Missing Millionaires and the Dangers of Tax Dependence

Just in time for my piece about Warren Buffet and the dangers of relying on high-income earners to pay all the taxes, the Wall Street Journal is out with an editorial analyzing some IRS data that reveals some interesting things:

In 2007, 390,000 tax filers reported adjusted gross income of $1 million or more and paid $309 billion in taxes. In 2009, there were only 237,000 such filers, a decline of 39%. Almost four of 10 millionaires vanished in two years, and the total taxes they paid in 2009 declined to $178 billion, a drop of 42%.

Those with $10 million or more in reported income fell to 8,274 from 18,394 in 2007, a 55% drop. As a result, their tax payments tanked by 51%. These disappearing millionaires go a long way toward explaining why federal tax revenues have sunk to 15% of GDP in recent years. The loss of millionaires accounts for at least $130 billion of the higher federal budget deficit in 2009.

Surprise, surprise. All those rich people that were earning money on their investments in the good years (and paying taxes on them) found themselves losing money in the bad years. This tells me a couple of things.

First, it supports the argument that it’s a bad idea to increase the government’s dependence on large but volatile incomes. If you balance your budget by taxing the rich what are you gonna do in a year when their tax payments drop 51%? As I said earlier,

The super-rich don’t make $100 million a year because they’re earning wages of $50,000 an hour doing constant work. They make that much because they invest money in the stock market along with various other complicated and volatile things that are taxed at different rates… the income of the super-rich is much less dependable than mine or yours – when the stock market crashed in 2008, so did the income of the super-rich. A lot of them even lost money. So the more you count on super-rich income to fund your government, the more you’re going to be hurting when super-rich income completely disappears for a year.

Second, it suggests that everybody like Warren Buffet can’t really be paying lower rates than their secretaries – how else could the government lose so much revenue if they weren’t paying very much to begin with?

Now the Wall Street Journal claims this article is based on “more detailed tax data” straight from the IRS, but they are often accused of cherry-picking data to fit their agenda. The reliable Media Matters makes such an accusation, picking apart the WSJ article with their own piece, which… isn’t very good. It hems and haws about how “millionaires” are usually defined by net worth, not income in a single year, and that millionaires have actually been going up. It references a recent WSJ article that talks about a new record number of millionaires. It talks about how silly it is to blame Obama for this and so on.

But Media Matters seems to be missing the entire point. When discussing government revenue, it doesn’t matter if the number of net-worth millionaires hasn’t gone down because we don’t tax net worth. We tax annual income. It doesn’t even matter if the number of annual-income millionaires came back up in 2010 or if it seems to be coming back up in 2011. The amount of government revenue from high-income earners still went down in 2009, and Media Matters does not seem to dispute this at all.

Clearly the years in questions (2007 vs. 2009) are a clever selection, as usually-high-income earners don’t have bad years like that all the time. But the point is that those kinds of years do happen, and if the top 0.2% are already paying more than 20% of the total income tax, how much more should we be relying on them to plug the gaps in our ever-expanding budget? With the stock market crashing again, the government might not collect very much money from “millionaires” in 2011, either.

It’s certainly a popular notion to tax the rich, and I’m open to ideas about simplifying tax schemes or rolling back some of the most recent tax cuts. But simply from an accounting perspective, I don’t think it’s a good idea to increase the part of your budget that is dependent on a revenue source that can go up or down by hundreds of billions of dollars a year. Am I missing something here?