Recession Reduced Top 1% Income While Raising Tax Rate

Before-tax income for the top 1 percent of U.S. households fell by 36.3 percent from 2007 to 2009 while their federal tax rate increased to 28.9 percent from 28.3 percent, according to a report by the Congressional Budget Office.

The income gap between the top 1 percent and the rest of the U.S. population narrowed during the recession. In 2009, the top 1 percent captured 13.4 percent of before-tax income, down from 18.7 percent in 2007. That trend will probably reverse as the economy recovers, said Alan Viard, a resident scholar at the American Enterprise Institute in Washington, which supports policies promoting individual opportunity.

“I’m pretty sure it would be a mistake to think that’s a change in the trend,” he said. “I do think that this is a business-cycle-related phenomenon.”

The shifts in income distribution and tax rates were affected in part by changes in capital gains received by taxpayers. Capital gains reported by all taxpayers decreased by 75 percent in the period, the nonpartisan CBO said in the report released today. That means a greater share of earnings reported by high-income households were taxed at ordinary income tax rates of up to 35 percent rather than the 15 percent capital gains rate.

Before-Tax Income

Because of the lower incomes, the share of federal taxes paid by the top 1 percent dropped to 22.3 percent from 26.7 percent. In 2009, the average before-tax income of someone in the top 1 percent was $1.2 million, down from $1.9 million two years earlier.

President Barack Obama and congressional Republicans are engaged in an election-year debate over whether to extend expiring tax cuts for the top 2 percent of taxpayers.

Obama says married couples making more than $250,000 should see their tax rates return to pre-2001 levels, while Republicans want to extend for everyone the tax cuts first enacted under President George W. Bush.

The report said the combination of lower income and tax cuts enacted to fight the recession drove down the average federal tax rate for the population.

The average rate for 2009, including payroll, income, corporate and excise taxes, was 17.4 percent, down from 18 percent in 2008 and 19.9 percent in 2007.

‘False Claims’

“However much Republicans try to perpetuate false claims, the facts speak for themselves: Tax rates have never been lower than under President Obama,” said Representative Sander Levin of Michigan, the top Democrat on the House Ways and Means Committee, in a statement. “Instead of asking the very wealthiest to contribute to deficit reduction, Republicans are doubling down on the Bush tax cuts by proposing massive new tax breaks for the very wealthy.”

Republicans pointed to the income declines highlighted in the report and said lower tax rates during a recession weren’t a positive economic indicator.

“Under President Obama and the Democrats who control Washington, Americans have lost their jobs, seen their wages decline, and fallen into lower tax brackets,” Michelle Dimarob, a spokeswoman for Representative Dave Camp, a Michigan Republican and chairman of the Ways and Means Committee, said in a statement. “A weak economy and fewer jobs is nothing to cheer about,” she said.

Since 2009, income has grown slowly for all U.S. households while growing faster for high-income households, according to the report.

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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