Like most Americans (though not Mitt Romney, who got an extension), I filed my 2011 tax returns this week and paid my five layers of income tax: federal, state, local, self-employed and something called the metropolitan commuter tax (even though I live in New York City and don’t commute). When I first looked at the returns, I was incredulous.
President Obama paid 24.6 percent in combined federal and state income tax for 2011 on adjusted gross income of $789,674, which the White House disclosed last week.
My adjusted gross income was higher than in 2010. Yet my overall tax rate went down. My alternative minimum tax also went down. Wasn’t the opposite supposed to happen — the more you make, the higher rate you should pay?
I called my accountant to double-check, but my returns were correct. This perverse outcome proves that what I’d already discovered about the ultrarich also holds true for people who are far from the million-dollar bracket: our tax code isn’t progressive. It’s not even flat. For people like me — and I assume there are millions of us — it’s regressive. For many people, the more you make, the lower the rate you pay.
Rest assured that I’m still paying a whopping amount of tax: 33 percent of my adjusted gross income in 2011 as compared with 37 percent the previous year. That’s far higher than Mitt Romney’s 13.9 percent (for 2010) on his more than $21 million in income or even President Obama’s 24.6 percent in combined federal and state income tax for 2011 on adjusted gross income of $789,674, which the White House disclosed last week. I’m also paying a lot more in total tax this year than last, even though the rate is lower.
But what really galls me isn’t how much I have to pay: it’s the unfairness of it. Some have argued that when it comes to the tax code, fairness isn’t the main issue. They contend that increasing rates for the ultrawealthy doesn’t raise all that much money and doesn’t make much of a dent in the federal deficit.
By that logic, we should encourage everyone to become a billionaire by freeing the super-rich from taxation altogether. In the name of tax efficiency, it would make sense to increase taxes on people in the $100,000 to $500,000 category, because that’s where the real money is. This group already pays 44.9 percent of total federal income tax even though they account for only 20.2 percent of total returns, according to the most recent data from the Internal Revenue Service.
That strikes me as absurd. Striving for fairness is not only fundamental to the American experience, but should be the starting point for any tax reform.
So how did I, a journalist as opposed to a private equity manager, manage to increase my income while lowering my tax rate and my alternative minimum tax?
The main culprit is the same thing that benefits the ultrarich and represents the single biggest preference item (i.e., loophole) in the tax code: preferential capital gains rates. And I discovered that the alternative minimum tax, or A.M.T., makes capital gains even more preferential than I’d realized.
When I joined The New York Times last year to write this column, I sold stocks to comply with the newspaper’s conflict-of-interest policies, including two of my longest-held positions that both had large unrealized gains — Google and Apple. Capital gains accounted for 26 percent of my adjusted gross income in 2011. The year before, I had a loss.
Even here, the tax code favors some rich people over others. People who have to divest stock to join the executive branch of the federal government can defer paying capital gains tax as long as they roll the proceeds into other investments. When two former Goldman Sachs executives, Henry M. Paulson Jr. and Robert E. Rubin, left the private sector and had to divest their presumably huge holdings of Goldman and other stocks to comply with federal conflict-of-interest policies, they could do so without any immediate tax hit.
Still, even for ordinary citizens like me, capital gains are taxed at a low maximum rate of 15 percent, which helped lower my overall rate. And I was amazed to discover that unlike other deductions, like state and local taxes and personal exemptions, the tax preference for capital gains is not added back when calculating the A.M.T.
That wasn’t the case when the A.M.T. was started in 1970. On the contrary, as the largest single tax break benefiting the rich and a major reason the A.M.T. legislation was enacted in the first place, the capital gains preference was added back when calculating the A.M.T. But as a result of the 1986 Reagan tax reforms, in which capital gains were taxed at the same maximum rate as earned income, capital gains lost their preferential status. Since there was no preferential treatment, there was no need to add anything back when calculating the A.M.T.
Then, over the years, the tax on earned income went up (currently a maximum rate of 35 percent) and the tax rate on capital gains was cut, reaching its current maximum of 15 percent as part of the Bush-era tax cuts, which restored the preferential treatment for capital gains. Nonetheless, capital gains were not restored when calculating the A.M.T.
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