ROBERT SIEGEL, host:
From NPR News this is All Things Considered, I'm Robert Siegel. F. Scott Fitzgerald once wrote, let me tell you about the very rich. They are different from you and me. And yesterday the IRS proved once again how right Fitzgerald was. The agency calculates that in 2006, the average income of the 400 wealthiest Americans was $263 million. 2006 of course was the good old days. And it turns out that the good old days were really good for the very rich. Two hundred sixty three million was 23 percent increase over the average in 2005. Bill Gale is co-director of the Tax Policy Center at the Brookings Institution here in Washington. Bill Gale, what do you make of that eye-popping figure from 2006?
Mr. BILL GALE (Co-Director of Policy Center, Brookings Institution): Well, I think there's two things going on, one is as you said 2006 was really the good old days in terms of the market in general and the economy as a whole, and so we've seen for a while that there's been a big rise in the income of - and wealth of the wealthiest individuals in the country, and this is just sort of stunning confirmation that continued at least through 2006. The other aspect of it is that the relatively low tax burden that this households paid, and that is due to the fact that almost - well, most of their income is in the form of capital gains which are taxed at very low rates relative to wage income.
SIEGEL: Yeah, the IRS said that the average tax bill for the 400 wealthiest was $45 million, which while a tremendous amount to pay in taxes, amounts to an effective tax rate of only 17 percent. How do you get your tax rate down to 17 percent when you make that much money?
Mr. GALE: Well, there's only two ways to get your tax rate down that low. One is to have an enormous amount of items that you can deduct from your income. The other is to get your income in a form like capital gains that already taxed that are very low rate. It's hard for me to believe that deductions can account for that low tax rate. And the fact that almost two-thirds of their income was capital gains provides a pretty solid explanation of why their effective tax rate is so low.
SIEGEL: Because the highest rate for capital gains is significantly lower than the highest rate for other kinds of income.
Mr. GALE: That's right. Now, the highest rate for capital gains is 15 percent, the highest rate for wage income is well into the 30s, and a lot of people, well everyone of course pays payroll tax from their wages, too, although those - that's not included in this calculation.
SIEGEL: When we hear about how much money the 400 wealthiest Americans paid in taxes, while it may get to our sense of equity, I wonder how a big a practical issue it is for collecting revenues. This is actually a fairly wealthy group. I mean their share of American income has been growing over the past decade.
Mr. GALE: Well, and the top 400 is the tip of the iceberg in terms of the top one percent of the five percent. Generally what we've seen is - over the past 20, 25 years up until this past year is much more rapid income growth at the high ends of the income distribution than at the middle of the low ends of the income distribution. And it looks like in the middle of this decade, incomes really skyrocketed at the very top.
SIEGEL: Obviously we won't get the score card for 2008 for another couple of years, but we can only assume it will be a lot different from this. Or should we?
Mr. GALE: It has to be different from what we just saw, again because of the capital gains component, you know, the market fell 35-40 percent last year, it's going to be hard to see the types of capital gains that we saw in 2006. So, you know, the bigger they come, the harder they fall, is sort of the lesson here.
SIEGEL: The Bush tax cuts are about to expire in another year or so. Does that change things much for this folks?
Mr. GALE: That will change things a little bit if they actually expire, but the main driver here is the low rate on capital gains and the huge amount of capital gains that we had in the middle of decade.
SIEGEL: Bill Gale, co-director of the Tax Policy Center at the Brookings Institution. Thanks a lot for talking with us.
Mr. GALE: Thank you.
SIEGEL: I guess before proceeding, to make sure there's no conflict of interest, are you one of the 400 wealthiest people in the United States?
Mr. GALE: I can categorically say that I am not one of the 400 wealthiest people in the United States.
SIEGEL: OK, me neither.
(Soundbite of laughter)