The Buffett Rule: Lessons from the Recession on Taxing Millionaires

January 26, 2012

President Obama's proposed "Buffett Rule" reminded me of a blog I wrote a few months ago on the impact of the recession on millionaire incomes and the taxes they pay. It may sound circular, but if you are going to tax millionaires, you need millionaires to tax. But recent IRS data for 2009 indicates that the recession did more to reduce the number of millionaires than any surtax.

Comparing the 2009 data to the pre-recession data for 2007 shows that not only did the number of millionaires fall by 40 percent, but the overall income of millionaires fell by 50 percent. The result for the U.S. Treasury was that 54 percent of the total drop in tax revenues during this period was due to the falling tax collections from millionaires.

Table 1 shows the total number of tax returns by income group. In 2007, there were 392,220 tax returns reporting $1 million or more in adjusted gross income (AGI). In 2009, by contrast, there were 233,435 millionaire returns, a drop of nearly 159,000, or 40 percent.

Of the total number of tax returns filed each year, millionaires' share of returns declined from 0.3 percent to 0.2 percent.

Table 1, Total Tax Returns

2007

2009

Change in the Number of Returns

Percent Change in Returns

Total

142,978,806

140,532,115

-2,446,691

-2%

$1 under $25,000

56,985,652

56,556,838

-428,814

-1%

$25,000 under $30,000

9,005,337

8,678,265

-327,072

-4%

$30,000 under $40,000

14,740,807

14,392,315

-348,492

-2%

$40,000 under $50,000

11,150,798

10,791,227

-359,571

-3%

$50,000 under $75,000

19,450,744

18,749,631

-701,113

-4%

$75,000 under $100,000

11,744,132

11,518,935

-225,197

-2%

$100,000 under $200,000

13,457,876

13,550,244

92,368

1%

$200,000 under $500,000

3,492,353

3,222,198

-270,155

-8%

$500,000 under $1,000,000

651,049

484,497

-166,552

-26%

$1,000,000 under $1,500,000

166,362

105,114

-61,248

-37%

$1,500,000 under $2,000,000

70,733

43,936

-26,797

-38%

$2,000,000 under $5,000,000

108,641

61,689

-46,952

-43%

$5,000,000 under $10,000,000

28,090

14,236

-13,854

-49%

$10,000,000 or more

18,394

8,460

-9,934

-54%

Millionaire Returns

392,220

233,435

-158,785

-40%

Millionaires' share of returns

0.3%

0.2%

6.5%

 

Source: http://www.irs.gov/pub/irs-soi/histab3.xls

  

Table 2 compares the amount of AGI reported by each income group in 2007 to 2009. Overall, American's incomes dropped 12 percent from 2007 to 2009. However, millionaires' income dropped 50 percent during this period to $702 billion from $1.4 trillion. While the total amount of AGI for all taxpayers dropped by roughly $1.04 trillion, the reduction in millionaires' income comprised 67 percent of that total loss in AGI.  

The AGI of taxpayers earning over $10 million fell 61 percent, the biggest decline in AGI of any group. Their incomes dropped $342 billion in two years, from $561 billion in 2007 to $219 billion in 2009. Their lost income comprised roughly 33 percent of the overall fall in AGI over those two years.

Table 2. Adjusted Gross Income

2007
($1,000s)

2009
($1,000s)

Change in AGI
($1,000)

Percent Change in AGI

Total

$ 8,687,718,769

$     7,648,676,270

$ (1,039,042,499)

-12%

$1 under $25,000

688,240,125

700,676,480

12,436,355

2%

$25,000 under $30,000

247,203,999

238,452,112

-8,751,887

-4%

$30,000 under $40,000

512,920,309

500,601,864

-12,318,445

-2%

$40,000 under $50,000

499,464,109

482,877,753

-16,586,356

-3%

$50,000 under $75,000

1,195,768,325

1,152,652,934

-43,115,391

-4%

$75,000 under $100,000

1,014,677,916

995,242,402

-19,435,514

-2%

$100,000 under $200,000

1,793,040,262

1,805,900,040

12,859,778

1%

$200,000 under $500,000

1,004,658,688

912,206,732

-92,451,956

-9%

$500,000 under $1,000,000

441,439,447

327,098,479

-114,340,968

-26%

$1,000,000 under $1,500,000

200,785,834

126,626,692

-74,159,142

-37%

$1,500,000 under $2,000,000

121,767,964

75,416,770

-46,351,194

-38%

$2,000,000 under $5,000,000

324,592,983

182,741,962

-141,851,021

-44%

$5,000,000 under $10,000,000

192,327,659

98,152,397

-94,175,262

-49%

$10,000,000 or more

561,612,712

219,219,775

-342,392,937

-61%

Millionaires AGI

$ 1,401,087,152

$        702,157,596

$    (698,929,556)

-50%

Millionaires' Share of AGI

16%

9%

67%

 

Table 3 shows the amount of income taxes paid by each income group for 2007 and 2009. Overall, income tax revenues declined by 22 percent in those two years, or $247 billion. However, collections from millionaires dropped 43 percent, or $133 billion. Collections from those earning over $10 million collapsed even more, falling by 54 percent or roughly $60 billion.

In 2007, millionaires contributed 28 percent of the roughly $1.11 trillion in tax revenues collected that year. By contrast, in 2009, their share of income tax burden fell to 20 percent.

Overall, the lost revenues from millionaires comprised 54 percent of the total drop in tax collections between 2007 and 2009.  

Table 3. Income Taxes Paid

2007
($1,000s)

2009
($1,000s)

Change in Taxes Paid
($1,000s)

Percent Change in Taxes Paid

Total

$ 1,115,601,803

$        868,049,646

$    (247,552,157)

-22%

$1 under $25,000

14,912,814

8,372,973

-6,539,841

-44%

$25,000 under $30,000

10,244,160

6,781,372

-3,462,788

-34%

$30,000 under $40,000

27,853,208

20,052,556

-7,800,652

-28%

$40,000 under $50,000

33,514,554

25,290,967

-8,223,587

-25%

$50,000 under $75,000

96,882,330

77,997,120

-18,885,210

-19%

$75,000 under $100,000

93,832,750

80,807,704

-13,025,046

-14%

$100,000 under $200,000

228,687,547

213,407,586

-15,279,961

-7%

$200,000 under $500,000

196,380,629

178,586,369

-17,794,260

-9%

$500,000 under $1,000,000

103,163,081

80,291,445

-22,871,636

-22%

$1,000,000 under $1,500,000

48,354,319

32,259,395

-16,094,924

-33%

$1,500,000 under $2,000,000

29,351,266

19,461,595

-9,889,671

-34%

$2,000,000 under $5,000,000

77,554,612

48,039,157

-29,515,455

-38%

$5,000,000 under $10,000,000

43,929,717

25,479,130

-18,450,587

-42%

$10,000,000 or more

110,843,388

51,168,777

-59,674,611

-54%

Millionaires Taxes Paid

$    310,033,302

$        176,408,054

$    (133,625,248)

-43%

Millionaires' Share of Taxes Paid

28%

20%

54%

 

The lesson from this IRS data is that we don't need higher tax rates on millionaires to collect more tax revenues from them. We need economic growth to create more millionaires. Once we have more millionaires, the tax collections will take care of themselves.

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