How the Average American household making $52,000 a Year is Coping while the Ultra Rich Pull Away. Examining the new Numbers on Income Distribution in the United States.

Now that tax season is rolling around average Americans are examining the implications of a difficult 2009 economy.  Yet the data on typical families shows that many Americans are falling further and further behind in this current economy.  It is sobering to realize that over 14 million American households live on $15,000 or less per year.  These statistics usually get lost in the noise of protecting the wealthy class with their generous tax breaks.  But when we examine the data even further we realize that even those with solid incomes of $100,000 to $200,000 per year are feeling the tax burden pinch with changes in the alternative minimum tax (AMT).  What we can gather from the data is the small elite, the top 1 percent have managed to setup a structure that manages to use the rest of the population to finance their adventure.  First, let us breakdown the numbers:

75,000,000 U.S. households (66 percent of all households) live on $75,000 a year or less.  54,000,000 live on $50,000 or less a year (47 percent of all households).  This is where the average American is financially in today’s economy.  And most of this money comes from a job that pays a weekly or monthly paycheck and not some dividend check from a trust fund.  You always hear that the top “x percent” pay all the taxes.  Well the burden is now falling squarely on people that make $200,000 or less a year.  Just run the numbers for a $50,000 household:

After taxes a tax payer here in California is taking home about $2,900 per month.  The notion that the very rich pay all the taxes is really a misnomer.  They also get the most breaks.  And the distribution is even more skewed.  It should be said that most of the taxes are paid by those under the top 1 percent umbrella.  But once you get over that hurdle, the numbers become more interesting.

The extremely wealthy are the people getting all the perks of the current system; accounting gimmicks, offshore accounts, capital gains tax rates that are favorable, and other items like carryover losses that most Americans never even deal with.  The bailouts, the tax breaks, and items that specifically only improve their bottom line.  First, let us move up the financial ladder:

In fact an income of $100,000 or more a year puts you in the top 15 percent of wealth earners in this country.  Looking at 2006 IRS records shows that an income of $108,904 would put you in the top 10 percent while an income of $388,806 would put you in the top 1 percent.  And here is the real break.  Because tax breaks become more generous for the ultra rich especially when a large number live off of capital gains and only pay 15 percent in taxes on this while working grunts have to pay every imaginable tax on the books.  Let us run the numbers for a family making $100,000 in California:

A single filer in California making $100,000 a year will take home roughly $5,000 per month.  They are paying in taxes nearly 40 percent per year.  But take for example someone that is taking in $100,000 a year in capital gains.  The W-2 worker is paying roughly $40,000 in taxes per year while the capital gains earner is paying $15,000 per year.  That is a significant difference but this is how the ultra wealthy protect their money.  This argument that all these gains are earned through the free market belies the fact that right now the vast majority are implementing bailout policies that are protecting the mega rich.  Why else do you think Wall Street is jumping up and down because of this 70 percent stock market rally while most Americans still have little faith in the economy:

Funny how only 12 percent actually think the economy is excellent or good.  Probably the people that have their money loaded up in Wall Street.  However the vast majority still see the economy as performing poorly because it is.  The unemployment and underemployment rate is up to 17.3 percent and would be higher if we calculated the numbers more accurately.  For example, we have people that are simply dropping out of the work force and no longer impact the headline rate.  So for many Americans, the recession is still dragging them further into a slump.

And this observation is not limited just to the facts.  Take a look at some analysis (a 2005 article before the bust):

“(NY Times) The Times analysis also shows that over the next decade, the tax cuts Mr. Bush wants to extend indefinitely would shift the burden further from the richest Americans. With incomes of more than $1 million or so, they would get the biggest share of the breaks, in total amounts and in the drop in their share of federal taxes paid.

One reason the merely rich will fare much less well than the very richest is the alternative minimum tax. This tax, the successor to one enacted in 1969 to make sure the wealthiest Americans could not use legal loopholes to live tax-free, has never been adjusted for inflation. As a result, it stings Americans whose incomes have crept above $75,000.

The Times analysis shows that by 2010 the tax will affect more than four-fifths of the people making $100,000 to $500,000 and will take away from them nearly one-half to more than two-thirds of the recent tax cuts. For example, the group making $200,000 to $500,000 a year will lose 70 percent of their tax cut to the alternative minimum tax in 2010, an average of $9,177 for those affected.

But because of the way it is devised, the tax affects far fewer of the very richest: about a third of the taxpayers reporting more than $1 million in income. One big reason is that dividends and investment gains, which go mostly to the richest, are not subject to the tax.”

And this is exactly what we saw in the following five years and are still seeing.  Republicans and Democrats alike seem destined to protect this elite group.  Hedge fund gains and Wild West gambling on Wall Street allowed the ultra rich to pull away from the average American pack while not even paying their fair share in taxes.  This is still going on by the way since the system also allows carryover losses in stocks and wonderful loopholes to game the system.

“Another reason that the wealthiest will fare much better is that the tax cuts over the past decade have sharply lowered rates on income from investments.

While most economists recognize that the richest are pulling away, they disagree on what this means. Those who contend that the extraordinary accumulation of wealth is a good thing say that while the rich are indeed getting richer, so are most people who work hard and save. They say that the tax cuts encourage the investment and the innovation that will make everyone better off.

“In this income data I see a snapshot of a very innovative society,” said Tim Kane, an economist at the Heritage Foundation. “Lower taxes and lower marginal tax rates are leading to more growth. There’s an explosion of wealth. We are so wealthy in a world that is profoundly poor.”

Of course that was their impression before they realized all the wealth of the average American was merely debt financed gains pushed out by Wall Street.  It was all hat and no cattle.  The real wealth, financial wealth is controlled by the top 1 percent who control the levers of 42 percent of our nation’s financial wealth.

“But some of the wealthiest Americans, including Warren E. Buffett, George Soros and Ted Turner, have warned that such a concentration of wealth can turn a meritocracy into an aristocracy and ultimately stifle economic growth by putting too much of the nation’s capital in the hands of inheritors rather than strivers and innovators. Speaking of the increasing concentration of incomes, Alan Greenspan, the Federal Reserve chairman, warned in Congressional testimony a year ago: “For the democratic society, that is not a very desirable thing to allow it to happen.”

And this is an enormous issue of framing the argument with phony data.  “Poor people don’t pay taxes.”  Actually they do.  A poor person who buys a $100 TV here in California pays the same 9.25% sales tax as the wealthy person.  They also pay into the Social Security and Medicare system.  But again, the uber wealthy only like to look at Federal tax rates and frame the issue to their own liking.  What about the hidden tax of inflation that has pushed up the cost of food and education?  Remember that estate tax debate?  Most of us have heard of it but this turns out to be an incredibly narrow issue that only helps the ultra rich:

Source:  IRS

So we had a major debate for 50,000 tax filers in a nation with over 113,000,000 households?  The top 1 percent are betting on you not doing the numbers.  They want to keep the game going because it is rigged in their favor.  The banking bailouts are largely a transfer of wealth to those who least need it.  Until we get this thing under control, the average American is going to feel the pinch of the economy deeper and deeper.

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