[The following is an article from Kosmo at The Soap Boxers. The site has a variety of content covering many topics. He has previously analyzed tax return data leading to articles such as How Many People Don’t Pay Taxes and What Percent of Taxes are Paid by the Rich.]
The short answer: based on information from the IRS, fewer than 3% of tax returns (3.924 million returns out of 140+ million total returns) claimed more than $200,000 in adjusted gross income (AGI) in tax year 2009 (more current data is not available). By definition, the number making more than $250,000 must be less than 3% (since some will fall in the range between $200,000 and $250,000.)
The long answer is pretty long – more than a thousand words long, judging by the length of this article. While I am not a CPA , or even a practicing accountant, I do have a degree in accounting and thoroughly enjoyed my income tax courses in college (yep, glutton for punishment). I’ll make an effort not to get too bogged down in technical terms in this article.
Why the question?
For whatever reason, $250,000 has become a benchmark amount. During the 2008 presidential campaign, President Obama had a tax plan that would raise taxes on couples making more than $250,000. A bit later, the US House of Representatives passed a bill that would impose a 90% tax for recipients of bonuses paid by companies that received bailout funds. This tax would be imposed on people making more than $250,000.
Why the source?
The IRS is in the business of determining how much money people make and have a vested interest in the accuracy of their data. I have a synopsis of their data in the table at the end of the post, and have also linked directly to their spreadsheet.
Definition of terms
Household – I am defining a household as any entity that filed a tax return. Note that people who do not have a tax liability are not required to file a tax return. These people tend to be on the low end of the income spectrum.
Income – This is definitely the tricky term. There are a few different things we could measure.
- Total income (line 22 of form 1040). Essentially, this is the result of adding up the money that comes in from all sources during the year – with the exclusion of tax-exempt interest income and the tax-exempt portion of some retirement benefits. This does include capital gains and business income (or loss). This is the largest of the three amounts I will describe.
- Adjusted gross income (AGI) (line 37 of form 1040). This is total income with a few deductions. For the typical person, the deductions would be for student loan interest as well as contributions to retirement accounts and health savings accounts. This amount will be smaller than total income, and this is what is used in the IRS statistics that I have used as my source.
- Taxable income (line 43 of form 1040). This is determined by taking the AGI, subtracting either the standard or itemized deduction, and then also subtracting the amount for exemptions (for tax year 2008, you would multiply $3500 X the number of exemptions – basically, the number of people in your household – and subtract this amount from the AGI.) Taxable income is used to determine your marginal tax rate. (Note: the marginal rate is the rate that is applied to the top slice of your income – it is not applied to your entire income. Income is taxed on a stair step basis, with each chunk of income taxed at a higher rate). In the case of Obama’s tax plan, he would be referring to $250,000 in taxable income, not total income or AGI.
You can quibble with the numbers a bit. You may claim that some people cheat on their taxes, so that the number of people who SHOULD be claiming an AGI of $250,000 is higher than the amount that actually do. You may claim that full-time students or single people should not be counted as households (of course, that argument could be countered by the argument that there are valid households that are not filing tax returns). However, it seems unlikely that you’re going to move the needle very much. The fact of the matter is that very few households earn more than $250,000.
Other stats:
66% of returns had an AGI of less than $50,000. 88% of returns had an AGI of less than $100,000.
0.08% of returns – a total of just 350,000 filers out of a total of 140 million – had an AGI of $1,000,000 of more. This is down from 0.26% in 2006.
8,274 returns – roughly half of 1/100 of one percent – had an AGI of more than $10,000,000. This is down from 15,196 in 2006. Why the sharp decline? A decline in the stock market is a likely explanation.
The average (mean) number of exemptions per return was 2.02. The number of exemptions in the “less than $5000 AGI” category is 1.01 (many are students who are claimed on their parents’ returns and thus cannot take themselves as an exemption) and peaks at 3.05 in the $50,000 – $100,000 range. This makes quite a bit of sense. The lower ranges are often going to have a higher concentration of single people, since those people have half the income of a dual-income married couple in a similar career.
