For the superrich, 2009 was supposed to be the “annus horribilis.” That’s the year that market averages hit their post-financial-crisis lows, and prices of nearly all assets plunged. Since the superrich depend disproportionately on assets, rather than earned income, they suffer more during hard times for financial markets since more of their assets are at risk, or so the theory goes. Plenty of people did get hit in 2009, including people at the very top. But all things are relative. The fortunate 400 people with the highest adjusted gross incomes still made, on average, $202 million each in 2009, according to Internal Revenue Service data. And this doesn’t even count income that doesn’t show up as adjusted gross income, such as tax-exempt interest. Yet the top 400 paid an average federal income tax rate of less than 20 percent, far lower than the top rate of 35 percent then in effect. In 2009, global markets bottomed out, but hedge fund titans barely felt the bump. David Tepper, made an estimated $4 billion. DANIEL ACKER / BLOOMBERG NEWS, VIA GETTY IMAGES They also paid a lower rate than the top 1 percent, which were people with adjusted gross incomes in 2009 of at least $344,000. These affluent but hardly superrich taxpayers paid on average just over 24 percent of their adjusted gross income in federal income tax. Even the top 0.01 percent, people earning at least $1.4 million, paid 24 percent. “The top 400 have enormously high incomes even after the dip,” said Leonard E. Burman, director of the nonpartisan Tax Policy Center and a professor of public policy at the Maxwell School at Syracuse University. “It’s still over $200 million each. And yet they’re still paying at a lower rate.” Even in a bad year like 2009, the federal tax code at the very top is regressive, not progressive. Of course, the top 400 are a tiny fraction of the overall population (there were over 140 million returns filed in 2009). But I’ve always found them to be a useful window to the otherwise hidden world of the ultrarich. And if the tax code is perceived as unfair to the wealthiest citizens, is it any wonder that there’s widespread resentment at lower rungs of the prosperity ladder? It may seem surprising that some of the country’s richest people had a banner year in the depths of the recent recession, but recall that 2009 was a year that Wall Street paid itself big bonuses even after taking billions in government rescue money. And while the stock market bottomed in March of that year, it went on to rack up impressive gains. These were especially favorable conditions for nimble hedge fund managers. The I.R.S. doesn’t identify the members of the elite 400, but they surely include some top hedge fund managers. In 2009, the minimum income required to make the top 25 in the annual ranking of top-earning hedge fund managers by AR: Absolute Return+ Alpha magazine was $350 million. That suggests that all of them would have been among the top 400. Among those at the top of the rankings that year were David Tepper, founder of Appaloosa Management, who earned an estimated $4 billion; George Soros, who earned $3.3 billion; James Simons of Renaissance Technologies, who made $2.5 billion; and John Paulson, at $2.3 billion, who famously bet against mortgage-backed securities and cashed in on the housing collapse. Most of the income of hedge fund and other managers of investment partnerships — so-called carried interest — is treated as capital gains rather than earned income, and is taxed at a low preferential rate, which was 15 percent in 2009. This much-criticized loophole has survived repeated attempts to remove it, and was left untouched by the Obama administration’s 2009 tax increases. The success of hedge fund managers as well as others who bet on both market declines and gains may help explain why members of the top 400 still managed to report average net capital gains of over $92 million in 2009. That was significantly lower than the peak year of 2007, when net capital gains for the top 400 averaged $228.5 million. Still, it represented 46 percent of their income, which is much higher than for most people. This tiny sliver of taxpayers accounted for an astounding 16 percent of all capital gains in 2009, the highest percentage by far since the statistics started to be compiled in 1992. A similar phenomenon occurred in 2002 and 2003, after the dot collapse, when the share of all capital gains earned by the top 400 also hit what was then a record. This suggests that the superrich do relatively better — not worse — in bad years, and goes a long way toward explaining why their tax rates have stayed so low, since capital gains are taxed at a preferential rate. Dividend income for the superrich also hit a record in 2009, at an average of $10.6 million each, which accounted for 13 percent of the top 400’s total adjusted gross income. With interest rates hitting new lows, many superrich people apparently shifted more of their assets to stocks paying higher dividends. Dividend income is also taxed at a preferential rate. “They’re still paying much lower rates because their income is dominated by capital gains and dividends,” said Edward Kleinbard, a professor at the University of Southern California School of Law and a former chief of staff for Congress’s Joint Committee on Taxation. “As long as those forms of income are taxed at a preferential rate, the rich are going to benefit the most.” It remains a pillar of Republican orthodoxy that taxes on unearned income, especially capital gains, should be low, or even eliminated. But it was Ronald Reagan who as president championed taxing capital gains at the same rate as earned income. This was a crucial part of his 1986 tax reform, which lowered overall rates by broadening the tax base. “Capital gains have taken on a totemic significance to the Republicans,” said Professor Kleinbard. “But they’re just another way that you earn a return by investing capital in productive activity. There’s nothing magical about capital gains from an economic point of view.” The view that it’s fundamentally unfair to tax capital gains and other unearned income at preferential rates has been gaining traction, even among the superrich. This week, Pimco’s co-founder, Bill Gross, wrote in his November investment outlook, “The era of taxing ‘capital’ at lower rates than ‘labor’ should now end.” Mr. Gross, whose net worth is estimated at over $2 billion, wrote, “A fair economic system should always allow for an opportunity to succeed,” but pointed out that many of the superrich were fortunate to benefit from buoyant financial markets, low interest rates and a credit boom. “You did not create that wave,” he said. “You rode it. And now it’s time to kick out and share some of your good fortune by paying higher taxes or reforming them to favor economic growth and labor, as opposed to corporate profits and individual gazillions.” He noted that two fellow billionaires, Warren Buffett and the hedge fund manager Stanley Druckenmiller, recently advocated a similar approach. In the wake of the recent government shutdown, tax reform is back on the table, and should something significant result, it might emerge as a silver lining to the crisis. Representative Dave Camp, Republican of Michigan, and Senator Max Baucus, Democrat of Montana, have been working on a much-anticipated bipartisan approach to tax reform, and the House Budget Committee chairman Paul Ryan has said, “They agree on the fundamental principles: Broaden the base, lower the rates and simplify the code.” But, Professor Kleinbard said, “You can’t have reform if you can’t agree on what the problem is.” He continued: “There’s no agreement what federal tax revenues should be as a percent of G.D.P. Everyone agrees that tax expenditures” — the economists’ term for tax breaks — “are out of control, but do you eliminate or reduce those in order to increase revenues or only to reduce tax rates?” Most Republicans want lower rates and are adamantly opposed to higher revenue; most Democrats are willing to lower rates, but also want higher revenue. Professor Burman was also pessimistic. “Tax reform is difficult under the best of circumstances. After the bruising battle we just went through, it’s even more difficult,” he said. Still, he said he hoped some good ideas could emerge. “Maybe a few years from now, we’ll get a president for whom tax reform is a priority. That’s what happened in 1986. Those plans came out 10 years earlier.”
Posted on: Mon, 04 Nov 2013 01:14:18 +0000
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