRS 400 fell under the Alternative Minimum Tax.
The primary answer is actually rather simple. Although the IRS 400 had 1.31 percent of all the AGI reported on all tax returns they had 13.10 percent of all reported Capital Gains and 10.49 percent of all Capital Gains subject to preferential rates. So while I am sure that the IRS 400 use every tax reduction measure available, most of their low tax rate is explained just by the preferential tax treatment of long term capital gains.
With over one in ten dollars of the tax benefit from the capital gains tax rate going to just 400 people, maybe it is time to re-examine how our tax code should, as in the words of the 16th amendment that enabled it, tax income from whatever source derived. I’m not against capital gains, but can we fairly claim that it is somehow more desirable than earning a paycheck or getting a bonus, or sharing in the profits from a business partnership or s-corporation? Those all contribute in their own way to economic growth.