"But nearly everyone I know makes $X. These numbers are wrong.”
I have had people tell me that these numbers are too low, and that $250,000 is not a lot of money in their location (big cities). It might be true – and probably is – that there is a higher concentration of the higher income jobs in the bigger cities. However, the vast majority of the households in these areas are still going to be below $250,000.
I also think that people tend to look at their own situation and assume that it is typical. If you are college educated, you are actually not typical. Only 30 percent of adult Americans have a degree. Likewise, if you have a household income of $100,000, you are not typical.
It’s very easy to fall into this trap, though. Our friends have tendency to have a income level that is similar to our own – even if we don’t make a conscious effort to ensure this. Why? Think of where your base of friends comes from:
Work – If these people have similar jobs, then it’s quite reasonable that their income will be similar to yours.
College friends – Do they have similar majors, and thus similar occupations?
Neighbors – Your neighbors can all afford homes in your neighborhood, which essentially places a floor on their income level.
Parents of your kids’ friends – School districts in many cities are not particularly heterogeneous. This is because certain sections of town have neighborhoods containing homes in a particular price range. If you put an elementary school in the midst of these neighborhoods, the children are going to come from families with similar economic backgrounds.
Table based on data from IRS Website (Excel file)
| AGI | Returns | % | cum % | % above | ex/ret |
| Under 5000 | 12,959,560 | 9.22% | 9.22% | 90.78% | 1.01 |
| $5,000 – $10,000 | 12,220,335 | 8.70% | 17.92% | 82.08% | 1.31 |
| $10,000 – $15,000 | 12,444,512 | 8.86% | 26.78% | 73.22% | 1.76 |
| $15,000 – $20,000 | 11,400,228 | 8.11% | 34.89% | 65.11% | 1.85 |
| $20,000 – $25,000 | 10,033,887 | 7.14% | 42.04% | 57.96% | 2.00 |
| $25,000 – $30,000 | 8,662,392 | 6.17% | 48.20% | 51.80% | 2.02 |
| $30,000 – $35,000 | 7,679,458 | 5.47% | 53.67% | 46.33% | 2.01 |
| $35,000 – $40,000 | 6,692,189 | 4.76% | 58.43% | 41.57% | 2.06 |
| $40,000 – $45,000 | 5,828,859 | 4.15% | 62.58% | 37.42% | 2.06 |
| $45,000 – $50,000 | 4,967,553 | 3.54% | 66.12% | 33.88% | 2.09 |
| $50,000 – $55,000 | 4,547,861 | 3.24% | 69.35% | 30.65% | 2.17 |
| $55,000 – $60,000 | 4,118,100 | 2.93% | 72.28% | 27.72% | 2.23 |
| $60,000 – $75,000 | 10,028,933 | 7.14% | 79.42% | 20.58% | 2.40 |
| $75,000 – $100,000 | 11,463,725 | 8.16% | 87.58% | 12.42% | 2.61 |
| $100,000 – $200,000 | 13,522,048 | 9.62% | 97.21% | 2.79% | 2.84 |
| $200,000 – $500,000 | 3,195,039 | 2.27% | 99.48% | 0.52% | 2.96 |
| $500,000 – $1,000,000 | 492,568 | 0.35% | 99.83% | 0.17% | 3.05 |
| $1,000,000 – $1,500,000 | 108,096 | 0.08% | 99.91% | 0.09% | 2.97 |
| $1,500,000 – $2,000,000 | 44,273 | 0.03% | 99.94% | 0.06% | 2.97 |
| $2,000,000 – $5,000,000 | 61,918 | 0.04% | 99.98% | 0.02% | 2.95 |
| $5,000,000 – $10,000,000 | 14,322 | 0.01% | 99.99% | 0.01% | 2.92 |
| $10,000,000 or more | 8,274 | 0.01% | 100.00% | 0.00% | 2.91 |
Legend
Column 1 – Range of adjusted gross income
Column 2 – Number of returns that fall into this range
Column 3 – Percentage of total returns
Column 4 – Cumulative percentage (percent of return that have this AGI or lower)
Column 5 – Percentage of returns that are above this range
Column 6 – Number of exemptions per return
Columns 1 and 2 are taken directly from the IRS spreadsheet. The other columns are calculations based on information from the IRS spreadsheet.
