The NYTimes just posted an article entitled The Little People Pay Taxes. Also see the original article, At the Helmsley Building, the Little People Pay the Taxes. I think it's fascinating that it's so easy to identify a super-rich segment of the U.S. population since The Helmsley Building has its own zip code, 10169. Comments on the NYTimes article exhibit the usual outrage at the rich. But, it seems that many comment-ers didn't understand that the low tax rate paid by those rich residents of the Helmsley Building is probably just a simple result of the tax system we've made for ourselves. Here are some facts to consider:
- The year considered was 2007, the end of a bull market (in both stocks and real estate). The "poor" and "middle class" tend to have little money invested in stock and real estate whereas the "rich" tend to have large amounts of money invested in such capital-gains-vehicles. Long-term capital gains are taxed at 15% for high incomes.
- State and municipal bond income is exempt from federal tax. However, this income is excluded from Federal AGI and so is irrelevant for the referenced tax rate calculation. (It is entered into line 8b of the 1040).
- AGI excludes business expense deductions. Martin A. Sullivan notes that Helmsley frequently wrote off home improvements as business expenses. While there are cases where such expensing is legitimate, it sounds like Helmsley's was not, as she served 18 months for fraud and tax evasion.
I wish more people would direct their outrage toward the convoluted tax system rather than at the people who manage to play it to their advantage. Here are some questions I think people should be asking:
- Why are long-term capital gains taxed at only 15%?
- Why is mortgage interest deductible?
- Why is state and municipality bond interest tax-free?
- Why do we allow the tax system to become more-and-more complex? The more complex it is, the more money you need to take full advantage of the system, and the less likely the IRS is able to enforce the law.