In a previous blog, I mentioned that 42% of the total income taxes in America are paid by the top 1% of  income earners even though this group generated less than 25% of the total personal income.   High income however does not mean high net worth and vice versa.  In spite of this our so-called leaders in Washington are deliberately ignoring the distinct difference between income and wealth. 

 Both conservatives and liberals know that those who are rich (millionaires, multimillionaires, decamillionaires, billionaires) have options.  What if you are very wealthy?  Given the proposed income tax on realized income, you may decide not to realize any income!  You can live off of your assets or you can move your family and your assets to another country.  Like it or not, the really wealthy people in this country are a key component of our capital based economy. 

I estimate there will be about 20,000 households this year that have an income of $10M or more (most are also wealthy), but there won’t be anywhere near 20,000 next year if they are threatened with a substantial tax increase, especially a tax on capital gains.  As a result, increased taxes on these households may actually reduce the total number of dollars the government collects.

On Oct. 31, 2010, an economist was interviewed for CBS’s 60 Minutes program.  He suggested that the government impose a one time wealth tax of 15% on the $40 trillion held by wealthy households in America. Can you imagine the economic calamity that would take place if people had to liquidate $6 trillion (or the equivalent of 3/4s of the entire adjusted income produced by households in a year) of family businesses, farms, common stock, municipal bonds, real estate . . . on April 15th?  It is more than likely that the values of these investments would plummet and cause chaos in the financial markets. 

In The Millionaire Next Door I profiled a billionaire worth $2.4 billion.  His adjusted gross income for one year was $230M.  His federal personal income tax was only $19.2M or the equivalent of only 0.8% of his wealth and only 8.5% of his realized income in tax.  “He did so by heavily investing in tax free municipal bonds, tax sheltered real estate, and stocks with unrealized gains.”  

Our system must by definition give favorable tax rates to those who generate realized income from investments.  In contrast, those with considerable earned incomes (salaries and wages) will be the ones paying a significantly greater proportion of their income to the federal coffers. 

Take a look at those who have annual adjusted gross incomes of between $200,000 to under $500,000.  Fully 61% of the total income for this group is generated from salary and wages.  As a side note, for those in the $100,000 to under $200,000 category, it is 75%.  Now let’s look at households which have adjusted gross incomes of $10 million or more.  Only 16% of their income comes from salary and wages.  And for the top 400 income producers [with an annual adjusted gross income of $260M] in America it is only about 7%.  By the way, they paid on average $45M in federal income tax! 

 As I wrote in The Millionaire Next Door (mimicking Yogi Berra), “. . .you can’t be wealthy, your income is too high.”