The latest IRS Statistics Of Income Report is out. In it, the IRS focuses on the wealthy segment of US population, i.e., those falling over the proverbial $200,000/year cutoff. What the IRS finds, is that in 2007, of the 4,576,315 tax returns with expanded income of $200,000 or more, 13,142 (0.287%) had no US income tax liability, and 4,354 (0.095%) had no worldwide income tax liability. These numbers are an increase of 2,100 and 32, respectively, over 2006. Some other interesting, but less relevant to the administration findings: when measuring income in current (not constant) dollars, the percentage of Americans making over $200,000 in 2007 was 3.201%, or 4.576 million, of all 143 million tax returns. Back in 1976, this number was 0.078%, or 67,580 of all 86.6 million tax returns, or 67.6 times less. However, when measured in 1976 constant dollars (indexed for inflation), only 618,154 American made the 2007 equivalent of $200,000 from 1976. This number is 10.5 times more than the 58,991 tax filers who made the same amount 30 years earlier.
Visualizing the wealthy in America in graph form yields the following results:
Yet what the US government is much more interested is the segment of the uber-wealthy which reports making over $200,000 yet ends up paying no tax on this. The IRS discusses this phenomenon:
Of returns with expanded income of $200,000 or more in current dollars, 0.287 percent reported no U.S. income tax for 2007, and 0.095 percent had no worldwide income tax. When looking at these returns using 1976 constant dollars, the percentage without U.S. income tax liability was 0.220; the percentage without worldwide income tax liability was 0.049.
Figure D shows the number of returns with no worldwide income tax and with expanded income of $200,000 or more and their proportion of all high expanded income returns for 1977 through 2007. These data are shown in both current-year and 1976 constant dollars. In this figure, the spread between the two percentage lines was small for the late 1970s, showed an increase for the early 1980s, and then narrowed before widening again after 1988. The spread generally narrowed after 1993 but has increased or stayed fairly consistent since 2002. Note that, because the number of nontaxable returns with expanded income of $200,000 or more is based on samples, year-to-year differences in the numbers and percentages of nontaxable returns with expanded income of $200,000 or more may represent sampling variability, in addition to actual changes in the numbers of such returns. Beginning with Tax Year 1991, nontaxable returns with expanded income of $200,000 or more were sampled at higher rates for Statistics of Income, which reduced the sampling variability of these returns and therefore provided improved estimates. Thus, the data for returns prior to 1991 are not entirely comparable with data for more recent years.
Here is what the tax "avoidance" table looks like:
These results graphed:
Why do so many of America's richest pay no taxes? Here are the IRS' reasons for nontaxability:
It is possible for certain itemized deductions and certain exclusions from income to cause nontaxability by themselves, but high-income returns are more often nontaxable as a result of a combination of reasons, none of which, by itself, would result in nontaxability. Moreover, some items, which singly or in combination may eliminate “regular tax” liability, i.e., income tax excluding the alternative minimum tax (AMT), cannot eliminate an AMT liability, since these items give rise to adjustments or preferences for AMT purposes.
Because they do not generate AMT adjustments or preferences, tax-exempt bond interest, itemized deductions for interest expense, miscellaneous itemized deductions not subject to the 2-percent-of-AGI fl oor, casualty or theft losses, and medical expenses (exceeding 10 percent of AGI) could, by themselves, produce
Due to the AMT exemption of $66,250 on joint returns ($44,350 on single and head-of-household returns and $33,125 on returns of married taxpayers fi ling separately), a return could have been nontaxable, even though it included some items that produced AMT adjustments or preferences. Further, since the starting point for “alternative minimum taxable income” was taxable income for regular tax purposes, a taxpayer could have adjustments and preferences exceeding the AMT exclusion without incurring AMT liability. This situation could occur if taxable income for regular tax purposes was sufficiently negative, due to itemized deductions and personal exemptions exceeding AGI, that the taxpayer’s AMT adjustments and preferences are less than the sum of the AMT exclusion and the amount by which regular taxable income is below zero.
Note that, because of the AMT, taxpayers may have found it beneficial to report additional deduction items on their tax returns, even if the items did not produce a benefit for regular tax purposes. Tables 7 and 8 classify tax returns by the items that had the largest and second largest effects in reducing or eliminating income tax. For returns on which each of the largest effects was identified, the tables show each of the second largest effects.
For example, Table 7 shows that, on taxable returns with some U.S. income tax and expanded income of $200,000 or more, the taxes paid deduction was the most important item 48.0 percent of the time. Where this was the primary item, the interest paid deduction was the second most important item 58.0 percent of the time, and the charitable contributions deduction was the second most important item 24.5 percent of the time.
Table 8 shows that on returns without any worldwide tax and expanded income of $200,000 or more, the most important item in eliminating tax, on 46.0 percent of returns, was the exclusion for State and local government interest (“tax-exempt interest”). For these returns, the itemized deduction for taxes paid was the second most important item 27.7 percent of the time, and the deduction for medical and dental expenses was the second most important item 24.9 percent of the time.
Table 8 also shows that, the four categories with the largest effect in reducing taxes on high-adjusted gross-income returns with no worldwide income tax were the total miscellaneous deductions (1,776 returns, or 36.7 percent of the 4,840 tabulated returns with AGI of $200,000 or more and with no worldwide tax liability); investment interest expense deduction (907 returns, or 18.7 percent); foreign-earned income exclusion (498 returns, or 10.3 percent); and medical and dental expense deduction (480 returns, or 9.9 percent). These effects are also shown graphically
in Figure E.
For high-expanded-income returns with no worldwide income tax, the four categories that most frequently had the largest effect in reducing taxes were tax-exempt interest (2,004 returns, or 46.0 percent of the 4,354 tabulated returns with expanded income of $200,000 or more and with no worldwide tax liability); medical and dental expense deductions(772 returns, or 17.7 percent); partnership and S corporation net losses (334 returns, or 7.7 percent); and charitable contributions deduction (316 returns, or 7.3 percent). These effects are also shown graphically in Figure F.
Table 8 also shows that the items that most frequently had the second largest effect in reducing regular tax liability for high-expanded-income returns with no worldwide tax were the deduction for taxes paid (1,104 returns, or 25.4 percent) and tax-exempt interest (647 returns, or 14.9 percent).