Emmanuel Saez is a Professor of Economics at the University of California in Berkeley, known for his income inequality research with Thomas Piketty who wrote the 2014 best seller, Capital in the 21st Century. Saez also directs the Center for Equitable Growth which promotes research and ideas for achieving economic growth that is fairly distributed.
A year ago, Saez added a 2012 income analysis to his work, and found an interesting example that illustrates how the rich react to higher income tax rates. Individuals who report income over $500,000 a year to the IRS make up about 0.5% of all taxpayers. They're the top half of the 1%. A substantial portion of their income is from capital gains. Farther up the income scale, at the 0.1% level, even more of the income reported to the IRS is from capital gains. It's not steady, predictable income like payroll wages and salaries. The dollar amounts fluctuate with the financial markets and economic conditions.
In 2012, capital gains income more than tripled for taxpayers who reported over $500,000 to the IRS. The stock market was up about 6%. Unemployment was stuck at 8.1% - 8.2% for most of the year. At the top of the income heap, capital gains tripled.
For Emmanuel Saez, it was a real life example and a text book lesson about inequality. He suggested that the wealthy, in 2012, realized capital gains (i.e. sold assets, which can result in a gain, or a loss, to be exact) to take advantage of low tax rates that were still in effect, and to avoid paying the higher capital gains rate that was scheduled to go into effect on January 1, 2013. His observation had no proof except for his logical reasoning.
The wealthy who avoided higher taxes by realizing capital gains in 2012, had income they would have otherwise received in 2013, or later. Just as there was more income than normally expected in 2012, there would be less than expected in 2013.
Here's an excerpt from the research paper Saez wrote:
Note that 2012 statistics are based on preliminary projections and will be updated in January 2014 when more complete statistics become available.
Note also that part of the surge of top 1% incomes in 2012 could be due to income retiming to take advantage of the lower top tax rates in 2012 relative to 2013 and after.
Retiming should be most prevalent for realized capital gains as individuals have great flexibility in the timing of capital gains realizations . . . Retiming of income should produce a dip in top reported incomes in 2013. Hence, statistics for 2013 will show how important retiming was in the surge in top incomes from 2011 to 2012.
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Saez was right. Income in the over $500,000 category fell 15% in 2013. Income in the over $2 million category fell 23%. The stock market was up 24% in 2013 and income at the top usually follows suit but not this time. A reaction against higher marginal rates and deliberate tax avoidant behavior brought about a notable departure from the norm.
Readers may not remember the higher taxes that went into effect January 1, 2013. If you ever wondered what was really behind the "fiscal cliff," here it is. The owners of commercial media outlets were throwing a tantrum over the raise in taxes in store for them for three solid months from November 2012 to January 2013. Here's why they were howling:
- The top income tax rate on realized capital gains and dividends increased from 15% to 23.8% in 2013.
- The top ordinary income tax rate increased from 35% to 39.6%.
- A payroll tax of 0.9% on top labor incomes was also added to improve Medicare funding.
- The top 0.1%'s effective income tax rate increased from 21.7% in 2012 to 26.1% in 2013, which was the first time in years that the top end of the scale aligned with progressive taxation.
The tables below summarize the 3-year income inequality trend for the top 0.1%, top 1%, top 10%, top 20%, and bottom 80%. |