America’s Newest Aristocracy

by Jack Stapleton, Jr.

In feudal times and up to the end of the 1800s, the aristocrats of America paid no taxes. Peasants and merchants did.

Economist Richard Kogan brings up this historic tidbit in relation to the latest statistics on the income and taxes of the rich in the United States. His figures show that the inequality of incomes continued to grow through the 1990s. Moreover, the rich paid less of their income in federal income tax in 2000 than in 1995. Kogan further notes the tax cuts already approved or scheduled for enactment are likely to lower the tax burden of the wealthiest families still further.

Instead of an aristocracy by birth, the USA will have an aristocracy of wealth, much of it inherited. Here are new data from the IRS: The number of those making $1 million or more rose annually from 87,000 in 1995 to over 205,000 in 1999. That group accounted for 11.2% of all income reported, while the average income of these millionaires went from 2.6 million in 1995 to $3.2 million in 1999. Since these “adjusted gross income” figures ignore tax-free income from state and municipal bonds and some business income, the share of total income of this group may actually be greater.

The “effective” income tax burden — the actual tax rate and not just the marginal rate on their last dollars of income — of these millionaires fell from 31.4% in 1995 to under 25% in 2000. Oddly, the effective tax rate of taxpayers making at least $500,000 and under $1 million was slightly higher than for the millionaires. Putting it another way, the richest families pay proportionately less taxes than the merely rich. That is because most millionaires — one in every 625 taxpayers in 1999 — make much of their income from capital gains, rather than from salaries or other earned income. Many may have sold corporate shares — hopefully before the rapid market decline — which means that net capital gains from all taxpayers rose 21.7% in 2000 to $542.8 billion.

All of this helped create the now-forgotten federal budget surplus, but since Congress, beginning in 1997, has been cutting the tax on capital gains (initially by eight percentage points) those selling stock kept more profits.

Most economists agree that if the U.S. is to realize any semblance of tax equity sometime in the distant future, the concept that capital gains should be treated differently has to go out the window. Logically one can ask why different sources, just because they are different, should not all be treated as regular earned income, which is exactly what capital gains are. After all, income is income, paid with the same kind of currency, and the pictures on those bills are just the same.

It’s been argued by the millionaires’ defenders that money earned by the wealthy will be available for new investments that create jobs and greater prosperity for all. One hears that not only from the White House and Capitol Hill but on the third floor of the Missouri Capitol as well. The trouble is that there’s little evidence that lowering tax rates for the rich changes their investment behavior. It just means that the government gives a tax reward to those fortunate in the stock market, not to those who actually work for their incomes.

Looking at wealth, which arises from accumulated income or has been inherited, the number of families with a net worth of $10 million or more has quadrupled from 64,000 in 1989 to more than 260,000 in 1999. This is an incredible rate of growth, never before seen in the U.S. economy. With the repeal of the estate tax scheduled in 2010, the number of high-wealth families will again multiply.

The real corker is that in the 10-year period noted above, the average income tax rate for all taxpayers increased from 13.5% to 14.85%. The actual income tax burden for families making $50,000 to $100,000 went up to 12.2%. But these IRS numbers do not include Social Security payroll taxes, state income taxes and various sales and excise taxes. These usually hit lower- income citizens relatively more than they do upper-income taxpayers.

It is likely that attempts in both Washington and Jefferson City to find more income to cover outlays will eventually occur. What is not likely to happen, however, is tax equality.

[Missouri News & Editorial Services,, Inc. Copyright (C) 2002 MNES Corp.]