For more great articles from Kosmo visit The Soap Boxers.
Wow, that’s actually higher than I thought if you’re talking individuals (your title is “How Many People”). It’s about right if you’re talking households, which you mention several times inside the article. I though around 5% of households should make over $200K.
Keep in mind that income is not the same as how much money they actually made. Many high income people use tax strategies to reduce their taxes, and almost all tax strategies work by reducing declared income. For example, if you don’t sell an asset that has appreciated then, even though you “made money” because your net worth increased, you didn’t earn income for tax purposes. For many of these people their asset might be a corporation which earns money and pays a lot of living expenses for the owners benefit, but doesn’t pay out a large income to the owner.
@ Alex
It’s the number of RETURNS, which isn’t necessarily the same as the number of people. I use “people” in the title because that’s the term the talking heads use (inaccurately). I discuss this issue a bit more in the “How many people don’t pay taxes” article that is linked in the introduction.
If a corporation is paying actual personal expenses on behalf of an owner, this is tax fraud. (If an argument can be made that the arrangement is for the benefit of the company, this is allowed). Income from sole proprietorships, partnerships, and S coporations flow through to the owners’ 1040s.
Unrealized capital gains aren’t included for good reason – because that “gain” is not achieved until you sell. The quoted price for a stock is not the price you can sell your for, it’s what the last person sold his for.
Note that I’m using AGI, which is BEFORE deductions.
It’s interesting to note that while less than 3% of the population makes a quarter-mil per year, I believe that roughly the same percentage of households have a net worth of $1 million or more. I wouldn’t be at all surprised, however, if the majority of folks in the over-250k club were not members of the $1 mil in assets club. Since so many high-income earners probably reside in larger metro areas, the conspicuous consumption might increase for those folks as well. Wonder what the average income for millionaire households is?
@ Track your bucks:
That’s an interesting question. It may be skewed a bit by people who are retired (thus having a relatively modest “income”, but perhaps having built up substantial assets during their working years.
If you exclude those folks, I’d say that the median income for those with great than 1 million in assets would still be at least 100K. The further down the income ladder you slide, the more luck you would need. Sure, someone with an AGI of $40K can build a nest egg of a million dollars, but it would take a serious commitment, good decisions, and some fortuitous investments.
The answers to many of the questions raised are found in the revised addition of “The millionaire next door”. Some facts he found. The average age of their car is 13 years old. Most families making $200,000 have such high expenses for the big house and the fancy car and the private school tuition that they are living paycheck to paycheck. He has done a lot of research, some things would surprise you.
I think some good questions would be, how many jobs do the people making $250,000 a year create and how many of these people would continue to create jobs if they took home less.And how many of these people today are not hiring (creating a job) because of Government regulations like health care. People who hire people want and need to know what the expense of that person will be, before they hire someone. Today an employer doesn’t know how much a new employee will cost, so they aren’t hiring.
The answers to many of the questions raised are found in the revised addition of “The millionaire next door”. Some facts he found. The average age of their car is 13 years old. Most families making $200,000 have such high expenses for the big house and the fancy car and the private school tuition that they are living paycheck to paycheck. He has done a lot of research, some things would surprise you.
“I think some good questions would be, how many jobs do the people making $250,000 a year create and how many of these people would continue to create jobs if they took home less”
I hear this question a lot. Let’s break down some scenarios. Let’s assume that all costs related to the new employee (direct and indirect, including FICA) are $50,000 and the new employee generates.
