Paul M O'Connell / Getty Images

Vanished: 4,000 jobs paying $6.5 million

The ability to earn a huge paycheck one year and none the next illustrates how tax rules favor the richest Americans

August 28, 2015 2:00AM ET

A very curious thing happened in 2013, when Congress raised the tax rates on top earners, from the 35 percent rate set under George W. Bush back to the Bill Clinton–era rate of 39.6 percent.

More than 4,000 households that in 2012 enjoyed salaries averaging $6.5 million each stopped collecting paychecks, my analysis of IRS data released Wednesday shows.

That means 28 percent of these rich households with jobs in 2012 and with average income from all sources of $31.4 million got no paycheck in 2013. By arranging to take bonuses and other pay before the tax hike took effect, these 4,008 households saved almost $1.3 billion in taxes in 2013.

Among all households with income of $1 million or more, the number reporting any salary fell by almost 35,000, or 11 percent.

This ability to earn a huge paycheck one year and none the next illustrates how Congress sets tax rules that favor the richest Americans. The vast majority of people have taxes deducted from their paychecks and retirement income and must pay whatever rates Congress sets before collecting their money. Meanwhile, many of the richest can decide when and how to take income, in order to pay the least legally allowed. As we will see, in some cases, they pay nothing.

The 1 percent

Despite the extreme actions of those 4,008 rich households, overall high-income Americans paid a larger share of their income to Uncle Sam in 2013 because the Bush-era tax cut for top earners expired after 12 years.

Among the nearly 346,000 households with incomes of more than $1 million, taxes rose by almost 5 cents on each dollar. These households paid on average 28.2 percent of their income to the federal government — up from 23.3 percent in 2012.

U.S. households earning $200,000 or more, the top 4 percent, all paid higher tax rates, with significant increases beginning at the $500,000 level. These households constituted the top 0.7 percent of taxpayers. The top 1 percent begins at about $340,000 of adjusted gross income, which means that about a third of the top 1 percent made less than half a million dollars.

Even within the top 1 percent, those who make less than $2 million are primarily workers who depend on salaries or the proprietors of small businesses, including legal and medical partnerships. In contrast, those making $2 million and more get a large share of their income from investments or, as business owners or executives, can determine how much of their income is from a paycheck versus forms of income that Congress taxes at lower rates, such as dividends and capital gains.

Meanwhile, for the vast majority of Americans, the 96.2 percent who made less than $200,000 of adjusted gross income in 2013, tax rates were essentially unchanged.

The share of households paying no tax was 36 percent in 2013 and 2012 — far below the widely cited 47 percent. Most of these households had too little income to pay taxes, with many benefiting from the $1,000-per-child tax credit. 

When will Congress level the playing field so the rich are taxed by the same rules as working stiffs?

But note that some households enjoyed big incomes with no tax bills. A separate IRS report on high-income Americans showed a small decline in the number of those households paying no U.S. income tax. In 2012 almost 2.5 million taxpayers reported income of $200,000 or more. Of these, 32,326 paid no U.S. income tax — down from 32,902 in 2011. Because more people reported incomes of $200,000 or more and fewer people escaped paying income tax, the odds of living tax-free on a big income declined from 1 in 65 to 1 in 77.

While the number of high-income, no-tax households declined, the fact is that Congress makes it relatively easy for the best-off to duck taxes. Even if taxes are only deferred, these individuals benefit, because a tax paid in a future year is, in effect, a zero-interest loan from the government, a loan most people can get only by putting money into a retirement account.

New rules

Those at the top paid higher rates, but they are still taxed far less than they would have been half a century ago. In the 1960s those with incomes of $1 million or more typically paid about 45 percent of their income to the federal government.

The huge increases in the federal debt began after the promise of tax cuts that swept Ronald Reagan into office in 1981. He promised to eliminate the publicly traded federal debt through economic growth spurred by lower tax rates. Instead the debt tripled during his eight years in office, from $711.9 billion to $2.2 trillion.

Debt growth stopped and reversed briefly after President Bill Clinton got Congress to raise tax rates in 1993. But the 2001 and 2003 tax cuts sponsored by the Bush administration, together with the wars in Afghanistan and Iraq, saw deficits soar again as the debt doubled.

The debt continued to soar during President Barack Obama’s first year in office. But since 2010, the annual budget deficit has been slashed by two-thirds because of the tight-fisted budgets he advanced and congressional Republicans’ demands to restrict spending. Still, the public traded federal debt as of Thursday reached $13.1 trillion.

The new tax data suggest that if the economy were operating at its full potential, the federal budget would be balanced in a few years. The economy is at about 97 percent of its potential.

Today’s effective tax rates remain far below the top rates Congress put in the tax code. The effective tax rates paid by those at the top remain well below what Warren Buffett, the famed Omaha investor, favors. Buffett and Obama have argued for a minimum 30 percent effective tax rate on those with incomes of more than $1 million. But according to IRS data, currently 1 in about 1,500 taxpayers pays a third of more in federal income taxes.

The savings from the Bush-era tax cuts were heavily skewed to the top. The best-off 1/10th of 1 percent got about 12 percent of the tax savings. But the new data show that even while paying higher tax rates, those at the apex of the American economic pyramid do very well and continue to enjoy ways to play the system, which for the rest of us is a set game. The question is, When will Congress level the playing field so the rich are taxed by the same rules as working stiffs?

David Cay Johnston, an investigative reporter who won a Pulitzer Prize while at The New York Times, teaches business, tax and property law of the ancient world at the Syracuse University College of Law. He is the best-selling author of “Perfectly Legal,” “Free Lunch” and “The Fine Print” and the editor of the new anthology “Divided: The Perils of Our Growing Inequality.”

The views expressed in this article are the author's own and do not necessarily reflect Al Jazeera America's editorial policy.

Related News

Find Al Jazeera America on your TV

Get email updates from Al Jazeera America

Sign up for our weekly newsletter

Get email updates from Al Jazeera America

Sign up for our weekly newsletter