The IRS recently released the Spring 2009 Statistics of Income Bulletin. Included in this issue of the quarterly report is information about “high income” tax filers with income more than $200,000. Congress mandated an annual analysis of these filers in the Tax Reform Act of 1976 and it was in that act (33 years ago) that $200,000 was defined as “high income.”
In 2006, the year for which the IRS is providing an analysis, there were 4.06 million individual returns with adjusted gross income (AGI) of $200,000 or more, roughly 3% of all returns filed with the IRS. This is an increase from 3.6 million in 2005 and 3.1 million in 2004.
In constant dollar terms, $200,000 in 1976 dollars is equivalent to $708,612 in 2006. The IRS reports there were 569,893 returns with adjusted gross income this high and the share of returns above this threshold has grown from 0.05 percent in 1977 to 0.41 percent in 2006.
President Obama has drawn much attention to the $200,000 threshold. In the Treasury Department’s description of the President’s most recent tax and budget proposals, they describe the proposal to raise the statutory marginal rate for singles earning over $200,000 (couples earning over $250,000), reinstate the phase-out of itemized deductions for singles earning over $200,000 (couples earning over $250,000), reinstate the personal exemption phase-out and raise the capital gains and dividends tax rate to 20 percent for these same taxpayers.
In addition, President Obama has expressed a commitment to ensuring that taxpayers below this threshold face no tax increase. What the SOI data demonstrates is that the tax increases that President Obama is proposing will fall on roughly 3 percent of taxpayers. With deficits running at $1 trillion a year—and given that a borrowed dollar today will be a tax increase for a future generation—a commitment to increase taxes only on these “high income” taxpayers suggests that future “high income” taxpayers face even greater tax risks.
While it may seem odd that Congress chose not to index their 1976 definition of high income to inflation, recall that at the time nothing in the entire income tax code was inflation-indexed. That change did not occur until The Economic Recovery Tax Act of 1981. What certainly seems surprising is that President Obama seems not to have indexed his definition of high income since 1976 either.