Let’s start with the 400 taxpayers reporting the highest income. What is their annual income? How much tax do they pay?
According to the Internal Revenue Service, the average annual income reported by the top 400 taxpayers is $344,831,528 and their effective income tax rate is 16.6%.
What about the top 1% of taxpayers? That’s a much larger group. How do they fare?
The top 1% earn an average income before taxes of $1,873,000 and they pay an effective tax rate of 20.6%.
Interestingly, the super-wealthy have a lower effective tax rate than those who earn “only” a couple million dollars per year. It’s almost like the super-wealthy have some kind of influence over tax policy.
Lately, marginal tax rates are being discussed. The two factors to consider are the highest marginal tax rate and the income threshold where it takes effect. Historically, top marginal tax rates have been well above 50%.
Let’s look at the top tax rate and income threshold for a single person and see how they have changed over the years. I used numbers from the Tax Foundation. If you want to examine the actual numbers, the data is in a table at the end of this blog post.
Using the data, I plotted the top tax rate every two years from 1932 to 2010 and then drew a line showing where the top tax rate would be if Obama is successful in raising it to the Clinton-era rate. You can see that the current top marginal rate is almost the lowest it has ever been. You can see, too, that the amount of increase that Obama has suggested is relatively slight.
From the early 1940s to the early 1960s the top tax rate was above 90% on income above $200,000. Despite that, the 1950s were a period of increasing prosperity. Manufacturing boomed, people earned more and spent more, and the country paid down much of its war debt. And some people became millionaires.
During the 1960s the economy expanded faster. With a tax rate of 91% on income over $200,000 at the beginning of the decade, dropping to 70% on income over $100,000 at the end of the decade, unemployment dropped every year during the ‘60s: from 6.7% in 1960 to 3.5% in 1969. And still more people became millionaires.
In reality, the US economy has grown every year since 1950 except for 2009. But while the economic pie is getting larger, the slices most people receive have not grown. So where is all the extra pie going?
Of all the new financial wealth created by the American economy between 1983 and 2004, 42% of it went to the top 1%, and 94% went to the top 20%. The bottom 80% received only 6% of the wealth generated in the United States during the '80s, '90s, and early 2000s. After accounting for inflation, the bottom 80% of earners saw no growth in income, and some earners saw their incomes shrink.
But the top 400 earners, in the period from 1992 to 2007, saw their income increase 392% (in 2007 dollars) and their average tax rate reduced by 37%.
In other words, the rich are getting richer – a lot richer – at the expense of everyone else. The economic pie is getting larger but unless you’re wealthy, your slice of the pie is staying the same or shrinking.
The Gini coefficent is a formula that measures income inequality in national economies. It is reliable enough that it is used by the CIA world factbook. According to the Gini coefficient, the U.S. ranks 93rd in income equality for household income. Among countries with at least a quarter-million adults, only Russia, Ukraine, and Lebanon are more unequal. Wealthy Americans are living in a new Gilded Age.
Marginal Tax Rate Data
| Year | Marginal Tax Rate | On Income Over | Inflation Adjusted to 2011 |
| 1932 | 63.0% |
$1,000,000
|
$16,378,075
|
| 1934 | 63.0% |
$1,000,000
|
$16,744,748
|
| 1936 | 79.0% |
$5,000,000
|
$80,712,095
|
| 1938 | 79.0% |
$5,000,000
|
$79,567,243
|
| 1940 | 79.0% |
$5,000,000
|
$80,135,580
|
| 1942 | 88.0% |
$200,000
|
$2,753,124
|
| 1944 | 94.0% |
$200,000
|
$2,549,768
|
| 1946 | 91.0% |
$200,000
|
$2,301,329
|
| 1948 | 91.0% |
$200,000
|
$1,862,072
|
| 1950 | 91.0% |
$200,000
|
$1,862,072
|
| 1952 | 92.0% |
$200,000
|
$1,693,431
|
| 1954 | 91.0% |
$200,000
|
$1,668,250
|
| 1956 | 91.0% |
$200,000
|
$1,649,850
|
| 1958 | 91.0% |
$200,000
|
$1,552,800
|
| 1960 | 91.0% |
$200,000
|
$1,516,079
|
| 1962 | 91.0% |
$200,000
|
$1,485,958
|
| 1964 | 77.0% |
$200,000
|
$1,447,610
|
| 1966 | 70.0% |
$100,000
|
$692,530
|
| 1968 | 70.0% |
$100,000
|
$644,769
|
| 1970 | 70.0% |
$100,000
|
$578,298
|
| 1972 | 70.0% |
$100,000
|
$536,793
|
| 1974 | 70.0% |
$100,000
|
$455,131
|
| 1976 | 70.0% |
$100,000
|
$394,340
|
| 1978 | 70.0% |
$102,200
|
$351,712
|
| 1980 | 70.0% |
$108,300
|
$294,907
|
| 1982 | 50.0% |
$41,500
|
$96,495
|
| 1984 | 50.0% |
$81,800
|
$176,653
|
| 1986 | 50.0% |
$88,270
|
$180,712
|
| 1988 | 28.0% |
$17,850
|
$33,856
|
| 1990 | 28.0% |
$19,450
|
$33,391
|
| 1992 | 31.0% |
$51,900
|
$83,003
|
| 1994 | 39.6% |
$250,000
|
$378,508
|
| 1996 | 39.6% |
$263,750
|
$377,184
|
| 1998 | 39.6% |
$278,450
|
$383,304
|
| 2000 | 39.6% |
$288,350
|
$375,725
|
| 2002 | 38.6% |
$307,050
|
$382,967
|
| 2004 | 35.0% |
$319,100
|
$288,350
|
| 2006 | 35.0% |
$336,550
|
$374,578
|
| 2008 | 35.0% |
$357,700
|
$372,780
|
| 2010 | 35.0% |
$357,700
|
$384,486
|
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