Thursday, February 26, 2009

The WSJ made an accounting error

Wall Street Journal 2/26:
The 2% Illusion
http://online.wsj.com/article/SB123561551065378405.html

I was curious to see how they arrived at the numbers for this article, given there are no citations. I found the table they were using:
http://www.irs.gov/pub/irs-soi/06in21id.xls

Unfortunately, this table is only for taxpayers who filed itemized returns. From the opinion piece:
Consider the IRS data for 2006, the most recent year that such tax data are available and a good year for the economy and "the wealthiest 2%." Roughly 3.8 million filers had adjusted gross incomes above $200,000 in 2006. (That's about 7% of all returns; the data aren't broken down at the $250,000 point.) These people paid about $522 billion in income taxes, or roughly 62% of all federal individual income receipts.
To arrive at $522B they took rows 26:32




To arrive at 62% they divided this number by $837B, once again this is only for itemized returns. One clue that might have tipped them off (they were looking at a subset) would be that there are only 42 million returns on this table for a country of over 300 million people.




Perhaps most bizarre is their claim that 7% of returns report more than $200k/yr. I don't understand how this number got past them.

The total for all returns (standard and itemized) can be found on
http://www.irs.gov/pub/irs-soi/06in12ms.xls

Using the correct table:
  • The total income tax collected is $1.023T, not $837B. ($1,023,920,139)
  • The total income tax collected by households making more than $200k is $544B, not $522B ($544,318,726)
  • The percentage of receipts collected by rich households is roughly 53%, not 62%.
  • Finally, the percentage of returns with income >$200k is 2.9%, not 7% (wow)
This does not fundamentally change the WSJ's arguments, which I feel are simply irrelevant. Rich people know to hide their wealth in corporations. Their assets are all comingled with corporate assets and their expenses become business costs. In 2002, US corporations report revenues of almost $50T, income of $563B, and paid just $154B in corporate income tax. I find that very strange.

Even stranger, I've learned that some rich people actually take the standard deduction! In fact, 244 of the 15956 households making more than $10M in income decided it was not worth itemizing in TY2006.