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Top 400 Earners Paid $16 Billion in Taxes

Wednesday, 6 Jun 2012 | 11:58 AM ET

It's popular today to talk about the super-rich getting richer and paying the lowest tax rates in recent history.

New IRS data, however, suggests that neither may be true.

An IRS report on the top 400 earners in America – known as the “Fortunate 400” – found that their adjusted gross income fell 41 percent between 2007 and 2009. That was a far steeper loss than the rest of the U.S. population, which saw it’s income drop by less than half that.

The income drop of the 400 translated into a loss of billions of dollars for the government. The group’s total income taxes paid fell by 27 percent between 2007 and 2009, to $16.1 billion from $22.9 billion.

No one should feel the least bit of sympathy for this slightly-less-fortunate 400. They earned a combined $80 billion in 2009 – about 80 percent of the total income for half of the American population.

To get into the exclusive “400 Club” you needed $202 million in 2009. The club has become a tad less exclusive: you needed $344 million in annual income to get in in 2007.

At the same time that their incomes are falling, their effective tax rates – taxes actually paid rather – are actually going up. The Fortunate 400 paid an average effective tax rate of 19.91 percent in 2009, up from 16.62 percent in 2007.

The rate increased largely because of the decline in the share of income coming from capital gains, which are taxed at a lower rate than ordinary income.

The tax rate paid by the Fortunate 400 is now the highest it’s been since 2003. To be fair, this rate is still well below the “list price” top tax rate of 35 percent. But neither does the rest of the population pay list price: The average tax rate paid by the middle class – those making between $30,000 to $50,000 – was 6.4 percent. The rate for those making between $50,000 and $100,000 was 8.1 percent.

This is not to argue for or against taxing the wealthy. But the decline in incomes and taxes paid by the wealthy offers two broader lessons. First, the IRS data confirms that top wealth is becoming more volatile in America, creating a new class of “High-Beta Rich.”

Of the people in the Fortunate 400, only 27 percent made it into the group more than one year between 1992 and 2009. Only 2 percent made it every year. That means the majority of the 400 top earners fall out of the club after one year – suggesting that we have more of a revolving door of riches rather than permanent plutocracy.

The 400 is most likely filled with entrepreneurs or executives who had one-time income events, like a stock sale or company sale or IPO (think Mark Zuckerberg) rather than a group of entrenched rentiers.

The second big lesson here is that any plans to plug government revenue holes by taxing the wealthy need to take these wild swings into account. Raising taxes from the 2007 rich would raise one amount: raising them on the current rich might raise much less (or possibly more, though we really don’t know.)

In the end, the Fortunate 400 is still earning colossal wealth. But their fortunes change faster than we realize – and that affects all of us through the taxes they pay.

-By CNBC's Robert Frank
Follow Robert Frank on Twitter:
@robtfrank


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  • A reporter and editor, Robert Frank is a leading authority on the American wealthy for CNBC.