On Tuesday I wrote about Warren Buffett’s recent op-ed in the NY Times arguing that the super-rich aren’t paying their fair share of taxes. Yesterday Roberton Williams at the Urban-Brookings Tax Policy Center posted an interesting graph that shows how preferential rates for dividends and capital gains income affect the overall tax rates households pay.
Source: Urban-Brookings Tax Policy Center, 2011
The graph is a bit complicated at first glance, so here’s a breakdown:
- It shows effective tax rates (ETR), which sum individual income taxes and payroll taxes (I explained why payroll taxes matter in my previous post).
- The blue bars show the average ETR a household pays if they earn less than 10% of their income from dividends and gains on investments.
- The red, green, and purple bars show the average ETRs paid by households that earn more of their income from investments. The purple bars, for example, represent households that earn at least 2/3 of their income from these sources.
As I explained the other day and as the graph shows, the more of your income you earn from investments rather than wages, the lower your overall tax rate. And it’s almost exclusively the top earners who are making large shares of their money from investments and getting those lower tax rates shown by the red, green, and purple bars.
If this is still a little confusing, let’s consider two hypothetical families:
Family #1: An upper-middle class family earning $90,000 a year, which puts them in the fourth income quintile. 97% of families in this group make less than 10% of their income from capital gains and dividends. So this family is almost certainly going to be in the blue bar group and will likely pay an average effective tax rate of 16.1%.
Family #2: A super-rich family earning $5 million a year, which places them in the top 0.1% of earners. Almost half of families in this category make more than 10% of their income from capital gains and dividends. If our hypothetical family earns half of their income from these sources, they will be part of the green bar group and will be paying an effective tax rate of around 15%, lower than Family #1.
Why Investors Pay Less Tax than the Rest of Us
Urban-Brookings Tax Policy Center // Roberton Williams // August 31, 2011
FYI, these are the income groups shown in the graph:
Lowest quintile: < $17,000 Top quintile: > $103,500
Second quintile: $17,000 – $33,500 Top 1%: > $532,500
Middle quintile: $33,500 – $60,000 Top 0.1%: > $2,179,000
Fourth quintile: $60,000 – $103,500