Tax share growing for wealthiest few

Sunday, March 18th 2001, 12:00 am
By: News On 6

WASHINGTON – The political battle over President Bush's tax-cut plan has centered on charges that it tilts too heavily to upper-income taxpayers. But the debate has obscured one fact about the nation's progressive tax system: An increasingly small segment of the population pays a huge share of federal income taxes.

The 400 wealthiest taxpayers pay about as much in federal income taxes as more than 40 million individuals and families at the bottom of the income scale, according to Internal Revenue Service data.

Those 400 taxpayers paid about $8.7 billion in taxes last year, more than enough to finance the State Department and its 30,000 employees in 250 embassies, consulates and other offices worldwide.

The rising disparity in incomes between the wealthiest and poorest Americans, rather than changes in the tax system, is largely responsible for the increasing share of the tax burden on the wealthy.

In 1980, the top 1 percent of taxpayers (about 1 million individuals and families) paid about 19 percent of the federal income taxes; in 1998, the top 1 percent paid 35 percent.

Meanwhile, millions of low-income Americans pay little or no federal income tax, or receive a share of more than $30 billion in tax credits for the working poor.

"The principal reason taxes are so skewed is that income is so skewed," said Joel Slemrod, a leading tax expert at the University of Michigan. The share of total income reported by the top 1 percent of taxpayers rose from 8.5 percent in 1980 to 18.5 percent in 1998, he said.

That may be one reason some of the richest of the rich don't appear to resent their multimillion-dollar tax bills.

"Speaking for myself, I don't need a tax cut or tax relief," said David Geffen, the music mogul who has amassed a $3.3 billion fortune and is 70th on the Forbes 400 list of wealthiest Americans. "It is a privilege to be an American citizen," he said. "It is appropriate to pay a greater share of taxes."

On average, each of the 400 top taxpayers paid more than $21 million in federal income taxes last year on income of more than $64 million, according to estimates based on the IRS data.

Treasury Secretary Paul O'Neill, who earned more than $60 million last year as chairman of Alcoa Inc., may fall into this category this year. He said he expects to pay about $24 million when he files his tax return, an amount he considers appropriate.

The estimate of the taxes paid by the 400 top taxpayers was calculated by a Harvard University professor who requested anonymity. The estimate, from the IRS' Statistics of Income database, was derived from a 1995 microdata file of 401 taxpayers with the highest taxable income, the last year for which such information is publicly available. The database is used by the Congressional Budget Office and other agencies for research on the individual tax burdens.

In 1995, the 401 top taxpayers reported total taxable income of $17.1 billion and paid $5.8 billion in income taxes before certain credits, according to the professor. The information in the data file is obscured so researchers can't identify individual taxpayers. The professor updated the income to 2000 levels.

Mr. Bush has proposed an across-the-board cut in federal income taxes, meaning those who pay the most in the taxes will generally get the biggest share of the tax cuts. On average, the top 400 taxpayers would get a tax cut of about $4 million each when the tax cut was completely phased in.

"Given the state of the tax system, it is really hard to design an income tax cut that is not in absolute dollars the biggest for the wealthy," said Austan Goolsbee, a University of Chicago professor who has studied how the rich respond to changes in tax policy.

The picture changes somewhat when payroll taxes for Social Security and Medicare are included. About 80 percent of American workers pay more in payroll taxes than they do in income taxes, according to the CBO.

The bottom 40 percent of the taxpaying population, who contribute about 1 percent of income tax revenue, pay about 14 percent of overall payroll taxes. The top 1 percent pay only 4 percent of all payroll taxes.

There is a cap on the amount of earnings subject to Social Security payroll taxes; in 2000, all wages above $76,200 were exempt from payroll taxes. In 1993, however, as part of President Bill Clinton's deficit-reduction plan, the cap was lifted on payroll taxes for Medicare hospital insurance, so even the very rich pay Medicare taxes on all income.

Mr. O'Neill, for instance, said he paid $874,000 in Medicare payroll taxes last year. His employer, Alcoa, paid an equal amount.

Mr. Bush hasn't proposed reducing payroll taxes, except in the context of broader Social Security reform. But several Democrats and some Republicans have proposed a credit against some payroll taxes, which could significantly alter the distribution of the tax cut and possibly help the president win some Democratic votes on Capitol Hill.

Distributed by Los Angeles Times/Washington Post News Service.