Subsidizing Millionaires

On Tuesday, Paul Caron and Peter Pappas linked to a report by Senator Tom Coburn (R-Okla). The report is entitled "Subsidies of the Rich and Famous: Federal Programs and Tax Breaks That Help Millionaires." The full report is 37 pages. It focuses on tax programs that benefit millionaires, and also spending programs that benefit millionaires.

Teslas and Golf Carts

Pappas is mildly critical of the report. The report lists several tax expenditures and summarizes the share of each tax expenditure captured by millionaires. I agree with Pappas that eligible millionaires are not doing anything "unfair." Congress enacts tax expenditures because it wants to influence economic behavior.

Take the electric vehicle credit. The Coburn report indicates that $12.5 million in electric vehicle credits were claimed by millionaires in 2009. To my knowledge, a $7,500 credit was available for the purchase of electric vehicles during the calendar year (Section 30D). The primary vehicle available for on-road transportation in 2009 was the Tesla Roadster. The base price for the Roadster is $108,000. Middle-class taxpayers were not rushing out and purchasing these vehicles. (As Paul Caron document in 2009, some upper- and middle-income taxpayers apparently claimed the credit to defray the purchase of golf carts.)

Remember, Democrats controlled Congress and the White House in 2009. They had the power to amend the Code and prevent millionaires from claiming the credit against purchases of Teslas (and golf carts). But they want to encourage an overall shift to "green" energy. The tax credits for electric vehicles are consistent with that larger policy commitment. Electric vehicles are expensive. Congress knew or should have known that millionaires would take advantage of the credits, because very few non-millionaires can drop $100,000 on an electric vehicle.

The fact that Congress designs stupid tax policy (like electric vehicle credits for millionaires) to support other policy objectives (like a transition to "green" energy) demonstrates that Congress can be stupid. This is not some kind of "loophole" for the wealthy. Congress opened a door to encourage upper-income taxpayers to purchase electric vehicles. Some upper-income taxpayers decided to walk through the open door. We don't know how many, if any, were encouraged by the credit. Tax incentives that don't change economic behavior are dollars down the drain.

On balance, the Coburn report highlights a number of these intersections between economic/social policy and tax/fiscal policy. The report demonstrates the law of unintended consequences. It doesn't make much sense to give tax credits to millionaires who purchase electric vehicles (but it's a consequence of supporting "green" energy manufacturers). It doesn't make much sense to pay unemployment or Medicare or Social Security benefits to millionaires (but it's a consequence of a political aversion to means testing for entitlements). We should be revisiting and reshaping these policies over time.

Closer Look at the Numbers

The Coburn report parrots a widely-reported data point: that 1,500 millionaires paid no income tax during 2009. To be more precise, 1,470 individual taxpayers reported AGI in excess of $1 million, but paid zero income tax.

I've seen this data point before, and it piqued my curiosity. How are these upper-income taxpayers zeroing out their federal income tax liability?

It seems likely that most of these taxpayers are making large charitable contributions. A wealthy individual may have resources to make a large cash or in-kind donation to charity and claim the amount as a miscellaneous itemized deduction (Line 40 of Form 1040).

In this respect, the Coburn report is misleading. This table in the Coburn report lists a number of "tax breaks" claimed by millionaires. The two biggest "tax breaks" are the deduction for mortgage interest ($27.7 billion from 2006-2009), and the deduction for rental expenses ($64.3 billion from 2006-2009). The report omits to mention the total charitable deductions by millionaires during the same period. I suspect that Coburn's staff included "bad tax breaks" (like mortgage interest expense) while excluding "good tax breaks" (like charitable deductions). This type of cherry-picking tends to muddy the waters -- all tax expenditures should be on the table when we start talking fundamental tax reform.

One thing is clear -- the list of "tax breaks" enumerated in the table would not zero out a millionaire's taxable income during a given year.

* * * * *

Interested readers can locate the 1,470 individual taxpayers on page 40 of this report.