1A and 1B – Current tax rate
1A. Let’s assume income of $500,000 and $100,000 in taxes. This is inline with the effective tax rate of ~20% for this income. (Note: effective rate rate is simply tax/AGI, so deductions, credits, and exemptions chisel it down).
After taxes, the business owner has $400,000 after federal income taxes.
1B. After hiring the new employee, the employer has an additional 100K in revenue and 50K in expenses, for an additional AGI of 50K. This is tax at the marginal rate of 35%, so there is an additional 17,500 in taxes.
So the AGI is $550K, with taxes of $117,500. He’s left with $432,500 after taxes.
In scenario 1, hiring the new employee meant $32,500 in his pocket after federal income taxes.
2A and 2B – Doubling the taxes from #1
2A: Employer has 500K in AGI and $200K in taxes. $300K after federal income tax.
2B: Add 50K to AGI and take out 35K for taxes (double the 17.5K in 1B). AGI is 550K and taxes are 235K, leaving $315K after federal income tax.
In scenario 2, hiring the new employee meant $15,000 in his pocket after federal income taxes.
In either case, it makes sense to hire the employee, because he generate additional profit. Additional profit, even when taxed at a higher marginal rate, is a good thing.
Flip the amounts – the employee generating 50K in expenses and costing 100K in expenses, and hiring them is a bad idea, regardless of the tax rate.
When you can make a decision that increase your income, it is wise to take advantage.
Kosmo: Just to respond to your response:
“If a corporation is paying actual personal expenses on behalf of an owner, this is tax fraud.”
You make me out to be a dumb — I didn’t just make this up :) Personal expenses to an employee are corporate expenses to an owner. For example, a vehicle. More many people, 90% of the use of their vehicle is to get to and from work. Employees cannot deduct, owners can. Not fraud, just one of the many benefits of being an owner.
“Unrealized capital gains aren’t included for good reason – because that “gain” is not achieved until you sell”
Again, I am not just making things up. I personally own a lot of real estate (a lot compared to someone who doesn’t). One thing you can do with real estate is NEVER SELL but take equity out when there is appreciation through various legal methods as simple as bank refinancing. Therefore you have use of the money, effectively paying yourself, but not paying taxes because you haven’t “triggered the gain”. Again, very basic techniques of people who are a little bit wealthy. Wealthy people hate paying taxes and there are many ways to legally avoid taxes. Anyone who earns $200K without using a bit of tax planning is throwing money out the window.
@ Alex
I definitely don’t think you’re dumb.
In regards to the personal expenses being paid by a corporation, the IRS would frown on this. People may do it (and they definitely do), but the tax law forbids it. Only business related mileage is deductible, and commuting is specically addressed in the tax code and is excluded from deductibility.
There are very specific exceptions when an expense is for the benefit of the employer. For example, if you’re on a business trip, the company can deduct the cost of your meals (and reimburse you) even though food is a persona expense – because you are on official business.
OK, I get what you’re saying about taking cash out in a refi when real estate has appreciated. That’s a bit of a one-off from a true capital gain, because your investment is still at risk.
The point is that you cannot deduct the car at all if you’re an employee. If you own the business then you can deduct by, for example, having a home office and traveling between your home office and another office. In that case, even part of your home is deductible. You have that flexibility as the owner of the business, to design the business. It makes sense. Most of a person’s life is spent in support of their work. The owner of a business can deduct much more of that portion than can an employee, who deducts practically nothing.
As far as the capital gain: That’s how everyone does it. The standard tax strategy is to avoid or at least defer triggering taxable income. They loan themselves (the business) money and repay in a small stream where the interest is the only income. If they have gains they try to construct compensating losses. They use earnings from the corporation to purchase other assets rather than personal money. Use the corporation to distribute income to family members tax free (example: Lend a child money tax-free for university or investment because the child makes very low income, then the child can repay the loan years later to claim a deduction when they are a wage earner). Use the corporation to employ family members, splitting income across multiple taxpayers that would have had to be supported by the income anyway.
It’s all about the opportunities to shift around the earnings and expenses such that the least taxes are paid. An employee cannot do much of that.
