Why 2016 May See a Record Top 1%

How much income do you want to report next spring on your 2016 tax return?

For most of us, that question rates as downright silly. We don’t get to choose how much income we report on our tax returns. The vast bulk of our annual income comes from our paychecks. We just transfer the numbers from our W2s onto our tax forms.

The wealthy, thanks to capital gains, can time when they receive their income.

The wealthy can time when they receive their income.

America’s wealthy come at taxes from quite a different perspective. Top 1 percenters do, of course, take in plenty of paycheck income. CEO salaries have, after all, never been higher.

But America’s rich also take in a substantial share of their income from buying and selling assets, everything from real estate to shares of stock.

The profits the rich reap off these sales — capital gains — enjoy a lower tax rate than paycheck income. These capital gains carry another mighty tax advantage as well: Wealthy taxpayers can game their timing. The rich can essentially decide when they want to report their capital gains.

Suppose, for instance, that you happen to be a deep pocket sitting on stocks that have doubled in value. If you sold these stocks, you’d clear a $100 million personal profit.

So should you sell and cash in on that windfall? Well, that depends — on all sorts of factors. You’re not going to want to sell if you feel your stocks are going to keep appreciating. And you are going to want to sell if you sense a nosedive in your stock’s future.

Politics — especially election-year politics — could also determine what you decide. If you feel that newly elected pols are going to cut the tax rate on capital gains, you’re going to want to hold off on selling any prized assets until after the new, lower tax rate goes into effect.

If, by contrast, you think an election result might bring a higher tax rate, you’re going to want to sell now, before that new rate goes into effect.

America’s wealthy faced just this sort of situation in the closing months of 2012. At year’s end, these wealthy understood, the Bush tax breaks for the financially fortunate enacted in 2001 and 2003 would by law expire. They also understood that the Obamacare health reform surtax on high incomes, enacted in 2010, would go into effect for the first time in 2013.

In the 2012 presidential election, Republican nominee Mitt Romney campaigned against both these increases. He lost. Obama’s re-election meant that tax rates on high incomes were almost certainly going to rise appreciably in 2013.

And these tax rates did rise, after an end-of-December deal between President Obama and GOP congressional leaders upped the capital gains tax rate from 15 to 20 percent and the tax rate on income over $450,000 from 35 to 39.6 percent.

But a good many of America’s richest taxpayers would deftly minimize the immediate impact of the higher new rates — by making post-election moves to fast-track potential 2013 income into 2012.

Reported top 1 percent incomes, as economist Emmanuel Saez details in a new analysis of IRS data published last month, would end up coming in “abnormally high” in 2012 “and abnormally low” in 2013, with the difference, Saez concludes, “most likely due” to the retiming of income to avoid 2013’s new higher tax rates.

All this retiming turned 2012 into an incredibly lucrative year for America’s ultra rich. Real incomes for the nation’s top 0.01 percent leaped an astounding 28 percent in 2012, from an average $20.8 million in 2011 to an average $26.5 million.

America’s top 1 percent overall would claim just below 23 percent of the nation’s income in 2012, the top 1 percent’s highest income share since 1928, the year before a crashing Wall Street helped trigger the Great Depression, and 2007, the year still another Wall Street crash helped usher in the Great Recession.

Might we see a similar surge in top 1 percent incomes in 2016? All the signs are pointing in that direction.

Hillary Clinton is currently campaigning for tax hikes on the rich that go well beyond the Obama tax increases America’s wealthy faced after the 2012 election. Wealthy U.S. taxpayers, Bloomberg reports, are getting “ready for higher taxes under a President Clinton,” preparing themselves “to take evasive action if Democrats make big gains.”

“We have to be quick enough to pull the trigger after November 8,” explains Alan Kufeld, a tax advisor at a major accounting firm flush with clients worth between $25 million and $1 billion.

Four years ago, University of California-Berkeley economist Saez calculates, taxpayers in America’s top 1 percent shifted “slightly over 10 percent of their 2013 incomes into 2012.” If they equal — or surpass — that shifting in this year’s closing months, 2016 could well wind up to be the most top-heavy year in American income history.

But the next year, 2017, would then see a fairly hefty decrease in the top 1 percent income share, since the wealthy will have shoved up so much of their potential 2013 income into 2012.

The danger in these sudden statistical shifts? We could have some widespread public confusion about what’s happening with inequality in America. Are we becoming much more unequal or much less?

We can’t answer questions like these on the basis on any one year’s statistics. We need to be looking at longer-term trends.

And the longer-term trend line remains troubling. The top tax rate increase that went into effect under President Obama, notes Emmanuel Saez, “has not depressed top incomes.” We need, he concludes, to be doing much more “to curb pre-tax income concentration in the United States.”

Institute for Policy Studies associate fellow Sam Pizzigati co-edits Inequality.org. His most recent book: The Rich Don’t Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class, 1900–1970. Follow him on Twitter @Too_Much_Online.

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