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Why Rich People Don’t Pay Taxes

Bruce Bartlett has a great Economix column up today on the New York Times’s Web site noting that Republicans who get all exercised about the nearly half of all Americans who pay no income tax never want to talk about those among them with incomes above $200,000. Back in 1969, Bartlett notes, it was considered such a scandal that 155 Americans with incomes over $200,000 ($1.3 million in current dollars) paid no income tax that President Richard Nixon, a Republican, hastily submitted legislation imposing a minimum tax on high incomes. Today the number of Americans with incomes over $200,000 who pay no income tax is about 21,000, or about 0.5 percent of all people in this income class. Don’t expect to hear a peep about this from the GOP. They’re too busy condemning legal tax avoidance by the working poor. 

Why don’t those 21,000 tax filers with incomes above $200,000 pay income tax? According to a new IRS report (see Figure E) the biggest primary reason (11.5 percent) is charitable deductions. The Obama administration tried to limit those and got burned. It’s still worth doing. The next-biggest primary reason (10.7 percent) is deduction of medical and dental expenses. These should probably be limited at higher incomes. The next biggest (10.3 percent) is partnership and S Corporation net losses. S Corporations are a scam (made famous by John Edwards) to avoid paying payroll tax and should probably be eliminated altogether. (Congress has repeatedly tried and failed to close the payroll-tax loophole.) About one third of the filers eliminated their tax liability primarily through a combination of miscellaneous deductions, suggesting that all deductions should be limited or phased out at high incomes.