The fortunate 400

SIX American families paid no federal income taxes in 2009 while making something in the order of $200m each. This is one of many stunning revelations in new IRS data that deserves a thorough airing in this year's election campaign.

The data, posted on the IRS website last week, brings into sharp focus the debate over whether the rich need more tax cuts (Mitt Romney and congressional Republicans) or should pay higher rates (President Obama and most Democrats).

The annual report (http://link.reuters.com/vec68s), which the IRS typically releases with a two-year delay, covers the 400 tax returns reporting the highest incomes in 2009. These families reported an average income of $202.4m, down for the second year as the Great Recession slashed their capital gains.

In addition to the six who paid no tax, another 110 families paid 15% or less in federal income taxes. That's the same federal tax rate as a single worker who made $61 500 in 2009.

Overall, the top 400 paid an average income tax rate of 19.9%, the same rate paid by a single worker who made $110 000 in 2009. The top 400 earned five times that much every day.

Just 82 of the top 400 were taxed in accord with the Buffett rule, which proposes a minimum tax of 30% on annual incomes greater than $1m.

Let's return for a moment to the single worker who made $61 500 in 2009 and paid 15% of his salary in federal income taxes. The top 400 made more every three hours than he did in a year, and yet many of them paid the same or a lower tax rate, according to the data in the report.

On top of his $9 225 federal income tax, he also paid $9 409 in payroll taxes, which include Social Security and Medicare taxes. Half of the payroll tax was deducted from his cheque. His employer paid the other half, which was really hidden wages taxed at a 100% tax rate.

His total federal tax burden was 30.3%, exactly 50% more than the 20.2% tax burden, measured the same way, on the 400 at the top.

Two tax systems

This comparison illustrates how Congress has created two income tax systems, separate and unequal, burdening millions much more heavily than the few, those with gigantic incomes and a propensity to make campaign contributions.

One system is for wage earners and pensioners, whose taxes are withheld from their cheques. This rigorous, efficient system taxes them fully.

The other system is for business owners, executives, managers of hedge and private equity funds, name brand athletes and entertainers, and many others with huge incomes. Congress lets them put unlimited amounts of income in sheltered accounts and put off paying taxes for years or even decades.

Deferral does not prevent these super rich Americans from spending their money. Hedge fund managers and others can borrow against their untaxed wealth, currently at interest rates close to zero. So long as their wealth grows faster than their borrowing their net worth continues to increase.

The IRS report covers only the 400 highest incomes reported on tax returns, not the 400 highest actual incomes, which I am certain are much larger on average because of deferrals. That means the report overstates the tax burdens of the richest Americans pay.

The issue we need to debate is not how much you earn - make all you can. The issue is that everyone should pay their taxes now, not in some far-off tomorrow, and as you go up the income ladder so should your tax rate.

By what economic, political or moral standard should working stiffs be forced to pay their taxes immediately, while plutocrats pay their taxes by-and-by? And why should anyone who makes more than $200m live tax-free?

Those are questions to ask candidates on the hustings, insisting they give specific, focused answers.

To give this a sense of scale, the top 400 are financial giants compared to Mitt Romney. It took Romney a quarter century of smart work to build up a fortune that his campaign says is between $190 and $250m. The top 400 made about that much in one year.

Romney says that those of us who tell these hard facts about the zero-to-low tax burdens of the richest Americans are promoting class warfare. Income inequality, according to Romney, should be discussed only “in quiet rooms.”

If you agree with Romney, then keep quiet. If not, now is the time to spread the word and encourage robust and thoughtful debate, just as the framers of our constitution intended.

 - Reuters

* David Cay Johnston is a Reuters columnist. The views expressed are his own.