California Forum

Yes, rich truly do get richer

The Associated Press

At first glance, it looks as if Americans’ incomes grew robustly in the years 2003 through 2012. Total income reported on tax returns, adjusted for inflation, rose almost 18 percent, which after two decades of analyzing income data I know looks pretty good.

So why do so many Americans report economic distress?

Here are some eye-popping facts I distilled from a new government report on tax returns filed in 2003 and 2012:

▪ Just 1,361 households enjoyed 8.5 percent of the total increase.

▪ During the years 2003-2012, the income of those 1,361 households rose from an average of $86 million to $161 million, per income tax filer, per year.

▪ As their income increased, their income tax burden fell by 3 cents on the dollar to 17.6 percent of their income.

▪ The top 1 percent, or 1.36 million taxpayers, enjoyed more than half of all the increased income in America.

▪ Average income declined for 95 percent of households.

▪ Tax rates rose for those on the 50th to the 99th rungs of the income ladder, up by close to a penny on the dollar.

▪ Income for the bottom half of Americans fell by 18 percent to an average of $14,755.

▪ Tax rates for the bottom half fell, too, but not much: a fifth of the penny on the dollar.

That first figure, the one that refers to top the 1,361 households, shows that just one in 100,000 households got every 12th dollar of all the increased income in America between 2003 and 2013. If that has your mind reeling, you should know that it comes right from reports we all sign under oath when we file our tax returns.

No one knew just how well those at the very top were faring until now, because the IRS used to count only two very high-income groups, the top tenth of 1 percent and the top 400 tax returns.

The new report added the top 100th of 1 percent and 1,000th of 1 percent, enabling my analysis.

Think about how vast America is, from Key West, Fla., to Nome, Alaska, from Maine to Hawaii. Most people would never have heard of a town with just 1,361 households, a speck too small for most maps.

And yet an economic community that size enjoyed a much thicker slice of the national income pie, while the vast majority of people had to get by on a smaller slice of income pie.

When we get the data for 2015, I am confident it will show a much larger share of increased income going to the very top of the top. While politicians and pundits talk in vagaries about ideology and politics, our Congress slowly but steadily builds an economic, legal and tax structure that takes from the many to benefit the few.

Here’s another fact: Income at the very top grew even more than what the tax return data show. Under little-known rules set by Congress, a growing number of super-rich Americans only report a portion of their income as they earn it.

Jeffrey Immelt, the General Electric chief executive, is one such example. He made more than $37 million in 2014, as reported in filings to the Securities and Exchange Commission. The commission requires companies to calculate pay based on what it costs shareholders. But Immelt’s W-2 report, used to calculate his income taxes, showed income of $9.6 million, GE disclosed this spring.

Immelt and thousands of other top executives are pikers, though, compared with managers of hedge funds and private equity funds. They legally defer most of their earnings into their funds, paying their taxes years or even decades later.

Meanwhile, they live lavishly by borrowing from the deferral accounts at interest rates of less than 2 percent, less than a tenth of the tax rate on long-term capital gains.

Imagine how much better off you would be if Congress would let you keep the taxes deducted from your paycheck, allowing you to invest it and then sometime in the distant future pay your taxes without any adjustment for inflation or interest.

Real estate professionals who work full time, defined in the tax code as 15 hours a week, get an even better deal from Congress.

Most Americans can offset no more than $25,000 of salaries, business profits, pensions and other income with depreciation losses from real estate.

But there’s no limit for real estate investors. So if your income is $1 million and depreciation on your rental properties is $1 million, you live tax-free until you sell your property. Donald Trump first did this in 1978, I revealed in my book, “Temples of Chance.”

In 2012, nearly 1.9 million taxpayers reported negative income and thus paid no taxes, with some minor exceptions. You might think they had fallen onto hard times. But at least 235,000 of them earned wages and other income of more than $200,000.

The data for 2015 will show even more growth going to the very top because that is the way it must be under little-known rules Congress has put in place one clause, one amendment, one statute at a time while hardly anyone pays attention to what the politicians do instead of what they say.

David Cay Johnston, a Pulitzer Prize-wining investigative reporter, law school lecturer and hotel management company founder, edited the anthology, “DIVIDED: The Perils of Our Growing Inequality,” out this month in paperback. His most recent piece for The Bee, “Tax hikes didn’t kill jobs,” appeared on July 20, 2014.