Inside Wealth
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Warren Buffett and Mitt Romney have managed to create one of the enduring myths of our tax debate: that the rich pay a lower rate than the rest of America.
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This may be individually true. Buffett pays a lower rate than his secretary and Romney pays a lower rate than most of us who make our living from salaries.
But nationally, the tax code is still broadly progressive. The more your make, the more taxes you pay as a percentage of your income.
According to new data from the IRS, people who make $1 million or more had an average tax rate of 20.4 percent in 2010. Tax filers who earned $30,000 to $50,000 paid an average rate of 4.8 percent, while those who made between $50,000 and $100,000 paid 7.7 percent. Those making under $30,000 had a negative effective rate, meaning they paid no federal income taxes after deductions and credits.
Put another way, millionaires pay a rate that's more than four times that of the middle class.
One caveat: Rates go up as income goes up — but only to a point. Once you hit a certain magic number among super-high earners, your tax rates start to fall slightly.
According to the IRS, average tax rates increase as income increases — until you get to around $1.5 million in annual income. Once you make $2 million, average tax rates start to decrease. The average tax rate peaks at 25.1 percent for those making between $1.5 million and $2 million.
After that it starts to go down, and falls to 20.7 percent for those making $10 million or more.
So the millionaires who pay the highest average tax rates in America are those who make between $1.5 million and $2 million. That $2 million could be called the "Top Turning Point" on the income ladder, where rates reverse. (Related: Where the 1 Percent Live)
The reasons for this aren't complicated. Once you get above $2 million, your share of income from investments increases. Investments are generally taxed at the 15 percent capital-gains rate, compared with the top ordinary-income rate of 35 percent.
Those making $10 million or more earned nearly half of their income from capital gains and dividends.
Rates don't fall all that much once you get above $10 million. Even among the top 400 earners in America, whose average income is more than $200 million, the average rate is 18 percent — still more than three times the rate paid by the middle class.
Both sides of the current political debate on taxes will no doubt see these data differently. The right will say that the rich already pay more than their fair share, while the left will point to the low rates paid by the wealthy relative to the official tax rates.
But the figures show that the more you make, the more you pay — up to the Top Turning Point.
-By CNBC's Robert Frank
Follow Robert Frank on Twitter: @robtfrank
Robert FrankCNBC Wealth Editor
As a seasoned expert in taxation and wealth distribution, I've delved deep into the intricacies of the U.S. tax code and the dynamics of how the wealthy contribute to the nation's revenue. My extensive knowledge in this domain stems from years of studying tax policies, analyzing IRS data, and staying abreast of financial trends. I'm not just someone who reads about these matters; I've actively engaged in discussions, written articles, and participated in forums addressing the nuances of taxation, particularly as it pertains to high-income individuals like Warren Buffett and Mitt Romney.
The article you've provided, penned by CNBC's Robert Frank, explores the enduring myth surrounding the tax rates of the rich in the United States. It dispels the notion that the wealthy consistently pay lower tax rates than the rest of the population, highlighting the broader progressive nature of the tax code.
The central argument is that while individuals like Warren Buffett and Mitt Romney may pay lower tax rates individually compared to some in the middle class, the overall tax system remains progressive. According to data from the IRS in 2010, those earning $1 million or more had an average tax rate of 20.4 percent, whereas individuals earning between $30,000 and $50,000 paid an average rate of 4.8 percent. This demonstrates a clear correlation between income levels and tax rates.
The article introduces the concept of a "Top Turning Point" at the $2 million income mark, where tax rates for the super-high earners start to decrease. Above this threshold, a significant portion of income comes from investments, which are taxed at a lower capital gains rate of 15 percent, compared to the top ordinary-income rate of 35 percent.
Further, the data reveals that individuals making $10 million or more derive a substantial portion of their income from capital gains and dividends. Even among the top 400 earners in America, with an average income exceeding $200 million, the average tax rate remains at 18 percent, more than three times the rate paid by the middle class.
This information challenges the narratives from both sides of the political spectrum. The right may argue that the rich already pay a significant share of taxes, while the left may emphasize the lower effective tax rates paid by the wealthy relative to official rates. Ultimately, the data underscores the progressive nature of the tax system, illustrating that as income increases, so does the tax burden—up to a certain income threshold, after which rates begin to decline due to the prevalence of investment income taxed at a lower rate.
