U.S. Markets closed

Guess What: The 1 Percent Are Earning Less and Paying More

Rick Newman
Senior Columnist
The Exchange
Guess What: The 1 Percent Are Earning Less and Paying More

The rich are getting richer. The rest of us aren’t. It’s become a defining theme of the 21st century.

Except for one thing: The wealthiest Americans faced a bigger tax hike in 2013 than everybody else, and endured a bigger hit to take-home pay as well. That alone won’t do much, if anything, to offset a host of challenges facing lower- and middle-class Americans. But it’s the first big shift in tax and income trends that have favored the wealthy over everybody else for at least a decade.

“This is the result of a conscious policy by the Obama administration to increase tax rates on upper-income taxpayers,” says Ben Harris of the Brookings Institution, a former White House economist under Obama. “This is exactly what was intended to happen.”

The new data come from a Congressional Budget Office report that analyzes income reported to the IRS in 2010 and makes projections about how those numbers are likely to change in 2013. The changes are likely to be significant because of tax hikes that went into effect at the start of this year. Some of those tax hikes hit ordinary people, but others applied only to the wealthy, including higher taxes on investment income meant to help pay for the Affordable Care Act, otherwise known as Obamacare.

The net result is a rising tax burden on the wealthy after years of declines. Here’s a chart showing the federal tax burden on different income groups since 1979 (which includes both payroll and income taxes), with the dots at the right representing projected rates once final data for 2013 are available:

Of course, just because taxes on the wealthy have gone up, that doesn’t mean they’re at the “right” level — something people will probably argue about until the end of humanity. What seems clear, however, is that taxes on the 1 percent are heading back toward historical norms. Their 2013 tax burden, in fact, will be the highest since 1997.

For everybody else, taxes have ticked up in 2013, but are still relatively low. “For most income groups,” the CBO says, “average tax rates under 2013 law are projected to remain below those in 2007, the year before the recession began, and well below those for most of the past three decades.”

Incomes are the mirror image of taxes, which is why they’re expected to decline by a greater percentage for 1 percenters than for everybody else. Because of this year’s tax hikes, after-tax incomes, on average, are likely to fall 1.6% for the overall population. For the 1 percent, they’ll fall 5.9%.

The wealthy can mostly afford it, of course, while even a small dent in the incomes of people living day-to-day can really hurt. And nobody will shed a tear for the 1 percent, whose average income, adjusted for inflation, has risen by perhaps 150% since 1979. For the bottom tier of earners, average incomes are up barely 15% during that time. No, that figure isn’t missing a 0.

Plus, the wealthy still benefit from a porous tax code that lets tax experts exploit loopholes to lower their wealthy clients' tax bill. Efforts to close such loopholes and clean up the tax code seem to have died amid the acrimony in Washington.

Still, before this year’s tax hikes, Obama said frequently that it seemed fair for the wealthy to pay “a little bit more” in taxes. Now they have. He could still try to get them to pay a little more than a little bit more, but the Washington budget battles may now pivot in a new direction. “This shifts the budget debate away from taxes and toward spending,” says Harris.

Higher tax revenues have been one reason the federal deficit has fallen to a projected $560 billion in the current fiscal year, down from more than $1 trillion each year from 2009 to 2012. That’s still a big hole, however, so the pressure remains to align government spending more closely with revenue. The wealthy may not be off the hook yet.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success . Follow him on Twitter: @rickjnewman.