Tuesday, April 26, 2011

How I Paid Only 1% of My Income in Federal Income Tax

How I Paid Only 1% of My Income in Federal Income Tax

In 2009, the median U.S. family had an income of just under $50,000, on which they would have paid roughly $2,761 (or about 5.5%) in federal income tax. I, by contrast, enjoyed an income of $207,415 in 2009, but paid only $2,173 (or 1.0%) in income tax.

In a recent newspaper interview, I mentioned my absurdly low tax rate to illustrate the extent to which the tax system is biased in favor of the wealthy (my income varies widely from year to year, but is typically north of half a million dollars). My point was that with our country facing frightening budget deficits amid an ever-widening income gap between the rich and everybody else, I consider it both unwise and unfair that a former investment banker like myself pays less in taxes than working Americans with far lower incomes.

Among the dozens of emails I received in response were many from people who assumed that rich people avoid taxes through complicated strategies devised by an army of expensive advisors (many correspondents asked for the name of my accountant). But under our current tax system, the rich don't need high-priced lawyers who exploit obscure loopholes; I wasn't even trying to minimize my taxes (and, in fact, could have paid zero tax if I was). Warren Buffett has observed that if there's class warfare in this country, the rich are winning. I offer my 2009 tax return, then, as a flare to illuminate the battlefield.

Americans are understandably angry over the government's multi-billion-dollar bailouts of reckless bankers. But low tax rates on investment income have put far more money into Wall Street's pockets than the TARP bill did. Even President Obama's proposal to let the Bush tax cuts lapse for the richest Americans would leave a top marginal rate on capital gains and qualified dividends of just 20% -- half the proposed rate on labor income.

This difference creates a loophole you can drive a Rolls Royce through. Having left Wall Street in 2002, I now earn far more money from my financial portfolio than from my job as an Adjunct Professor, and as a result I consistently pay under 15% of my income to the IRS. Still, I was astonished when my accountant told me that my tax rate for 2009 was a mere 1%.

I knew my deductions were an unusually large percentage of my income that year due to three items: $46,000 in charitable gifts, $56,000 in state and local taxes (mostly related to 2008, when my income was much higher) and $45,000 in investment expenses (basically fees paid to various money managers). Personally, I think there are reasonable arguments to be made for keeping each of these types of deduction, but the numerous "tax expenditures" that litter the tax code mean that citizens with similar incomes can end up paying wildly different amounts in tax.

Even after deductions and exemptions, however, I still had taxable income of $37,349, putting me in the 15% bracket (higher than the average rate I've paid in years past with income twenty times as large). If I'd been an ordinary worker, my tax bill would have been $4,764. But wait! Under the Bush tax cuts, if one's income from other sources is low enough (which mine was after deductions), certain types of investment income are subject to zero -- yes, zero -- tax. In my case, the qualified dividends I received in 2009 would have escaped taxation altogether if not for the Alternative Minimum Tax. Even under the AMT, however, I paid less than half the income tax paid by a wage-earner with the same taxable income (and less than a third of the tax burden when including social security taxes, which are not due on investment income).

Does that seem fair to you?

Advocates of lower taxes on investment income argue that they increase the incentives for folks like me to create jobs. As a long time investor, I'm skeptical. After all, job growth was much higher in the years following the Clinton tax hike in 1993 than it has been over the last decade as investment tax rates were repeatedly slashed. And lower rates on investment income also reward financial speculators, whose actions in recent years haven't exactly promoted increased employment.

Middle class anger in the Tea Party era, meanwhile, has been directed primarily at government spending. Arguing that government will simply waste whatever money it receives, Tea Party supporters oppose higher taxes on anybody (which explains why this is one populist movement which many billionaires are happy to support). But by focusing attention solely on whether government costs too much, the Tea Party ignores the completely separate question of who pays those costs. Last year, the answer was: not me.

...While the Republicans talk about the "shared sacrifices" necessary to close our government's budget deficit, their plan imposes pain mostly on the sick, the elderly, and the poor. Asking the rich to sacrifice by paying higher tax rates surely pales in comparison. I believe that having wealthy investors pay taxes at the same rate as middle-class workers would be an important step towards making sure that we all contribute to putting our fiscal house in order.

This author is facing the real dollars figures and issues head on. That will sink in with some people and not others. The other are the slash and burn Conservatives who just want to see enlivenment destroyed regardless of who or how many it hurts. Civilized society? The rabid right could care less. They want America to become Pottersville. With them living on the hill and the dirty masses toiling away without a safety net - like Medicare and Medicaid. The issue for them is not as much about money as about who they have decided should be full participants in this democracy - them of course, and who should not - everyone else, what the Right considers the "other". Taking money from working class Americans and redistributing it to the top five percent is their way of dividing what they see as the wheat from the chaff.

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