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The income earned by the top 1% of United States taxpayers has declined for the second year in a row while their average tax rate has increased, according to a study by the Tax Foundation (TF).
The TF's analysis is based on new data from the Internal Revenue Service on individual income taxes for the calendar year 2009, and shows that the average federal tax rate for those reporting at least USD344,000 in income has increased from 22.5% in 2007 to 24.0% in 2009, while the average income for the top 1% has declined from USD1.4m to USD1m over the same period.
It pointed out that the amount of individual income tax paid steeply declined in 2009 by USD166bn, twice the decline from 2007 to 2008, and that, nationally, average effective income tax rates were at their lowest levels since the IRS began tracking them in 1986. The average tax rate for returns with a positive liability went from 12.2% in 2008 to 11.1% in 2009.
"During a time of economic downturn, we expect to see significant changes in both total income reported and the share of taxes paid by those with the highest incomes," said TF economist David Logan. "Unlike middle-income wage-earners whose incomes and tax liabilities are fairly steady, high-income people tend to realize significant capital gains that fluctuate wildly with the economy, causing their income tax liabilities to fluctuate as well."
The TF discovered that, in 2009, the top 1% of tax returns earned 16.9% of adjusted gross income and paid 36.7% of all federal individual income taxes. In 2008 those figures were 20.0% and 38.0%, respectively. Each year from 2005 to 2007, the top 1%'s constantly growing share of income earned and taxes paid set a record. The 2008 reversal of this trend continued in 2009.
The study also looked at the very highest earners, the top 0.1% of tax returns. In 2009, those 138,000 tax returns accounted for nearly 7.8% of adjusted gross income earned (down from almost 10% in 2008), and they paid around 17% of the nation's federal individual income taxes (down from 18.5% in 2008).
"The very highest income group actually has a lower average effective income tax rate than the rest of the top 1% of returns because these extremely high-income returns are more likely to have income from capital gains and dividends, which are typically taxed at lower rates," continued Logan.
He added, however, that "it's worth pointing out that in the case of capital gains and dividends, income derived from these sources has already been taxed once by the corporate income tax, which is not included in the current study, meaning the average effective tax rate numbers can be somewhat misleading."
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