If you’re using the car for business activities, you most definitely CAN deduct mileage – and the rate is set up to reflect the total cost of ownership for a mile.
Yes, commuting between two business locations is a deductible expense, but there are test for the home office. Among other things, it must be a principal place of your business and must be used exclusively for business purposes. You can’t simply deem your garage as your home office and start treating it as one for tax purposes.
In either case – employee or owner – you must reach a place of business before you are allowed to deduct any miles. In some case, this may be your home office.
Sure, there are handful of expenses that fall into this category, but most do not. Thse cost of the in-ground pool is not going to be deductible (unless you’re a swim coach).
In your student loan example, I’m not sure what the student would be deducting, if it’s an interest free loan. Only student loan interest is deductible, not principal. I’d have to check, but I’m guessing you’d have to jump through some hoops to make this a qualifying student loan. If it’s an interest bearing loan, the coporation will have interest income when the loan is repaid.
While some coporations pay family members salaries, again, there are rules about this. Rules that aren’t always followed, but rules nonetheless.
To slide back on track, this was originally the second point you were making
“For example, if you don’t sell an asset that has appreciated then, even though you “made money” because your net worth increased, you didn’t earn income for tax purposes.”
This only works for specific capital assets. If you have a stash of gold, for example, you can’t really turn it into cash, outside of simply using it as collateral for a loan (and proceeds of a loan aren’t income).
Note: when I discuss tax law, I refer to how it is written, rather than how it is follow. I’m aware of abuses of the system – but these generally constitute fraud.
I missed these the first time around:
“They loan themselves (the business) money and repay in a small stream where the interest is the only income. ”
Right. Why would the repayment of principal constitute income? It never does.
“If they have gains they try to construct compensating losses. ”
I don’t know many successful companies that attempt to contruct losses. They may attempt to REALIZE losses, but that’s not the same thing.
Of course the accounting definition of income = the accounting definition of income. However, the tax definition versus the practical usability of the money is what is important. Wealthy, especially self employed people, have the ability to reduce their taxes much more than others. Paradoxically (not to you, but to those who DON’T understand), to do this you reduce taxable income.
Yes, I mean realizing losses. This is exactly the same as the concept of manipulating income that I have been talking about. You have losses that are convenient to REALIZE for tax purposes, then that is an option that wealthy people may have that check-to-check employed people don’t.
Regarding the student:
Mom owns a company and kid wants to go to school. Kid could take out a student loan and pay it back, resulting in tax deduction on the interest when kid is making big bucks. Or company could take out the loan, then loan the kid money. Kid realizes the full value of the loan as income, but pays little tax because that is the only income. Then later when employed and repaying loan, kid realizes deduction for both principal and interest.
Another tactic of income splitting is to employ family. Although the have to actually do useful work, they can be paid a high rate (reasonable, but still high) to get more after-tax money into the family. Another tactic is to have the family members hold shares and distribute dividends to low-earning family members like children. Most families with a single or pair of employed parents would.
“Then later when employed and repaying loan, kid realizes deduction for both principal and interest.”
No, absolutely not. Student loan principal is NOT deductible. Only the interest. You can recoup the actual costs of attendance via the Hope Credit and such, but with respect to the actual loans, you can never deduct the principal. You’d get slapped silly by the IRS for trying that.
No (major) disagreements with anything else in that post.
You may be right in the US. I’m from Canada and in Canada, non arms-length shareholder loans are classified as income in the current year. If a corporation in the US can make a shareholder loan without classifying it as income then there is the opportunity to take money out of the business for further investment without triggering income tax (except tax on the interest as you mention, which is essentially free nowadays). I guess Canadian law wants to prevent such a case but instead opens up the possibility of income splitting.
Basically, in the US:
1) If the IRS deems that is a payment disguised as a loan, it is treated as either wages or dividends, depending on whather or not services were rendered in exchange.
