A Rich Income in ‘06 Was $263 Million

Original Link: http://dealbook.blogs.nytimes.com/2009/01/30/a-rich-income-in-06-was-263-million/

The income of the 400 wealthiest Americans swelled in 2006, soaring nearly 23 percent from the previous year, to an average of $263 million, according to data released Thursday by the Internal Revenue Service. Since 1996, this group has nearly doubled its share of all income earned in the United States.

The top 400 paid just more than $18 billion in federal income taxes in 2006, or an average of $45 million, on a record $105 billion in total income — the lowest effective tax rate in the 15 years since the agency began releasing such data.

That compares with nearly $1 trillion paid by all other individual taxpayers in 2006.

The gains for the richest took place amid a booming economy, in which hedge funds and private equity firms blossomed and the subprime lending machine went into high gear.

The rising wealth of the nation’s richest taxpayers, The New York Times’s Lynnley Browning writes, will most likely intensify debate among tax and policy analysts about the equitability of the tax code, which analysts say favors the ultrawealthy.

Tax cuts enacted by the Bush administration that benefit the wealthy are set to expire by 2011.

“Until recently, we had a financial system that rewarded investors, and we have a tax system that does as well,” Robert S. McIntyre, the director of Citizens for Tax Justice, told The Times.

Now wealthy people, he said, pay income tax rates well below those of working-class citizens because of a myriad of tax breaks. A lower capital gains tax, now at 15 percent, down from 28 percent in 1997, benefits investors with big portfolios.

The average adjusted gross income in 2006 of more than $263 million for the top 400 taxpayers compared with an average of $214 million in 2005. It was three and a half times what they earned in 1996, which was $74 million.

And their average tax rate continued to a 15-year low of 17 percent.

But their contribution to federal coffers rose slightly, to nearly 1.8 percent of total contributions by all individual taxpayers. About 130 million taxpayers file returns each year.

The growth in income came primarily from dividends and interest income, not rising salaries and wages. Capital gains income jumped to 63 percent of the adjusted gross income of the richest 400, up from 58 percent in the previous year.

As a percentage of their income, salaries and wages fell to 7.4 percent of their total income, down from more than 12.5 percent just two years earlier. But taxable interest as a percentage of their income rose to nearly 7.8 percent, the highest level since the dot-com boom era of 1995.

The higher income also came from a sharp rise in claims for foreign tax credits, typically through privately owned entities. Such claims rose in 2006 to an average $2.5 million from $1.7 million the year earlier, and quadruple the level in 1996.

More than half, or nearly 54 percent, of all the itemized deductions taken by the wealthiest were related to their charitable contributions, a figure roughly unchanged since 1996.

And while the top 400 wealthiest earned more deductions from their charitable contributions, such gifts still account for just 5.19 percent of all itemized charitable contributions by all taxpayers.