The Plight of the Lower Uppers

The top one percent is a convenient way of referring to the super-rich. But it can be quite misleading, sometimes dangerously so. It’s actually a much smaller group, roughly the top one-thousandth, or .1%, that lies at the heart of America’s obscene concentration of wealth and income. Most of that concentration has been into that top one-thousandth. The gains of folks at the bottom of the one percent, the “lower uppers,” have been far less spectacular.

And those lower uppers may actually be paying for the tax breaks that have been showered on the top one-thousandth.

In his recent column, Obama’s War on Inequality, none other than Paul Krugman failed to recognize this reality. Professor Krugman noted that under President Obama, the effective tax rate on the top one percent rose substantially, and that it now was equal to its 1979 level. He then predicted that if elected, Hillary Clinton would continue that trend.

Inside the top one percent, however, the picture is entirely different. Since 1979, there have been three major structural changes in federal tax rates:

First, the number of income tax brackets has been reduced from 15 to 6. The impact of that reduction has been primarily at the upper reaches of the top one percent. The brackets leading up to the top one percent look quite similar to how they looked in 1979. The change has helped those at the very top tremendously, but has left the lower uppers in approximately the same place. The top rate on their earned income has decreased by ten percentage points, but most of their income in 1979 was taxed at lower rates. At the same time, the tax preferences they enjoyed in 1979 have been trimmed.

Second, the rates on capital gains and dividends have been reduced dramatically. In 1979, capital gains and dividends were taxed at 28% and 70%, respectively. Today, they’re taxed at 23.8%. That has greatly benefitted those at the tippy top, but not the lower uppers, a group that consists largely of professionals and executives whose wages are taxed at ordinary income tax rates.

Third, employment taxes have increased substantially. That pinch has been felt far more by the lower uppers. The income sources of those in the top one-thousandth – rents, dividends, interest and capital gains – are exempt from social security tax. Furthermore, because employment taxes are regressive, the increase in effective rates has been greater for the lower uppers than for those at the very top.

The bottom line: Although Professor Krugman is correct that effective tax rates for the top one percent are about at 1979 levels, the effective tax rates on the top one-thousandth and the lower uppers have moved in opposite directions, falling substantially for the first group, while rising for the second.

This highlights the danger in using a convenient but imprecise expression like the top one percent. Professor Krugman gives the impression that the super-rich are paying tax at the same rate they did in 1979, whereas the reality is anything but.

What about Obama and Clinton? Is there a divergence there, which Professor Krugman fails to see by treating the entire top one percent as one group? Quite possibly, yes.

Obama, to his credit, actually has narrowed the gap between the top one-thousandth and the rest of us. The tax rates applicable to capital gains and dividends have increased substantially during his tenure, from 15% to 23.8%.

Would President Hillary Clinton continue that trend, as Professor Krugman predicts? Given that she has said she would place her husband in charge of economic policy, the likely answer is no. Bill Clinton, you see, favored tax policy at the top entirely different from President Obama. Although he pushed through a substantial increase in ordinary income tax rates, he also joined with a Republican Congress in lowering the rates on capital gains. Thus, under President Bill Clinton, the top one-thousandth did just fine, while the lower uppers took a hit. It’s anyone’s guess whether he’d pursue a similar course as Hillary Clinton’s economic czar, but Professor Krugman’s prediction that Hillary Clinton would continue the progress President Obama has made does not seem warranted.

Bob Lord is a veteran tax lawyer who practices and blogs in Phoenix, Arizona. He’s an associate fellow of the Institute for Policy Studies.