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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, April 18, 2014

NY Times: Will The Super Rich Finally Pay More Taxes Than The Very Rich?

New York Times:  Merely Rich and Superrich: The Tax Gap Is Narrowing, by Floyd Norris:

Will this be the year that the superrich finally pay higher taxes than the very rich? ...

[I]t is an interesting fact that our current tax system assures that — year after year — the superrich, those who report adjusted gross incomes of more than $10 million, have tax rates that are significantly lower than those of the very rich, those earning more than $500,000 but less than $10 million.

Figures just released by the Internal Revenue Service show that in 2011 the difference in rates between the groups rose to 4.1 percentage points, the largest since the I.R.S. began calculating the data in 2000. The superrich paid 20.4 percent of their income in federal income taxes in 2011, while the very rich paid 24.5 percent. ... Why are the superrich treated so well? It is largely because investment income — what we used to call unearned income — has long enjoyed preferential tax treatment. ...


Starting in 2013, the wealthy face significant tax increases. And the increases are greater for investment income. It seems likely that the gap in tax rates between the superrich and the very rich may be narrowed.

For earned income, like salaries and bonuses, married couples who make more than $450,000 now face a top marginal tax rate of 39.6 percent, up from 35 percent. ... [S]ome tax deductions [are] reduced for those with very high incomes. ...

That no doubt hurt the rich, but it is the increases in taxes on investment income that have caused the most surprise, and distress, for some wealthy people as they filed their tax returns this month. Under the Affordable Care Act passed in 2010, the Medicare payroll tax increased by 0.9 percentage point in 2013, but only for couples earning more than $250,000 and unmarried taxpayers earning more than $200,000. And unlike the old Medicare tax, the increase applies to investment income, not just to wages. More important was an additional 3.8 percent Medicare tax on “net investment income” for those couples earning more than $250,000. That includes long-term capital gains and qualified dividends on stock, income that until now was taxed at a maximum rate of just 15 percent. But it also includes other income that had been taxed at the same rate as earned income, including rent, royalties, interest and short-term capital gains. ...

The 2013 tax law made the health law tax bill even higher. The long-term capital gains rate was raised to 20 percent for couples who earn more than $450,000. Add in the Medicare tax, and the capital gains rate is 23.8 percent for the rich. For the first time in memory, the wealthy are confronting a tax rate on some investment income — like interest and short-term capital gains — that is higher than the ordinary income rate. Including the Medicare surcharge, the top rate on such income is now 43.4 percent.

Wall Street Journal:  Top Earners Feel the Bite of Tax Increases: Big Tax Bills Fuel Debate on How Much the Well-to-Do Should Pay, by John D. McKinnon:

The jump in federal tax rates that kicked in last year is causing sticker shock for many higher earners this tax season.

That, in turn, is rekindling a debate over a question likely to smolder for a long time: How much more could—or should—taxes go up on the well-to-do?

Higher earners' share of the overall federal tax burden has been climbing fairly steadily, 


The issue of how much to tax top earners is often debated now in political and economic circles. One camp, led by economists such as Emmanuel Saez of University of California at Berkeley, focuses on the rising gap in incomes between rich and poor. They advocate significantly higher tax rates on the rich. "Higher-income people are the obvious target, because we have seen the trend of much higher incomes among [them]," said Peter Diamond, a Nobel Prize-winning MIT economist who has written with Mr. Saez on taxes. "Secondly we've seen a [long-term] trend of declining tax rates on higher income people." Mr. Diamond advocates going to a 50% top federal rate, for starters.

Others think the tax burden on high-income people may already be too heavy. "Potentially it is too high," and could be causing economic distortions, said Jeffrey Miron, an economist at Harvard University and the libertarian Cato Institute. "That can have serious costs for economic activity," he added.

At the same time, a number of tax economists, including some on the right, advocate narrowing or closing many of the tax breaks that higher-income people use, including for investment and retirement savings. That would reduce some of the means for tax avoidance, and perhaps add to economic efficiency.

(Hat Tip: Mike Talbert.)

Update:  Forbes: Floyd Norris In The NY Times Completely Misunderstands The Taxation Of Capital Income, by Tim Worstall

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The second sentence in the following excerpt is incorrect; the .9% Medicare payroll tax does not apply to investment income:
Under the Affordable Care Act passed in 2010, the Medicare payroll tax increased by 0.9 percentage point in 2013, but only for couples earning more than $250,000 and unmarried taxpayers earning more than $200,000. And unlike the old Medicare tax, the increase applies to investment income, not just to wages.

Posted by: Howard Chapman | Apr 18, 2014 3:25:24 PM

I doubt any shift will last for long. Two characteristics of the superrich, their ability to hire experts to help them evade taxes and their ability to shift their investments around, mean it'll only be a matter of a few years before they adapt to these changes. The superrich also have more resources and opportunities to persuade Congress to create loophole. Indeed, one of my suspicions is that the Democrats talk so loudly of taxing the rich in public so that in private they can discuss creating those loopholes.

Posted by: Michael W. Perry | Apr 19, 2014 6:01:36 AM