Tax Analysts Blog

Tax Rates for Millionaires Continue to Fall

Posted on Dec 7, 2009

Households with incomes over $1 million paid income tax equal to 22.1 percent of their adjusted gross income in 2007. This is down from 23.4 percent in 2004. And from 30.8 percent in 1996. See the chart below. The 2007 data were just released by the Statistics of Income Division of the IRS.

The main reasons for this decline are: the May 7, 1997 cut in the capital gains rate to 20 percent; the 2001 Bush cut in tax rates (scheduled to expire at the end of 2010); the reduction in the capital gains tax rate from 20 to 15 percent in 2003; and the 15 percent rate available for qualified dividends starting in 2003. In addition to these statutory changes, the decline in the rate over the last few years can be attributed to an increasing share of millionaire income coming in the form of capital gains and dividends.

This declining trend is likely to reverse itself shortly. When data becomes available for 2008 and 2009 the rate will probably increase because the size of capital gain realizations typically follow stock prices. The rate will also rise in 2011 if, as President Obama intends, Congress agrees to let the Bush tax cuts expire for incomes over $250,000. This would restore the top individual rate to 39.6 percent and the capital gains rate to 20 percent.

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