A quarter of all households making $1 million paid a smaller share of their income in taxes than 10 million middle class families, according to a new report from the Congressional Research Service. In addition to the 94,500 millionaires paying a lower tax rate that much of the middle class, we've also shown that about 7,000 likely paid no federal income tax at all.
The super-rich escape middle income taxes in two ways. First, the payroll tax, which comprises the bulk of most families' tax bills, doesn't touch any income above $107,000. That means millionaires pay this tax on a smaller share of their income. Second, investment makes up a larger share of richer household's income, and it is taxed at a lower rate than regular income.
In short, millionaires make more of the kind of money the tax code preferences and less of the kind of money the tax code punishes.
That's not ideal, to say the least. So the Obama administration has floated a "Buffett Rule" to require millionaires to pay a higher share of their income in taxes than the middle class. With today's report in mind, there are a lot of ways to raise the tax burden of those 94,000 families. First, you could impose a surtax on earned income above a certain threshold (Democrats have proposed $1 million). Second, you could limit deductions for millionaires to raise their effective tax rate. Third, you could remove the ceiling on Social Security taxes. Fourth, you could tax investment like income. Not all of these ideas are smart, but the fourth solution is probably the most viable, because a simple intermediate step would be reverting to the tax code we had in 1997, when capital gains were taxed closer to income.
I don't want to cloud the bigger picture, which is that, although some millionaires use the tax code's preferential treatment of investment income to lower their tax burden, the top percentile in general pays a higher share of income to the IRS. The lucky 94,000 notwithstanding, the effective tax rate of the top 1 percent (and the top 0.1 percent) is higher than the middle class. This doesn't mean taxes can't or shouldn't be any higher. It means that the tax code, for all its weirdness, is a progressive instrument of revenue-raising.