Our new White House has begun a counterattack against America’s grand divide between the rich and everyone else. But we face, new stats from the IRS make dramatically plain, a steeply uphill battle.
Last Thursday, the day after President Obama announced a $500,000 cap on executive pay at bailed-out banking giants, the banking industry’s trade journal celebrated. The President’s cap, the American Banker exulted, would be “unlikely to have much impact” on banking executive compensation.
American Banker, in one sense, has that right. The new White House cap doesn’t apply to most enterprises getting bailout dollars, and, even where the cap does apply, bankers can still eventually pocket millions in stock awards.
But the Obama $500,000 cap does have symbolic value — and a good bit of it. A President of the United States has sent the message that rewards at the top can sometimes be too titanic to tolerate. That’s a necessary first step down the road toward a more equal, less top-heavy America.
We have, to be sure, an enormously long way down that road yet to travel.
Consider, for instance, the story of Mark McGoldrick, a Wall Street trader who spent 2006 with investment banking kingpin Goldman Sachs. McGoldrick took home $70 million that year, a sum that amounted to about $200,000 for every day he labored.
McGoldrick, interestingly, actually considered his labors somewhat undervalued. The next year he exited Goldman Sachs to start his own hedge fund.
How could someone making $200,000 a day feel undervalued? Researchers at the IRS late last month released a set of fascinating data that can help us understand. High-flyers like McGoldrick may indeed have been making $200,000 a day. But a sizeable cohort of Americans have been making fantastically more.
In fact, says the IRS, the top 400 U.S. tax returns in 2006 — the year McGoldrick pulled in $70 million — reported an average $263.3 million in income, nearly quadruple McGoldrick’s personal bottom line.
How can someone pocket over $263 million in a single year? Simple. Find a line of work that pays $60,000 an hour. Then work 12 hours a day, seven days a week, for an entire 12 months.
America’s most fortunate 400 don’t, of course, spend 12 hours a day behind some desk working. In fact, precious little of top 400 income comes from actual wages and salaries, just 7.4 percent in 2006.
The income of the super rich comes overwhelmingly from wealth, not work. Capital gains — income from the sale of assets America’s deepest pockets already owned — supplied nearly two-thirds, 63 percent, of the top 400’s 2006 income. Many millions more came from dividends and interest payments.
In all, the top 400 reported $105 billion in income over the course of the year. They paid a mere 17.2 percent of that in federal income tax, a smaller share of their income than the rich right below them ended up paying in tax. In 2006, America’s top 1 percent — taxpayers with at least $388,806 in income — paid federal income tax at an average 23 percent rate.
Millions of average Americans actually pay more in federal payroll tax — for Social Security and Medicare — than they do in federal income tax. If you take these payroll taxes into consideration, the top 400 pay federal taxes at a lower rate, as billionaire Warren Buffett likes to quip, than their receptionists.
Buffett isn’t kidding. In 2006, he paid 17.7 percent of his income in taxes. His secretary, who made $60,000, paid 30 percent.
Should we be aghast at all this, at the mammoth concentration of income that currently sits at America’s economic summit? One conservative think tank, the Tax Foundation, thinks the new IRS top 400 data offer nothing in particular that should alarm us.
The latest IRS top 400 snapshot, a Tax Foundation analysis trumpets, “clearly shows that wealthy Americans are not a static elite club that no one can penetrate.”
From 1992 through 2006, the Tax Foundation goes on to note, only just over a quarter of the high-income Americans who have appeared on an IRS annual top 400 list have appeared more than once. Only eight individuals on the 2006 list also showed up on the 1992 list and every list in between.
The Tax Foundation seems to believe that this “churning among the top 400” should leave us feeling comforted. But let’s go back, before we get too comfortable, a little bit further in time, back a half-century to a quite different American economic scene.
In 1955, America’s top 400 collected on average, in dollars inflation adjusted to 2006 levels, $12.3 million in income each, an amazingly tiny fraction of the over $263 million in average income the top 400 reported in 2006.
Should we dismiss this spectacular increase in top 400 income because no one on the 2006 top 400 list also appeared in the 1955 top 400? Or should we worry about an economy that’s generating colossal windfalls at the top while Americans at the middle and bottom are getting nowhere fast?
We do need to note one other fundamental difference between the 1955 and 2006 top 400s, a tax difference. In 1955, the top 400, after exploiting every tax loophole they could find, paid 51.2 percent of their incomes in federal tax, almost triple the 17.2 percent tax rate on the 2006 top 400.
If the 2006 top 400 had paid taxes at the same rate as the top 400 in 1955, the IRS would have collected another $90 billion in revenue. But the IRS didn’t collect that revenue, a reality that left the pockets of America’s richest stuffed with tens of billions of dollars they could use to make their influence felt on the American body politic.
These tens of billions have been piling up in the pockets of America’s richest, year in and year out, ever since tax rates on the rich started plunging a generation ago, with the Reagan revolution.
Our body politic, in every way that counts, still hasn’t recovered.
Sam Pizzigati edits Too Much, the online weekly on excess and inequality.