2) If it’s a bona fide loan (meant to be repaid – which seems to be the case in your example, since it actually IS repaid in the future) then the transfer of principal back and forth is not treated as income by anyone.
Loans below $10,000 can be made at below fair interest rates with no penalty.
For loans above 10K, any forgone interest on the part of the coporate (fair rate – actual rate) is considered to be income to the recipient.
If the loan is a personal loan (for a new car, for example), interest paid by the individual would not be deductible when repaid (but WOULD be interest to the corporation). If the loan is a mortage, student loan, or used for investments (and probably some others I’m forgetting), then the interest IS deductible to the individual and income to the corporation.
I’m pretty sure the corporation would need to be approved as a recognized student loan lender in order for the loan to be considered a student loan, though. I’m not really sure how that would work.
I sense that we’ve moved slightly off the topic of “How many people make more than $250,000 per year” :) Enjoyable discussion, though.
some Really rough math would indicate that about 35 million people [24 million ‘households’?] don’t file returns….. do you come up with the same or a similar number? so would ‘we’ guess that these folks either get money under the table or via some type of charity? just trying to understand… not pointing any fingers. thanks for your help.
We would guess that a good number of these people are retired, with no taxable income. If you’re living off a Roth IRA and Social Security, for example, you wouldn’t have taxable income.
Then you have those in prison (most of whom don’t make significant income), and some other odd situations like that.
I think the determination for payment of taxes should be Gross Income, not Adjusted Gross Income. I don’t want to pay for other people’s life choice! I end up subsidizing their life choices, as a single individual. I still believe that the higher the income level the more likely is a lack of honesty and hiding money. Oh, and why should I have to sacrifice for their retirement….I sould have gotten a deduction because I could not put money/the max into a tax free retirement plan/investment. It is not just. People with money rationalize that these injustices are benefits they deserve, which is deluded thouht.
Thanks for allowing me to say how I see the situation.
It is my understanding that 48%-52% of households do not pay federal income tax.
There are somewhere around 250,000 households that make over $1 millon per year.
If the feds were to tax these people with a 5% tax for all of their income, how much money would the goverment net each year?
@ J LaLone – Actually, the tax is figured an table income, not adjusted gross income. The numbers for AGI are more readily available.
Some of the reason for high income levels is also the fact that some jobs simply pay more :) I have 14 years of experience in IT, so I make more than the fry guy at McDonalds.
@ HHMSailer – Take a look at the “How many people don’t pay taxes” link in the intro to the article. The stat – which I think was 47% last year – is for FILERS, which is not necessarily the same as households. A 16 year old with a summer job could be a filer, but is not a household, for example. There’s a table with stats in that article.
I need to know the value distributions of IRA accounts i.e. values of the highest 5%,next 5%, & on down. Ours are about $1.7million each. Not getting much help from guy who’s supposed to manage them & wonder if they’re too small for him to be bothered with.
Thanks for the table! So how much would we have to raise taxes, at what levels, to solve the deficit problem with *no* spending cuts?
I’m just playing with these numbers now but to me it looks like we should not be doing all this hand-wringing. In a 5-minute Excel sheet (not very sophisticated I grant) it looks like we could solve 90% of the $120 billion per year deficit — I’m calculating $108 billion per year — if we do nothing but raise the marginal rate from 35% to 40% on income over 200k.
If you add a bracket at 50% for $1 million, that brings it up to $174 billion additional tax revenue per year. The entire goal is $120 billion per year.
Even if I’m off by half (e.g., does it matter if they are married filing jointly, how do capital gains affect results etc), it makes all the supercommittee agony seem silly to me.
But this is 5 minutes of effort. What answer do you get? I’d give the SuperCommittee a whole hour if they want !
I’m still curious about this. IIUC, the annual deficit (not the cumulative debt) is $1.2 trillion per year, and the goal is to bring the annual deficit down to zero in 10 years. Is that what is meant by “$1.2 trillion over ten years” ?
(The phrase sounds like merely a cumulative savings of $1.2 trillion across ten years, but that is not what is meant is it?)
