The income earned by the top 1 percent of Americans has declined for the second year in a row while their average tax rate has increased, according to a new Tax Foundation study.
The average federal tax rate for those reporting at least $343,927 in income has increased from 22.5 percent in 2007 to 24.0 percent in 2009, while the average income for the top 1 percent declined from $1.4 million to $1 million over the same period.
The Tax Foundation’s analysis is based on new data from the Internal Revenue Service on individual income taxes, reporting on calendar year 2009. The total amount of individual income tax paid declined by $166 billion, twice the decline from 2007 to 2008.
Nationally, average effective income tax rates were the lowest since the IRS began tracking them in 1986. The average tax rate for returns with a positive liability went from 12.2 percent in 2008 to 11.1 percent in 2009.
Fluctuating Tax Liabilities
“During a time of economic downturn, we expect to see significant changes in both total income reported and the share of taxes paid by those with the highest incomes,” said study author and Tax Foundation economist David S. Logan.
“Unlike middle-income wage-earners, whose incomes and tax liabilities are fairly steady, high-income people tend to realize significant capital gains that fluctuate wildly with the economy, causing their income tax liabilities to fluctuate as well,” Logan added.
In 2009, the top 1 percent of tax returns earned 16.9 percent of adjusted gross income reported and paid 36.7 percent of all federal individual income taxes. In 2008 those figures were 20.0 percent and 38.0 percent, respectively. Each year from 2005 to 2007, the top 1 percent’s continually growing share of income earned and taxes paid set a record. The 2008 reversal of this trend continued in 2009.
Decline Among Very Highest
The study also looks at the very highest earners, the top 0.1 percent of tax returns, which the IRS only began singling out in recent years. In 2009, those 138,000 tax returns accounted for nearly 7.8 percent of adjusted gross income earned (down from almost 10 percent in 2008), and they paid approximately 17 percent of the nation’s federal individual income taxes (down from 18.5 percent in 2008).
“The very highest income group—the top one-tenth of one percent—actually has a lower average effective income tax rate than the rest of the top 1 percent of returns because these extremely high-income returns are more likely to have income from capital gains and dividends, which are typically taxed at lower rates,” said Logan.
“It’s worth pointing out that in the case of capital gains and dividends, however, income derived from these sources has already been taxed once by the corporate income tax, which is not included in the current study, meaning the average effective tax rate numbers can be somewhat misleading,” Logan added.
Richard Morrison ([email protected]) is manager of communication for the Tax Foundation in Washington, DC.