The Fortunes of the Top 1 Percent
Pity the top 1 percent in America. At the end of 2012, their taxes went up. First, Congress allowed the top tax rates on ordinary income and capital gains to increase back to 2001 levels (39.6 percent and 20 percent respectively), and the top tax rate on dividends increased to 20 percent (which is lower than the 2001 rate of 39.6 percent). Second, the Affordable Care Act net investment income tax of 3.8 percent and the additional Medicare tax of 0.9 percent took effect for high income taxpayers. Third, the limitation on itemized deductions and the personal exemption phase-out were reinstated for taxpayers with income over $250,000 (basically the top 3 percent). Lastly, the temporary payroll tax holiday, which reduced the Social Security payroll tax rate to 4.2 percent, expired (the tax rate is back to 6.2 percent for all workers).
With all these new (and old) taxes, how are the 1 percent doing? The Congressional Budget Office recently released a report on the distribution of household income and taxes for 2011, which may provide an answer.
CBO’s analysis shows trends in the average tax rate and income between 1979 and 2011, for various income groups. Between 1979 and 2011, the inflation-adjusted before-tax income of the top 1 percent grew by 175 percent; the income of the middle 60 percent grew by 29 percent. Over the same period, the inflation-adjusted after-tax income of the top 1 percent increased by 200 percent, compared to 40 percent for the middle 60 percent of the income distribution. At least in 2011, the top 1 percent was doing very well—especially compared to everyone else.
Of course, this information does not answer our question. CBO also estimated taxes under the 2013 tax law (assuming the 2011 distribution of income) and showed that average tax rates would indeed be higher across the income distribution. The average tax rate of the top 1 percent would be 33 percent under the 2013 tax code rather than the 29 percent under the 2011 tax code—a whopping 4 percentage point increase. However, even with this increase, the average tax rate of the top 1 percent is lower than it was in 1979, 1980, 1993, 1994, 1995, 1996, and 1997!
With the tax increase after 2012, the inflation-adjusted after-tax income of the top 1 percent increased by over 180 percent since 1979; income for the middle 60 percent increased by less than 40 percent since 1979. Even with the additional taxes, the folks in the top 1 percent are doing much better than they were in 1979 and much better than everyone else; they don’t need pity.