Where the tax burden falls
In Doug Stives' response ("Another response to Bose," Aug. 16-Sept. 12, 2010) to my letter to the editor ("Obama editorial demands response," June 7-20, 2010, page 9), he contends that the wealthy are overtaxed, but in support of his position offers only an article from The Wall St. Journal.
According to Mr. Stives: "The Wall St. Journal told us that the top 1 percent of U.S. earners pay 40 percent of total tax collections and the top 5 percent account for more than 60 percent of tax revenues."
The source for this article is a news release from the Tax Foundation, Fiscal Fact No. 183, published in July 2009. It examines individual income tax data released by the IRS for the 2007 calendar year. According to the Tax Foundation, the top 1 percent of individual income tax filers paid 40.42 percent of all federal individual income tax, and the top 5 percent paid 60.63 percent.
There has been a paradigm shift in the last decade in how we talk about the tax burden in this country. We used to talk about what percentage of our personal income went for taxes. Now we use total dollars, or percentages of total dollars paid, to discuss who pays what. What this shift means is that our understanding of the tax burden has been refocused, or maybe soft-focused is a better term.
I am reminded of our office administrator's first tax season. One of her responsibilities is to help our older clients write checks to the Internal Revenue Service. Late in the filing season she helped an elderly gentleman write a check to the IRS for $82,000. After the client left, she went to see a partner to express her distress that this charming older client had to pay so much tax. The partner explained that because of how his business investments were structured and also because he owned a large municipal bond portfolio, he actually paid a lower percentage of his income in taxes than most of the other clients she had helped that tax season. That check represented a small percentage of his total income.
According to the Federal Reserve, the top 400 families in this country control more wealth than the bottom 50 percent of the population. In these circumstances, wealthy taxpayers will naturally pay large amounts of federal income tax on an absolute basis, and large percentages of total federal individual income tax collections, because their income is so much higher than everybody else's.
Mr. Stives is an accounting professor with a sophisticated understanding of federal tax law. I can tell from his letter that he is highly intelligent, and yet his understanding of how the tax burden in this country is allocated is as unsophisticated as an office administrator's in their first tax season.
According to Mr. Stives, the Journal article addressed all tax collections, but when the Tax Foundation cites collection percentages in Fiscal Fact No. 183, it is plainly individual income tax to which the report refers. The top 1 percent do not pay "40 percent of total tax collections," because "total tax collections" in this country include, in addition to individual income tax: the federal corporate income tax, federal excise taxes, Social Security tax, Medicare tax, state sales and income taxes, and local property tax, among others.
Total tax collections in the U.S. during the 2007 year amounted to just over $5 trillion, according to the nonpartisan Tax Policy Center. The federal government collected $2.57 trillion, while state and local governments collected $2.5 trillion. Included in the $2.57 trillion was $1.16 trillion of individual income tax (and $370 billion in federal corporate tax).Therefore, the top 1 percent of individual filers paid 40.42 percent of the individual income tax burden during 2007, paying $470.3 billion, which is only 9.4 percent of total tax collections in this country for that year.
According to the Tax Foundation news release, the top 1 percent accounted for 22.83 percent of adjusted gross income reported. If I were writing in the style of The Wall Street Journal, I would conclude here, saying: It's outrageous that the top 1 percent earned 23 percent of the income and paid only 9 percent of total tax collections.
But the top 1 percent pays other taxes too, just like the rest of us, don't they?
Some do. According to the Tax Foundation, $410,096 was the minimum AGI required for a tax return to fall in the 1 percentile, and this threshold would capture many professionals, management-level individuals living in metro areas, small-business owners and others who rely on earned income. These are certainly upper-middle-class members, by any definition. But to call all of them rich is wrong. These folks tend to pay a lot of tax, perhaps 40 percent of their income when Medicare, state and local taxes are considered.
I would define rich based on asset ownership, rather than income, but if compelled to use income as a determiner I would consider those in the upper one tenth of 1 percent to be wealthy. According to Fiscal Fact No. 183, the threshold in 2007 for the upper one tenth of 1 percent was an AGI of $2,155,365.
I think it isn't unreasonable to say that many in this elite group (approximately 140,000 tax returns) do not pay much tax outside of the federal individual income tax. Certainly the Social Security tax, which topped out at $6,045 in 2007, would not be much more than a rounding error on such a return. Many wealthy taxpayers reside in states that do not impose an income tax. The wealthy save more than they spend, which would tend to minimize their sales tax burden. Following California's lead, many states have capped property tax assessments, such that the property tax burden for the wealthy would, like the Social Security tax, be on par with a rounding error.
According to Fiscal Fact No. 183, the top one tenth of 1 percent paid an effective federal individual income tax rate of 21.5 percent in 2007. If the wealthy do not pay significant tax outside of the federal individual income tax, to group these taxpayers with the other members of the top 1 percent is misleading. Many of the taxpayers in the lower nine tenths of the 1 percent rely on earned income and pay an effective rate, when all taxes are considered, much higher than 21.5 percent.
Large amounts of money evoke emotion. Our first reaction is to sympathize with the kindly old gentleman who wrote the $82,000 check. But is it fair for the taxpayers in the lower nine tenths of the 1 percentile to pay a 40 percent rate when the ultra-wealthy are paying 21.5 percent? Maybe we need to re-evaluate how we define the wealthy in this country, and stop asking the middle class and upper-middle class to shoulder the bulk of the taxes. The wealthy should pay at least as much as the wage earners and self-employed pay. In a nation that values democracy, that's only fair. In order to make that happen, a truly progressive system of individual income taxation at the federal level is necessary.
Harry Bose, CPA
Read & Bose, PC
What a smile I got, knowing that I had every one of the tax return personalities listed ("The personalities of tax returns," Sept. 13-26, 2010, page 8). However, add one more that I am sure many other accountants have - the return that gets completed timely and mailed back to the client, perhaps in mid-March, only to have them call on April 10 or so to say, "I just opened the envelope and I have a few questions, and there might be an error." Usually these are clients that know they owe money. Now if there is an extension needed, the rush is on to get it to the client so he can make a payment.
Just what we accountants all live for!
Michael C. Lefkowitz
East Meadow, N.Y.
You recently published a letter from Leonard Steinberg ("1099 rules: Bad all around," Sept. 27-Oct. 10, 2010, page 9) in which he comments on an earlier article by Roger Russell ("1099 rules seen as a major burden," August 16, page 10).
Contrary to Mr. Steinberg's thoughts, the impact on recipient companies [of new rules for 1099 reporting] will be negligible at most. Most companies (especially large firms) have a system of accounting to track their revenues. They are not waiting to receive 1099s to tell them how much revenue to report on their tax return. Most companies will or should discard the 1099s they receive. As a small accounting firm, we receive 1099s from business clients every January, which are promptly shredded. We report our income as it's received, which also includes a substantial percentage from individuals who do not issue 1099s.
There is absolutely no purpose in reconciling 1099s to the amount of revenue that we record on our books and report on our tax returns.
The new 1099 rules will certainly be a burden to small businesses, and I hope that the rules are modified or repealed before they take effect. But the only recipients that will be impacted are those that are not reporting all of their income.
James W. Lloyd, CPA
Lloyd & Co. LLC
Saint Charles, Mo.
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