So $120 billion per year would go one-tenth of the way towards eliminating this $1.2 trillion annual deficit, right?
Your coverage seems thorough. I would be interested to see an analysis from you on “how much of the annual deficit could be paid for by raising marginal income tax rates to X% at AGI=X?” Maybe with 1, 2, or 3 brackets starting at $200k, no increase on the rate on lower incomes.
For example, assuming the income levels above apply in 2012, what increase in tax revenue would result from raising the marginal rate to 40% at 200k, 50% at $1 million, and 60% at $10 million?
Thanks, happy Thanksgiving!
I have a question about the numbers. I’m trying to reconcile two sources of information.
The IRS Excel document’s figure for total 2009 Income Tax revenue is $380,998,382,000.
http://www.gpo.gov/fdsys/search/pagedetails.action?granuleId=BUDGET-2011-BUD-28&packageId=BUDGET-2011-BUD
This link has a PDF that on page5(table s3) states total 2009 income tax receipts of $915,000,000,000.
That’s 380 billion vs. 915 billion. Should these not be the same number? Could Kosmos, or anyone with a couple of minutes to look at the tables explain to me what I’m missing, and which one of these numbers is a more accurate depiction of gross income tax revenues for 2009?
Wow, thanks so much for the quick and helpful response.
@ Marshall – Scroll over in row 3. This entire group of columns (including the one you pull the 380B number from) is a sub-section of the entire group of returns. It’s not very apparent, as row 3 appears to just be a blank line.
I think you want column Q from this spreadsheet:
http://www.irs.gov/pub/irs-soi/09in11si.xls
That gets you to 865B. Still a difference, but much closer.
The idea that higher taxes on income over any amount, such as $250K, will harm job creation is logically flawed. What really happens is that as a business owner at the end of every year I must decide whether or not to lower my taxable income by investing additional money in my business (equipment, supplies, employee bonuses, etc.) or keep the money in my pocket and pay taxes. If the incremental tax rate on that money is 35% I may decide to keep the money and just pay the tax. If the incremental tax rate on that money is 50% (like it was in 1986 for earnings over $350K) then I have an extra incentive to invest that money in my business (buy equipment, pay bonuses, hire a new employee, etc.) So, logically a higher incremental tax rate is more likely to lead to the hiring of new employees, buying of equipment, etc., all which help grow the economy. Logically, a higher tax on that extra income would lead to the creation of more jobs, and lowering the tax would lead to fewer jobs. Unless of course your counting the extra maid, lawn boy, or pool boy that might be hired. Which job would you prefer your daughter or son to have? The one at the company, or the personal service job?
@ Mark – I think it’s an even easier decision than that.
If hiring the employee makes you more profitable, do it. If hiring the employee doesn’t make you more profitable, don’t do it.
If you hire an employee and the net impact is that taxable income rises by $50,000, this is a good thing! You’ll still come out ahead even after paying the taxes.
The tax rates are marginal, so if you bump into a higher tax bracket by $10, you pay the higher rate on the $10, not on your entire income.
I’m not sure if some people don’t understand the concept of marginal rates or income vs. revenue or what.
Kosmo,
Recently, a company tried to get me to use direct mail in two zip codes near my office. I had them break down the number of households by income. There were 9000 households. Out of that 9000 there were only 41 earning over $500K per year. Can anyone guess why protecting those 41 out of 9000 from paying an extra 3% is so important? It’s not because they vote, because even if all 41 voted the 9000 would still out vote them even if only 1% voted.
Most people are also tricked by the quote that 10% of Americans pay 70% of the taxes. This is actually not even a correct quote. The “taxes” in the statement is only Federal Income tax. It does not include social security tax (which stops at $110,100 in earnings), sales tax, utility tax, gas tax, tolls, and multiple other taxes that hit lower income folks by a larger percentage of their earnings.
