Thursday, June 29, 2017

Over $200,000 in Income: What Income Taxes Paid?

It always takes a couple of years for the Internal Revenue Service to publish detailed tax statistics. In the Summer 2017 Statistics of Income Bulletin, Justin Bryan provides and overview of "High-Income Tax Returns for Tax Year 2014."

"For Tax Year 2014, there were almost 6.3 million individual income tax returns with an expanded income of $200,000 or more, accounting for 4.2 percent of all returns filed for the year. Of these, 9,692 returns had no worldwide income tax liability. This was a 24.2-percent decline from the number of returns with no worldwide income tax liability for 2013, and the fifth decrease in a row since reaching an all-time high of 19,551 returns in 2009. This article presents detailed data for high-income returns for 2014 and summary data for the period 1977 to 2013." 
The report has lots of detail on patterns in these tax returns. Here, I'll focus on two points: the actual income taxes paid by different groups, and what's going on with those who have over $200,000 in income, but don't owe anything in income taxes. 

This graph provides some evidence on income taxes paid by various groups (that is, payroll taxes, property taxes, and other taxes are not included here). The four sets of bars represent four income groups: under $50,000, $50,000 to $100,000, $100,000-$200,000, and $200,000 and up. For each income group, the bars show the share of people in this group paying a certain share of their income in taxes, grouped into six categories. Of the group with $200,000 or more in income, 0.2% paid 0 percent or less in income taxes; 2.6% paid more than zero but less than 10 percent; 9.6% paid more than 10% but under 15 percent; 38.1% paid between 15-20%; 28.5% paid 20-25%; and 21.1% paid 25 percent or more of income in the form of income taxes. 

High-income, zero tax returns have often been about 0.1-0.2% of all tax returns, with the higher values falling in recession years. However, this value spiked up during the Great Recession, and only by 2014 had it fallen back in to the usual historical range. 

What's happening with this group? Bryan breaks down what provisions of the tax code that have the biggest effect in reducing the taxes owed for this group, and reports:
"It is possible for certain itemized deductions and certain exclusions from income to lead to nontaxability by themselves, but high-income returns are more often nontaxable for a combination of reasons, none of which alone would result in nontaxability. ... Of the 9,692 returns without any worldwide income tax and expanded incomes of $200,000 or more, the most important item in eliminating tax, on 54.7 percent of returns, was the exclusion for interest income on State and local Government bonds ... The next three categories that most frequently had the largest primary effect on taxes were: 1) the medical and dental expense deduction (15.6 percent or 1,509 returns); 2) the charitable contributions deduction (8.5 percent or 819 returns); and 3) the foreign-earned income exclusion (6.6 percent or 638 returns). The item that was most frequently the secondary effect in reducing regular tax liability on high expanded-income returns with no worldwide income tax was the deduction for taxes paid (24.4 percent or 2,365 returns). The next three categories that most frequently had the largest secondary effect in eliminating taxes were: 1) the charitable contributions deduction (12.7 percent or 1,229 returns); 2) capital gains taxed at 0 percent (12.2 percent or 1,183 returns); and 3) the medical and dental expense deduction (11.3 percent or 1,094 returns)."
The small number of those who have high incomes but no income tax don't bother me much. It's a big country. A few rich people will put all their wealth into tax-free bonds. Some will have a few years of making very large charitable contributions, or very high medical expenses. Some will have earned much of their income in another country, and so pay income taxes there. When you hear about high-income people who don't pay income tax, it's pretty much always a situation with exceptional circumstances, and certainly not a general rule.