By Paul DiNardo, CPA
Wall, Einhorn & Chernitzer
The IRS has released data on 2008 individual income taxes. As the data show, the top 1 percent of tax returns paid 38 percent of all federal individual income taxes while earning 20 percent of adjusted gross income, compared to 2007 when those figures were 40.4 percent and 22.8 percent, respectively.
The top-earning 5 percent of taxpayers with adjusted gross income (AGI) over $159,619 paid far more than the bottom 95 percent.
The top 5 percent paid 58.7 percent of federal individual income taxes but earned 34.7 percent of the nation’s adjusted gross income.
Overall, these data on high-income tax returns appear to confirm that the recent recession had actually reduced income inequality, not increased it as had been widely reported.
In 2008 almost 52 million tax returns were filed with either positive or negative AGI that used exemptions, deductions and tax credits to completely eliminate their federal income tax liability.
Because of refundable tax credits like the earned income credit, they not only got back every dollar of federal withholdings, but some even received more back from the IRS.
Taxpayers with an AGI of $159,619 or more in 2008 fell into the nation’s top 5 percent of income earners. To make the top 1 percent, a taxpayer needed AGI of at least $380,354, which was significantly less than the 2007 threshold of $410,096. If you wanted to break the top 0.1 percent, you needed AGI of $1.8 million which was a significant drop from the 2007 level of $2.15 million.
Federal individual income tax remains highly progressive. The average tax rate in 2008 ranged from around 23.27 percent for the top 1 percent down to 2.7 percent of income for the bottom 50 percent.
For the top 1 percent and 0.1 percent, the average income tax rate increased from 2007 to 2008 despite lower income. This rate differential is most likely explained by diminished capital gain and dividend income which are taxed at lower rates coupled with a higher percentage of ordinary income which is taxed at higher rates.