Social Security taxes in 2010 brought in $864 Billion, while income taxes brought in $1,090 Billion. Millionaires don’t pay much in SS tax because they don’t pay on passive earnings and the tax is only on the first $110K. That means the 90% paid most of that $864 Billion. Then add in the 30% of income taxes paid ($327 Billion) and the 90% of us non-millionaires paid $1,191 Billion to the Federal Government, while the 10% millionaires paid $663 Billion. Plus, this doesn’t include all the other taxes stated above.
It is simply not the lopsided scenario we’ve been led to believe.
Hello,
The tax foundation says that most of the returns with more than 1 million dollars in annual incomes are joint returns, which means that both husband and wife together made a million. Is this true? Does it mean that individual one million dollar earners are way lesser?
Yep, that would mean that there are fewer individual one million dollar earners.
The assertion that raising the taxes on business owners would result in increased employment is a ridiculous assertion that isn’t based in reality. My company has just over 100 employees and it is owned by myself and 1 other person as an S-Corp. All corporate income is realized as income by me and my partner. We do not get to December and decide to hire a few more people to reduce out tax burden (which would have ZERO effect on that years taxes). We will increase bonuses or purchase some capital items (which are typically depreciated and not realized as full expense deductions) not because we are evading taxes, but because we have realized more income than had been forecast throughout the year. By law, we are required to pay estimated taxes on income throughout the year, and are penalized if we underestimate that number so we don’t have some huge chunk of cash sitting in the bank waiting until December to distribute. By the government confiscating that money with a higher tax rate, all you are doing is restricting commerce and investment. That income is used to purchase goods, hire service companies (like those horrible service jobs someone else was talking about – when did it become beneath these kids to work for a landscaping company or work to become a plumber or electrician??) , or invest in the stock market. All of those things are essential to our economy!!! By taking that money out and allowing government bureaucracies to make those decisions only encourages waste and crony capitalism instead of growth and expansion. If I get that money, I may finish my basement, or add on to my garage, or take an extra long ski vacation. All of which employ local people and create commerce… The other post just encourages more government spending and the ever deepening spiral into insolvency. Do you really think that if taxes were raised and more money was coming into Washington that congress would balance the budget? Or would they just increase spending and give more handouts to their cronies (whichever side those cronies happen to be on)? Every citizen payer should have some skin in the game. Even if it’s a 1% tax, they should have some burden of support for our country. All we have is the bar just getting moved higher up as to who will be paying the taxes. While it is true that the tax figure of 47% not paying taxes is only income tax, most of those other taxes the commenter posted on were local taxes, not federal. And as a business owner, I pay my social security, and I match all the rest of my employee’s social security too. So don’t whine about how it is capped at only $110,000 and those rich folks don’t pay a proportionately higher amount – that may be true for some, but not for the majority of us in that middle spot. Just like most small and mid-sized businesses, we have to pay the taxes even if we don’t realize the actual cash distribution. Well, that was enough for me. I vented.
I make over $250,000 a year and I am by no mean rich. we have 3 cars – and 4 drivers in our family. Two cars are paid off and BOTH have over 140,000 mile son them. I have a leased Honda accord that is $199 a month.
Our children are in public schools and we haven’t had a vacation in over 5 years.
We do have savings for college and we have no credit card debt.
My point is that I live WELL within my means and I am not rich.
I think it is important to repeat a point made by 37Dcount.
If we taxed the rich sufficiently to pay off today’s debt, there is exactly a ZERO percent chance the money would go to that purpose. In fact, debt would INCREASE to become at least the same percentage of the higher revenues. Government would grow at the expense of the private sector.
In today’s political reality, the best thing we can do is to let the debt grow until even Congress thinks it’s too much. Unless, that is, you want the government to own the means of production. That’s called communism.
I would be interested to know what percent of the households making AGI between $100k-$300k are business owners that do have the previously mentioned tax advantages. I think the majority in that bracket aren’t business owners but are two-income homes with parents working full time and paying more than their fair share of taxes.
Informative piece – I loved the points , Does anyone know if my business could find a template IRS W-2 version to type on ?