Tax bills for rich families approach 30-year high

AP

WASHINGTON (AP) — The poor rich.

With Washington gridlocked again over whether to raise their taxes, it turns out wealthy families already are paying some of their biggest federal tax bills in decades even as the rest of the population continues to pay at historically low rates.

President Obama and Democratic leaders in Congress say the wealthy must pay their fair share if the federal government is ever going to fix its finances and reduce the budget deficit to a manageable level.

A new analysis, however, shows that average tax bills for high-income families rarely have been higher since the Congressional Budget Office began tracking the data in 1979. It's middle- and low-income families who aren't paying as much as they used to.

For 2013, families with incomes in the top 20% of the nation will pay an average of 27.2% of their income in federal taxes, according to projections by the Tax Policy Center, a research organization based in Washington. The top 1% of households, those with incomes averaging $1.4 million, will pay an average of 35.5%.

Those tax rates, which include income, payroll, corporate and estate taxes, are among the highest since 1979.

The average family in the bottom 20% of households won't pay any federal taxes. Instead, many families in this group will get payments from the federal government by claiming more in credits than they owe in taxes, including payroll taxes. That will give them a negative tax rate.

"My sense is that high-income people feel abused by being targeted always for more taxes," said Roberton Williams, a fellow at the Tax Policy Center. "You can understand why they feel that way."

Last week, Senate Democrats were unable to advance their proposal to raise taxes on some wealthy families for the second time this year as part of a package to avoid automatic spending cuts. The bill failed Thursday when Republicans blocked it. A competing Republican bill that included no tax increases also failed, and the automatic spending cuts began taking effect Friday.

The issue, however, isn't going away.

Obama and Democratic leaders in Congress insist that any future deal to reduce government borrowing must include a mix of spending cuts and more tax revenue.

"I am prepared to do hard things and to push my Democratic friends to do hard things," Obama said Friday. "But what I can't do is ask middle-class families, ask seniors, ask students to bear the entire burden of deficit reduction when we know we've got a bunch of tax loopholes that are benefiting the well-off and the well-connected, aren't contributing to growth, aren't contributing to our economy. It's not fair. It's not right."

The Democrats' bill included the "Buffett Rule," named after billionaire investor Warren Buffett. It gradually would phase in a requirement that people making more than $1 million a year pay at least 30% of their income in federal taxes.

The rule targets millionaires who make most of their money from investments — capital gains and qualified dividends, which have a top tax rate of 20%.

"It's fairness," said Sen. Claire McCaskill, D-Mo. "We're not raising taxes with the Buffett rule as much as we are correcting an inequity in terms of, one guy can be working at one end of the hall and because he's working with hedge funds, he gets taxed at 20%. Another guy at the other end of the hall is on a salary at an insurance company and he has to pay (39.6%). That's just not fair."

On average, households making more than $1 million this year will pay 37.2% of their income in federal taxes, according to the Tax Policy Center. But there are exceptions.

For example, the Internal Revenue Service tracks tax returns for the 400 highest-paid filers each year. Those taxpayers made an average of $202 million in 2009, the latest year available. Their average federal income tax rate: 19.9%.

That's still higher than the tax rate paid by most middle-income families, but not by much.

The middle 20% of U.S. households — those making an average of $46,600 — will pay an average of 13.8% of their income in federal taxes for this year, according to the Tax Policy Center. Over the past three decades, the average federal tax rate for this group has been about 16%.

The Associated Press analyzed two sets of data to compare tax burdens over time.

The CBO produces data from 1979 to 2009; the center has overlapping data from 2004 through 2013. Both get tax data from the IRS, but they use slightly different methodologies to calculate federal tax burdens.

Still, their numbers track closely enough to make some general observations. For example, it is clear that for 2013, average tax bills for the wealthy will be among the highest since 1979. It also is clear that federal taxes for middle- and low-income households will stay well below their averages for the same period.

Liberals and many Democrats say rich families can afford to pay higher taxes because their incomes have grown much more than incomes for middle- and low-income families.

Average after-tax incomes for the top 1% of households more than doubled from 1979 to 2009, increasing by 155%, according to the CBO. Average incomes for those in the middle increased by just 32% during the same period while those at the bottom saw their incomes go up by 45%.

"You've got to think about the context," said Chuck Marr, director of federal tax policy for the Center on Budget and Policy Priorities, a liberal think tank. "We just had three decades in the United States where we had a tremendous increase in inequality."

The growing disparity in income is a big reason why tax bills for the rich are approaching 30-year highs, Williams said. As the rich get richer, a greater share of their income is taxed at the top rate, he said.

High-income families also have been targeted by tax increases this year, including a new tax law passed by Congress on Jan. 1 as well as tax increases in the president's health care law.

The new tax law made the federal income tax more progressive, increasing the top tax rate from 35% to 39.6%, on taxable income above $400,000 for individuals and $450,000 for married couples filing jointly. Lower tax rates on income below those amounts were made permanent. Also, tax breaks for low-income families first enacted as part of Obama's 2009 stimulus package were extended through 2017.

Conservatives say raising taxes again on the wealthy would reduce their incentive to save and invest, hurting long-term economic growth.

"Raising taxes hurts the economy, and raising taxes on upper-income individuals — whether those who work for salaries or those who save and earn capital income — always hurts the economy the most," said J.D. Foster, a fellow at the conservative Heritage Foundation. "Spite and envy are not sound bases for public policy."

Besides, Republican leaders in Congress say, one tax increase a year is more than enough.

"Let's make it clear that the president got his tax hikes on Jan. 1," House Speaker John Boehner, R-Ohio, said Friday. "This discussion about revenue, in my view, is over."

Ten states with the lowest and highest tax burdens: