The Wall Street Journal Review and Outlook writes Millionaires Go Missing (full access may require paid subscription).
The critical point is that there are fewer wealthy now than before the recession. This should not be surprising, but to many it is since we often hear that the economic burden is not being equally shared.
In 2007, 390,000 tax filers reported adjusted gross income of $1 million or more and paid $309 billion in taxes. In 2009, there were only 237,000 such filers, a decline of 39%. Almost four of 10 millionaires vanished in two years, and the total taxes they paid in 2009 declined to $178 billion, a drop of 42%.
Those with $10 million or more in reported income fell to 8,274 from 18,394 in 2007, a 55% drop. As a result, their tax payments tanked by 51%. These disappearing millionaires go a long way toward explaining why federal tax revenues have sunk to 15% of GDP in recent years. The loss of millionaires accounts for at least $130 billion of the higher federal budget deficit in 2009. If Warren Buffett wants to reduce the deficit, he should encourage policies to create more millionaires, not campaign to tax them more.
The millionaires who are left still pay a mountain of tax. Those who make $1 million accounted for about 0.2% of all tax returns but paid 20.4% of income taxes in 2009. Those with adjusted gross income above $200,000 a year were just under 3% of tax filers but paid 50.1% of the $866 billion in total personal income taxes. This means the top 3% paid more than the bottom 97%. Yet the 3% are the people that President Obama claims don’t pay their fair share. Before the recession, the $200,000 income group paid 54.5% of the income tax.
There is a lot of distorted information about the distribution of wealth and income. For a critical analysis read Income and Wealth by Alan Reynolds. You can search the author on this blog to read several critical excerpts from that book.
Some of the poorest countries have the most equal distribution of wealth and income. Our poorest fair much better than the average income of most of the rest of the world. Yet this fact is lost in much of the rhetoric in the class war. This administration seems to prefer fairness to prosperity.
The presumption that unfairness leads to political instability is partially true. But revolution stems more from frustrated opportunity than an unequal distribution of wealth at any point in time. Our super regulated society and our complex tax structure is less effective at redistributing wealth than it is in making it much more difficult for those who do not have it to acquire it. Capitalism is about distributing our assets based on return rather than political power. The more government controls the wealth the less fluid and the less efficient the distribution of our assets becomes.
Furthermore, as this article noted, the more progressive our tax system is the more our government depends on the fortunes of the wealthy to provide the revenues to run the country. Recessions affect the wealthy more and thus become more severe. There is an irony that a less progressive tax system would lead to a much more stable revenue stream. The most dependable stream of revenue is probably a consumption tax, since our buying habits change less drastically than our income.