Here's the breakdown among the different income groups:

	Returns		Paid Tax		No Tax
$1.0 under $1.5	8,274		8,211		63
$1.5 under $2.0	14,322		14,236		86
$2.0 under $5.0	61,918		61,535		383
$5.0 under $10.0	44,273		44,015		258
$10.0 or more	108,096		107,416		680
Total	236,883		235,413		1,470

Searching for the Elusive "Fair Share"

On Monday, David Logan of the Tax Foundation issued a report summarizing the individual income tax data from 2009. Highlights (or lowlights, depending on your perspective):

- Nationally, average effective income tax rates were at their lowest levels since the IRS began tracking them in 1986. The average tax rate for returns with a positive liability went from 12.24% in 2008 to 11.06% in 2009.

- Incomes reported by tax returns at the high end of the income spectrum fell from 2008 to 2009, as did their share of the nation's income and income taxes paid. In 2009, the top 1% of tax returns paid 36.7% of all federal individual income taxes and earned 16.9% of adjusted gross income (AGI), compared to 2008 when those figures were 38.0% and 20.0%, respectively.

- Each year from 2005 to 2007, the top 1%'s constantly growing share of income earned and taxes paid set a record. The 2008 reversal of this trend continued in 2009. In fact, the income share for the top 1% of tax returns was lower in 2009 than in 2000, largely due to differences in capital gains.

- In 2009, as in 2008, the top 1% no longer pays a larger percentage of total income tax than the bottom 95%. This trend was exacerbated by the aforementioned precipitous drop in AGI in 2009. During 2009, the bottom 95% (AGI under $154,643) paid 41.3% of the total collected, a larger share than the 36.7% paid by the top 1% (AGI over $343,947).

- The top-earning 5% of taxpayers (AGI equal to or greater than $154,643), however, still paid far more than the bottom 95%. The top 5% earned 31.7% of the nation's adjusted gross income, but paid approximately 58.7% of federal individual income taxes.

- Since 2001, the IRS has also been presenting data on a small subset of the top 1%, the top 0.1%. In 2009, this top 0.1% filed 137,982 tax returns, reporting 7.8% of all adjusted gross income earned and paying approximately 17.1% of the nation's federal individual income taxes. The average income for a tax return in the top 0.1% was $4.4 million in 2009, while the average amount of income tax paid was $1.07 million, indicating an average effective individual income tax rate of 24.3%.

- Overall, these data on high-income tax returns appear to confirm that the continued economic stagnation had the same diminishing effect on income inequality that most recessions have, and that it occurred for the same reason: a sharp decline in income at the high end. This appears to contradict reports based upon Census data suggesting the opposite that the recession increased income inequality.

Logan's report is particularly timely, in the midst of ongoing Occupy Wall Street protests. However, that's a post for another day, if the protesters keep plugging away despite the blizzard approaching the East Coast.

For today, the data inspire several questions. President Obama and his cheerleaders on the political left want to "spread the wealth" around. They believe that "millionaires and billionaires," defined as working professional married couples with $250,000 in taxable income, aren't contributing their "fair share" to the federal government.

Three questions for the political left:

[Q1] In 2009, the top 0.1% of taxpayers paid 17.1% of all individual income taxes, the top 1% of taxpayers paid 36.7% of all individual income taxes, and the top 5% of taxpayers paid 58.7% of all individual income taxes.

What percentage of individual income taxes should be paid by each sub-group to be considered their "fair share"? The answer should be a simple percentage, for example, 25% for the top 0.1%, 45% for the top 1% and 65% for the top 5% (numbers are illustrative only, not my view).

[Q2] If we increase taxes on the top 5% as you recommend in A1, will that solve the short-term or long-term budget gaps associated with current spending projections? Or will we also be required to increase taxes on the bottom 95% of taxpayers to solve the fiscal imbalance?

[Q3] Do you really believe that increasing taxes as set forth in A1 and A2 will address the wealth imbalance between the wealthiest 1% and the remaining 99%? Note that increased taxes on the bottom 99% or bottom 95% will decrease their ability to accumulate resources and "catch up" to the top 1%.

Tax bloggers on the political left, I look forward to seeing the answers to these straightforward questions.