One of the cornerstones of American income tax policy is that taxes are progressive. People who make more money devote a higher share of their income to federal income taxes than people who make less money. That allows for a redistribution of wealth that lowers inequality.
That’s how it’s supposed to work, at least.
But The Washington Post reports new data out this spring from the IRS gives us a closer look of how the income tax works at the pinnacle of the income distribution—not just the top 1%, or even the top 0.1%, but among the rarified realm of the 0.01% and even the 0.001%. Those latter two categories are new in the IRS report this year, reflecting a growing public interest in the ultra-wealthy and their effects on the economy.
The IRS found that as you go from being merely wealthy (the 1%) to super-duper wealthy (the 0.001%), your average federal income tax rate actually goes down. In other words, the progressivity of the federal income tax starts to fall apart at the upper reaches of the income distribution.
The data shows average tax paid across the top half of American society by income—the top 50% of earners—was 14.33% in 2012, according to the IRS. Climbing up the income ladder the tax rate increases to 22.83% for the top 1% of earners. But when you start to slice that group further , all the way up to the top 0.001%, the effective tax rate falls steadily to 17.60% at the very top.
In other words, a person in the top 0.001% income bracket, who would have an adjusted gross income of at least $62 million, pays the nearly same effective tax rate as somebody in the top 20% bracket who makes $85,000 in adjusted gross income.
