The wealthy may pay more taxes now -- but their wealth goes further, too

As of Jan. 1, the wealthiest Americans -- those in the top 1 percent -- will have to pay more in federal income taxes. About 6 percent, according to the Tax Policy Center.  That’s the highest rate the 1 percent has paid since 1979. But federal income tax is just one part in the incredibly complicated tax system. Overall, the 1 percent are actually paying less in taxes than they were in ‘79 and the 1 percent looked very different then, than they do today.

Let’s start with the obvious differences. If you were a 1 percenter in 1979 you didn’t have a cell phone or an iPod. You probably had a tape deck that you used to listen to the number one album of the year, “52nd Street,” by Billy Joel. I would venture to guess that your favorite song was “Big Shot.”

From now on I will refer to 1 percenters as big shots. The average income for a 1979 big shot adjusted for inflation was about $413,000.

Jon Bakija was one of the authors of a paper titled “Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality: Evidence from U.S. Tax Return Data." He says,  “The Congressional Budget Office estimates that all fed taxes were about 35 percent of income for people in the top one percent of the income distribution in 1979.”

That’s the same as the new rate for big shots in 2013. Today the average income of a big shot is $1.4 million.

So let’s say we bring a 1979 big shot into the present to buy a house  in one of the 10 wealthiest zip codes in 2013 America.

If the 1979 big shot follows the golden rule and doesn’t spend more than 30 percent of  gross income on the monthly mortgage payment, it would take the 1979 big shot 30 years to pay off the average house in one of those wealthy neighborhoods. It would take today’s big shot about nine years.

So why are big shots so much wealthier today? Partly it has to do with the people in the 1 percent who work in finance. “You know the Wall Street types the hedgefund types,” says Steve Kaplan, who teaches at Chicago Booth.

Statistically speaking, the percentage of people working in finance hasn’t changed much in the last 35 years. But those big shots who work in finance are earning in 3.5 times more of the nation’s income than they were in 1979.

And much of that income is not subject to federal income tax. When you factor all the taxes other than income -- like payroll, state and local -- the wealthiest 400 big shots in America today pay about 16 percent taxes on their income. Using those same calculations the average American pays 22 percent.

About the author

David Weinberg is a general assignment reporter at Marketplace.

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