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Do Rich People Pay Taxes?

What do you think… do rich people pay taxes?

Here is a quick answer… Yes!

You may not think that they pay enough, or their fair share, but let me assure you that rich people pay taxes.  Having practiced public accounting for over 20 years and dealing with millionaires and billionaires, I know they pay taxes.  A select few pay more income tax in one year than the average American will make in a lifetime.  When you look at the statistics, it’s actually low-income people who don’t pay income taxes.

Despite the facts, it makes great headlines to claim that rich people don’t pay taxes.  Last week, a CNNMoney article reported that 4,000 millionaires didn’t pay any federal tax in 2010.   The Tax Policy Center was their source of information.  Since I’m always looking to learn and stay abreast of innovative ideas, I read the article hoping to glean something useful.   Not surprising, the details of the article didn’t exactly support the headline.  Here are a few points of contention and contradiction that I noted.

  • Although the article references 2010, it’s unclear how they can make claims about 2010.  The IRS is still processing 2010 returns filed a few weeks ago.  Plus, many high-income taxpayers’ returns are on extension until October 15, 2011.  They don’t cite the source of their statistics, but it certainly isn’t the IRS.
  • The exclusion of municipal interest income from federal income tax was mentioned as a prime example of how millionaires avoid paying taxes.  This is not a tax break for the wealthy.  All interest income from municipal bonds is exempt from federal taxation, irrespective of your wealth or tax bracket.  The contributors failed to mention that this not a tax issue.  It’s a Constitutional issue dealing with the sovereignty of the States.  If Congress could tax municipal interest income, I’m suspect that they would.
  • A capital loss carryover was cited as another possibility.  Capital loss carryovers are generated from the economic loss incurred when you sell something for less than you paid for it.  I don’t think offsetting prior losses with current gains is a great “loophole.”
  • The mortgage interest deduction was another.  This is completely bogus.  You can only deduct interest on $1.1 million of mortgage debt.  Even if you were paying an incredibly high interest rate of 10%, your mortgage interest deduction would be $110,000; far short of being able to shelter $1 million of income each year.
  • Charitable contributions were listed as another possibility.  This is a little better than the mortgage interest deduction, because you can deduct up to 50% of your adjusted gross income to certain qualified charities.  It may get you closer to eliminating your tax liability, but it’s still only 50%.  Furthermore, you have to give the money away. The tax savings might make it more affordable to give, but you’re still out the economic value of what you contributed.
  • Foreign tax credits are also cited.  Generally, you are allowed a credit for taxes paid to another jurisdiction on income that is also taxed in the U.S.  It’s supposed to prevent you from  being taxed twice on the same income.  There are limitations on foreign tax credits which make it extremely difficult to eliminate your U.S. tax liability with foreign tax credits.  Even if it is possible, you’re still paying tax, just not to the U.S.  Furthermore, you would have to pay more to the foreign jurisdiction than the IRS to avoid the imposition of U.S. taxes.

Since tax information is personal and private there no actual examples cited.  These were the possible strategies that the contributors cited.  In reality, this article is a headline searching for a story.  None of the examples given are really “loopholes,” nor do they support the notion that millionaires receive special treatment to avoid paying taxes.

Such articles may seem benign, but I disagree.  Whenever one class of people is able to avoid paying taxes (whether real or perceived), it can provide justification for others to be dishonest in filing their taxes.  Additionally, misinformation can easily lead to tax policy with unintended consequences.  The Alternative Minimum Tax (AMT) is a great example.  The AMT was enacted in 1970 to target 155 high-income families who supposedly paid no federal income tax in 1969, but today, millions of middle-class families are subject to AMT.  A provision originally designed to snare the “rich people” is now being imposed on many middle-class families.

It might make a great headline to suggest that wealthy people don’t pay income taxes, but it’s not really true.  There is no magic to avoid paying taxes.  More often than not, rich people pay income taxes.  If you’re still not convinced, become wealthy and see what you find out.

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  1. November 27, 2011 at 2:51 PM

    Hi, just wanted to tell you, I enjoyed this blog post. It was inspiring. Keep on posting!

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