Investing to Wealth

Filed under: Good news

New data from the IRS shows that the average tax rate paid by the richest 400 Americans fell by a third from 22.9% to 17.2% in the first six years of the Bush presidency, even as their average incomes doubled to $263.3 million.

But here's what's interesting: their incomes doubled and the tax rate only fell by 5.7% meant that, on average, they paid more in taxes.

Bush's capital gains tax cuts were a huge driver of the decrease in tax rates but Dean Baker, co-director of the Center for Economic Policy and Research in Washington, told Bloomberg that the rich "are realizing more of their gains due to the lower tax rate."

So by lowering the capital gains tax rate, Bush's plan spurred tax revenue generating asset sales that otherwise would have continued to compound tax-free. It isn't that the tax cuts spurred job creation and economic productivity, but they did at least generate some capital-gains tax revenue.

The fact that the rich paid a smaller percentage of their incomes is not especially problematic because they still generated more tax revenue. The IRS study is sure to generate many "Rich get richer" and "Tax rates for top earners decline" headlines but the reality is actually better than that.

 

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