Top-earning Americans had shockingly good 2012

Americans at the top of the income ladder enjoyed an astonishing year in 2012, new data show. Compared with 2011, their incomes increased by half — their second highest ever — while their tax burdens fell to almost the lowest ever.

The tax returns of the top 400 earners reported average income of $335.7 million, a real increase of more than $111 million over 2011, a new IRS report reveals.

Even better for the top 400, their taxes came to just 16.7 percent of their adjusted gross income.

Compare that with singletons. More than 1 in 5 who made $75,000 to $100,000 paid a tax rate of 17 percent or more. And more than half who made $100,000 to $200,000 paid 20 percent or more.

The top-400 tax rate  was not much more than the 13.4 percent average for all other taxpayers, my analysis of IRS statistical tables shows.

Among the top 400, the IRS report shows that 32 paid nothing to 10 percent in income tax; 123 others paid under 15 percent.

For this cohort, the zenith of incomes and the nadir of tax burdens came in 2007, the last peak year of the economy. That year the top 400 averaged $381.8 million, measured in 2012 dollars, and their tax rate was just 16.6 percent.

Compared with the vast majority, the top 400 taxpayers did especially well. For the bottom 90 percent, incomes rose in 2012, but by a scant $159, or one-half of 1 percent, from the year before. Their average was $31,610. That means the vast majority’s average income in 2012 rose by $3.06 a week, contrasted with the $2.1 million more a week, on average, that the top 400 enjoyed.

While those at the top have been rolling in dough, the vast majority of Americans remain much worse off than before the Great Recession began more than seven years ago. Their average 2012 income was $4,775 less than in 2007 and $5,443 less than in 2000.

The new data, reported here first, show how the rules made in Washington and the state capitals lavish benefits on those at the top while keeping the vast majority mired in the Great Recession, even though it officially ended in 2009.

The single biggest subsidy for those at the top is the Federal Reserve’s zero-interest rate policy combined with easy credit for hedge funds and those who buy businesses with borrowed money. The real interest rate, which takes inflation into account, is less than zero for many of the richest Americans.

Older Americans who saved for their final years have been devastated by the zero-interest policy, forcing many to consume their savings instead of living off interest.

In this century the share of Americans owning stocks and mutual funds other than in retirement accounts has shriveled. Those in the top one-tenth of 1 percent, which consists of Americans with annual incomes of $2 million or more, saw their share of dividends more than double, as I revealed in my column in November.

Those at the top also benefit from government policies that discourage unions, whose purpose is to increase the pay and benefits of members. Widespread unions benefit all workers, even those without unions, by generating competitive pressure for higher pay to attract the best workers.

The decline in the incomes among the bottom 90 percent and the corresponding rise at the top both track the fall in unions, which represent fewer than 7 percent of private-sector workers today, down from more than a third of workers in the 1950s through the mid-’70s.

Lacking bargaining power, most workers have had to contend with almost two decades of flat to falling wages. In 2013 average pay fell in 59 of the 60 salary levels that the government tracks. Wages rose only for the fewer than 100 workers with jobs paying $50 million or more.

The steady growth in government welfare for corporations helps those at the top. There are no official federal statistics on welfare for corporations, but state and local corporate welfare costs each family of four more than $900 a year.

The richest Americans benefit from tax deferrals not available to the bottom 90 percent, especially rules that let multinational corporations transform the burden of taxes into profits.

The 2012 tax figures illustrate how many of the top earners were able to time their income to avoid the 2013 tax rate increases that President Barack Obama got through Congress. The increases fell mostly on those with incomes of more than $2 million.

The top tax rate increased in 2013 from the 35 percent set under President George W. Bush to the 39.6 percent under President Bill Clinton, and a tax on the richest investors to help finance the Affordable Care Act hit the top 400 starting in 2013.

Many of the top 400 arranged to collect bonuses in 2012 instead of 2013. Their average salary including bonuses doubled to $32 million in 2012.

Dividends increased to $54.3 million on average for the top 400, up from just under $24 million in 2011 — another indication that by taking income early, the rich could avoid the effect of the Obama tax increases.

Capital gains rose too, up a bit more than half, to $191 million on average.

The top earners pay such low taxes rates because most of their incomes are from capital gains and dividends, which Congress taxes at lower rates than wages.

When the economy expands, these two forms of income rise even more and thus account for a larger share of top incomes, causing tax rates at the top to decline.

During down years, by contrast, salaries — including bonuses and profits from stock options, all of which are taxed at the higher rates for wages — constitute a larger share of total top incomes, so tax rates rise somewhat.

The top 400 report covers only those rich Americans required to report their incomes each year. By the grace of Congress, many of the richest Americans are allowed to defer their incomes or not report them at all. For example, hedge fund and private equity managers can defer their compensation back into their fund and are even allowed to borrow against that untaxed money to finance their lifestyles.

In contrast, most Americans must report all their income each year, except for what they place in retirement accounts — generally limited to $18,000 per worker, or $24,000 for older workers, annually.

Although the top 400 earners is a statistical group that can change year to year, 343 taxpayers have turned up on the list five or more times since 1990. Anyone who makes the list even once would remain for life among the top one-tenth of 1 percent of Americans, those making $2 million or more, even if they achieve only average returns on their investments.

There’s a word for a government whose policies pump up the incomes of top earners and cut their tax rates while suppressing what the vast majority earn. That term is “oligarchy.”