High Earners, Low Payers

Everyone knows that the rich get richer. But not every day does the Government disclose how it happens. Last week the Treasury Department issued a report showing that in 1983 some 55,000 taxpayers with incomes exceeding $250,000 paid a lower percentage of their income in federal taxes than the average middle-income family of four. At least 1,900 of these high earners paid no tax at all.

The Treasury report showed that a family of four with an income of $45,000 paid an average of $6,272 in federal taxes in 1983. Yet some 30,000 taxpayers who made more than five times as much (above $250,000) paid the IRS on average less than twice as much (about $12,500) as the middle-income family. Those 30,000 represent about 11% of all taxpayers with incomes exceeding a quarter of a million dollars.

Perhaps even more striking, 3,170 taxpayers who earned more than $1 million in 1983 paid virtually no tax at all. In an accountant's terms, the Treasury study restates the rich-are-different theory: "These high-income, low-tax returns look very different from ... those of typical upper-middle-income taxpayers."

The study is sure to become a tool in the hands of politicians wrangling over plans to reform the federal tax system. "If anyone had any doubt about the unfairness of our present tax code," said Democratic Congressman J.J. Pickle of Texas, "these figures should convince them." Pickle, who requested the report, is advocating a minimum-tax provision on personal income. The study, said a White House spokesman, "shows that fat cats pay little or no money. It's a perfect example of why the President wants tax reform." But tax-reform experts point out that many of the major loopholes used by the wealthy would not be closed by the President's tax-reform plan.

Probably the most popular of the write-offs are limited partnerships, which have proliferated as tax shelters since the late 1970s and early '80s. An orthodontist investing in a real estate venture, for example, can deduct from his taxable income a share of the venture's losses based on the amount of his investment. Yet his actual liability is limited--hence the name of the arrangement--to the cash value of his initial in vestment. Thus if a partner invests $10,000, or 10% of a partnership's total investment, and the venture loses $700,000, he will be able to write off $70,000 but will be liable for only $10,000. The study revealed that such losses on limited partnerships (about half of them in the real estate and oil industries, both areas that receive generous tax breaks) exceeded or offset the entire incomes of the 1,900 high earners who paid no taxes at all.

In 1982 more than half the partnerships in the real estate and oil-and gas-drilling industries were losing propositions, a sure sign that they were being used as tax shelters. States the Treasury report: "The rapid growth in the number of partnerships reporting losses would lack a sound business rationale if it were not for the ability of many taxpayers to use the tax losses ... to shelter other income from taxation." Pickle is now asking the Treasury for another study that will pinpoint the sections of the current tax code that are being abused. "No law has been violated," he says. "But the tax code should not allow the accumulation of shelters."