The Tax Foundation - The Buffett Rule: Lessons from the Recession on Taxing Millionaires

The Tax Foundation - The Buffett Rule: Lessons from the Recession on Taxing Millionaires

The Buffett Rule: Lessons from the Recession on Taxing Millionaires

by Scott A. Hodge

President Obama's proposed "Buffett Rule" reminded me of a blog I wrote a few months ago on the impact of the recession on millionaire incomes and the taxes they pay. It may sound circular, but if you are going to tax millionaires, you need millionaires to tax. But recent IRS data for 2009 indicates that the recession did more to reduce the number of millionaires than any surtax.
Comparing the 2009 data to the pre-recession data for 2007 shows that not only did the number of millionaires fall by 40 percent, but the overall income of millionaires fell by 50 percent. The result for the U.S. Treasury was that 54 percent of the total drop in tax revenues during this period was due to the falling tax collections from millionaires.
Table 1 shows the total number of tax returns by income group. In 2007, there were 392,220 tax returns reporting $1 million or more in adjusted gross income (AGI). In 2009, by contrast, there were 233,435 millionaire returns, a drop of nearly 159,000, or 40 percent.
Of the total number of tax returns filed each year, millionaires' share of returns declined from 0.3 percent to 0.2 percent.

Table 1, Total Tax Returns	2007	2009	Change in the Number of Returns	Percent Change in Returns
Total	142,978,806	140,532,115	-2,446,691	-2%
$1 under $25,000	56,985,652	56,556,838	-428,814	-1%
$25,000 under $30,000	9,005,337	8,678,265	-327,072	-4%
$30,000 under $40,000	14,740,807	14,392,315	-348,492	-2%
$40,000 under $50,000	11,150,798	10,791,227	-359,571	-3%
$50,000 under $75,000	19,450,744	18,749,631	-701,113	-4%
$75,000 under $100,000	11,744,132	11,518,935	-225,197	-2%
$100,000 under $200,000	13,457,876	13,550,244	92,368	1%
$200,000 under $500,000	3,492,353	3,222,198	-270,155	-8%
$500,000 under $1,000,000	651,049	484,497	-166,552	-26%
$1,000,000 under $1,500,000	166,362	105,114	-61,248	-37%
$1,500,000 under $2,000,000	70,733	43,936	-26,797	-38%
$2,000,000 under $5,000,000	108,641	61,689	-46,952	-43%
$5,000,000 under $10,000,000	28,090	14,236	-13,854	-49%
$10,000,000 or more	18,394	8,460	-9,934	-54%
Millionaire Returns	392,220	233,435	-158,785	-40%
Millionaires' share of returns	0.3%	0.2%	6.5%
Source: http://www.irs.gov/pub/irs-soi/histab3.xls

Table 2 compares the amount of AGI reported by each income group in 2007 to 2009. Overall, American's incomes dropped 12 percent from 2007 to 2009. However, millionaires' income dropped 50 percent during this period to $702 billion from $1.4 trillion. While the total amount of AGI for all taxpayers dropped by roughly $1.04 trillion, the reduction in millionaires' income comprised 67 percent of that total loss in AGI.
The AGI of taxpayers earning over $10 million fell 61 percent, the biggest decline in AGI of any group. Their incomes dropped $342 billion in two years, from $561 billion in 2007 to $219 billion in 2009. Their lost income comprised roughly 33 percent of the overall fall in AGI over those two years.

Table 2. Adjusted Gross Income	2007 ($1,000s)	2009 ($1,000s)	Change in AGI ($1,000)	Percent Change in AGI
Total	$ 8,687,718,769	$ 7,648,676,270	$ (1,039,042,499)	-12%
$1 under $25,000	688,240,125	700,676,480	12,436,355	2%
$25,000 under $30,000	247,203,999	238,452,112	-8,751,887	-4%
$30,000 under $40,000	512,920,309	500,601,864	-12,318,445	-2%
$40,000 under $50,000	499,464,109	482,877,753	-16,586,356	-3%
$50,000 under $75,000	1,195,768,325	1,152,652,934	-43,115,391	-4%
$75,000 under $100,000	1,014,677,916	995,242,402	-19,435,514	-2%
$100,000 under $200,000	1,793,040,262	1,805,900,040	12,859,778	1%
$200,000 under $500,000	1,004,658,688	912,206,732	-92,451,956	-9%
$500,000 under $1,000,000	441,439,447	327,098,479	-114,340,968	-26%
$1,000,000 under $1,500,000	200,785,834	126,626,692	-74,159,142	-37%
$1,500,000 under $2,000,000	121,767,964	75,416,770	-46,351,194	-38%
$2,000,000 under $5,000,000	324,592,983	182,741,962	-141,851,021	-44%
$5,000,000 under $10,000,000	192,327,659	98,152,397	-94,175,262	-49%
$10,000,000 or more	561,612,712	219,219,775	-342,392,937	-61%
Millionaires AGI	$ 1,401,087,152	$ 702,157,596	$ (698,929,556)	-50%
Millionaires' Share of AGI	16%	9%	67%

Table 3 shows the amount of income taxes paid by each income group for 2007 and 2009. Overall, income tax revenues declined by 22 percent in those two years, or $247 billion. However, collections from millionaires dropped 43 percent, or $133 billion. Collections from those earning over $10 million collapsed even more, falling by 54 percent or roughly $60 billion.
In 2007, millionaires contributed 28 percent of the roughly $1.11 trillion in tax revenues collected that year. By contrast, in 2009, their share of income tax burden fell to 20 percent.
Overall, the lost revenues from millionaires comprised 54 percent of the total drop in tax collections between 2007 and 2009.

Table 3. Income Taxes Paid	2007 ($1,000s)	2009 ($1,000s)	Change in Taxes Paid ($1,000s)	Percent Change in Taxes Paid
Total	$ 1,115,601,803	$ 868,049,646	$ (247,552,157)	-22%
$1 under $25,000	14,912,814	8,372,973	-6,539,841	-44%
$25,000 under $30,000	10,244,160	6,781,372	-3,462,788	-34%
$30,000 under $40,000	27,853,208	20,052,556	-7,800,652	-28%
$40,000 under $50,000	33,514,554	25,290,967	-8,223,587	-25%
$50,000 under $75,000	96,882,330	77,997,120	-18,885,210	-19%
$75,000 under $100,000	93,832,750	80,807,704	-13,025,046	-14%
$100,000 under $200,000	228,687,547	213,407,586	-15,279,961	-7%
$200,000 under $500,000	196,380,629	178,586,369	-17,794,260	-9%
$500,000 under $1,000,000	103,163,081	80,291,445	-22,871,636	-22%
$1,000,000 under $1,500,000	48,354,319	32,259,395	-16,094,924	-33%
$1,500,000 under $2,000,000	29,351,266	19,461,595	-9,889,671	-34%
$2,000,000 under $5,000,000	77,554,612	48,039,157	-29,515,455	-38%
$5,000,000 under $10,000,000	43,929,717	25,479,130	-18,450,587	-42%
$10,000,000 or more	110,843,388	51,168,777	-59,674,611	-54%
Millionaires Taxes Paid	$ 310,033,302	$ 176,408,054	$ (133,625,248)	-43%
Millionaires' Share of Taxes Paid	28%	20%	54%

The lesson from this IRS data is that we don't need higher tax rates on millionaires to collect more tax revenues from them. We need economic growth to create more millionaires. Once we have more millionaires, the tax collections will take care of themselves.