The top .001 percent are different from you and me

A new IRS report examines incomes and tax burdens of all Americans. Its story of stagnation should be familiar to all. For 80 percent of Americans, average incomes fell between 2003 and 2012. That’s every taxpayer with income of less than $85,440 in 2012.

As depressing as that news is, the real story from the report concerns the very top level of income earners. The biggest income gap in America is not between the top 1 percent of earners and the 99 percent below them, but rather within the top 1 percent, where the split between the have-mores and the have-a-lot-mores is a fast-widening chasm.

Nearly 1.4 million households are in the top 1 percent income group, a statistical cohort whose members change somewhat from year to year.

But for the first time ever, the IRS offers a close look at the top .001 percent of taxpayers. It shows that incomes in this rarefied air — the top 1,361 households — are soaring while their tax burdens are falling.

The differences in income-growth rates from 2003 to 2012 between the top .001 percent and the rest of the top 1 percent are akin to watching a race to the skies between a helium balloon and a rocket.

I analyzed the report to compare the 99.9 percent in the top 1 percent to the one in a thousand above them. Adjusted for inflation, average incomes for 99.9 percent of those prosperous households rose to almost $1.3 million in 2012, up  $424,000 over 2003.

As big as those numbers are, they pale next to the income growth among the one-in-a-thousand households above them on the income ladder. Those 1,361 households enjoyed an average income of $161 million, an increase of $84.6 million.

Here’s a simple way to put that in perspective: Think of the top percent having an income ladder with a thousand steps. On the lowest rung stand those making $434,600 in 2012.  On the 1,000th rung are 1,361 very lucky families. For each household on the first 999 steps that gained one dollar those on the very top step got $200.

The top one-in-a-thousand households captured an astonishing 21 percent of the group’s income gains. Ponder that for a moment: One in a thousand households in the top 1 percent got more than a fifth of all the increased income.

Keep in mind that reality is even worse than what the report shows.

Researchers at the IRS Statistics of Income division looked at more than 136 million tax returns. They ignored nine million tax returns filed by dependents, primarily children with jobs or trust funds. That means the IRS analysis understates household incomes at the very top, where trust funds are common. 

Also, don’t forget that many of the very richest Americans show little or no income on their annual tax filings because they borrow against their wealth, paying interest at about one tenth of the tax rate on long-term capital gains.

Looking at tax burdens adds another element illustrating how government policy is helping those the very top add to their fortunes will the middle class must contend with falling incomes and rising income tax burdens.

The top .001 percent paid just 17.6 cents out of each dollar they earned in federal income taxes.

Because of another report, we know that the best-off of that group, the top 400 taxpayers, whose income averaged $335 million in 2012, paid just 16.7 cents on the dollar in income taxes.

That means the next 1,000 best-off households (961 to be precise) paid more — 19 cents on the dollar.

Now consider the top 1 percent except for those 1,361 households at the very top. The rest of the 1 percent bore a tax burden of 23.5 cents on the dollar. That means their burden was a third higher than the very top households.

To get an idea of the difference in income between those among the top 1 percent who bore a high tax burden compared to the one in a thousand at the top consider this: On average everybody else in the top 1 percent worked all year to earn what those 1,361 households earned every three days, and yet those at the top were far less burdened by taxes.

Indeed, thanks to Congress, which sets the tax rates and rules, people making $250,000 in 2012 paid 18.6 cents on the dollar. So they paid nearly 2 pennies more on each dollar of income than those at the very top whose average income was about $441,000 each day.

This may seem arcane and of no significance, especially if you cannot imagine ever making $250,000 in a year, much less $161 million. But if you’re in the middle class, my analysis of the report shows, your income has probably been falling and your tax burden rising since 2003.

The new report is the latest proof that our income tax system is no longer progressive. Instead of tax burdens rising with income, and thus with the ability to pay, burdens fall off as incomes rise into the stratosphere. That doesn’t make sense.

Congress has lavished so much tax relief on the very richest Americans, in fact, that their burdens are falling even though overall income tax burdens are rising, especially for the middle class. And those with the very highest incomes have such abundant resources that they can neither consume much of their income nor find profitable places to invest their wealth.

A robust economy will never emerge until we recognize that falling incomes for four out of five households means not enough money to buy the goods and services that will spur new investments and make us all better off.