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Where the Rich Get Their Money From ... and How It Affects You

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For anybody who caught last year's brouhaha over Mitt Romney's taxes, it should come as no surprise that poor, middle class and wealthy people all get their money from different places -- and pay taxes in very different ways. This week, the nonpartisan Tax Policy Center released a report that made the differences between the classes much more explicit -- and went a long way toward explaining America's tax policy.

In some ways, the TPC's analysis looks like a bell curve. On the lower end of the spectrum, the poorest one fifth of workers get 49 percent of their income from wages and 40 percent from transfer payments -- another name for benefits like Social Security payments and food stamps. Over the next three segments of the population -- the second, third and fourth quintile of households -- the amounts of wage income steadily increase to 73 percent of household income and the amount of transfer payments steadily decrease to 7 percent of income. In other words, as households move from the lower class to the middle class, they get less money from the government and make more money at their jobs. At the fourth quintile, the second-to-top level of households, the vast majority of money is coming from work, with a little sliver coming from transfer payments.



But among the richest 20 percent of households, the income structure suddenly changes. For them, only 60 percent of income comes from wages, and only 2 percent comes from transfer payments. Filling the gap, the income from business and investments vastly increases. In the fourth quintile, the top of the middle class, 8 percent of income comes from business and investments; in the top quintile, that more than triples, to 28 percent.

The difference is even more noticeable within the top quintile. The richest 1 percent of households only get 39 percent of their income from wages and salary, contrasted with a whopping 53 percent from investments and business earnings.

Uncle Sam Cares Where Your Money Comes From

Again, as should come as no shock to people who watched the 2012 presidential contest, the differences between these income sources figure heavily in your tax bill: Long-term capital gains tax rates top out at 23.8 percent, while standard income taxes go all the way up to 39.5 percent for earners in the top percentile. Put another way, income from long-term investments is taxed at a nice discount compared to income that comes from wages.

January's fiscal cliff tax deal was designed to make the tax structure a bit more equitable, but -- given the income distribution revealed by the TPC's analysis, it's clear that the compromise was still favorable to the wealthy.
For example, taxes on wages above $450,000 went up by 4.6 percent --m but that had a limited impact on the wealthiest households: As Census figures show, the top 5 percent of households make an average of $186,000 and up, a large percentage of which comes from investments and business income. And, because so much of that money isn't coming from salary, they likely aren't on the hook for the increased tax rate. Similarly, the tax compromise's Medicare surtax increases would have an attenuated effect on the rich, because those taxes are payroll deductions.

But what of the rest of the grand 2013 tax deal? Cuts in dependent exemptions and itemized deductions will hardly touch the richest households, which get only 2 percent of their income from transfer payments. However, those cuts will hit families in the bottom 20 percent especially hard -- after all, they get 40 percent of their money from such transfers.

This isn't to say that the richest households aren't paying more than they did: The 5 percent increase in long-term capital gains should increase the taxes paid by the wealthiest households. It's worth asking, however, if the increased burden on poor and middle class families is being equally carried by wealthier ones. Or, to put it another way, is each quintile getting the tax rate it deserves -- or the tax rate that its political donations are paying for?

Bruce Watson is a senior features writer for DailyFinance. You can reach him by e-mail at bruce.watson@teamaol.com, or follow him on Twitter at @bruce1971.

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Benign Adviser

the rich get their money from the poor who ironically are beholden to the rich for getting a pittance from them. http://makemoney.hereishelpforyou.com/

August 10 2013 at 3:31 AM Report abuse rate up rate down Reply
HiBarbRayAndMeg

Lets be clear, the rich are doing just fine, they are not being punished. Enough said.

July 31 2013 at 1:12 AM Report abuse +2 rate up rate down Reply
nkriesel

I think all classes would benefit greatly if the tax and spend Democrats would stop spending and tax less. No matter what is said and done it all comes down to spending. Of course the GOP controlled House is being blasted for trying to keep spending and taxes at a reasonable level.

July 30 2013 at 11:50 PM Report abuse rate up rate down Reply
vlady1000

Intersting. With the increase in the wealth gap, and the upper ends having a good % of their income coming from income not subject to SS withholdings, makes you wonder about the future of SS.

July 30 2013 at 10:50 PM Report abuse rate up rate down Reply
saltcitybaptist

One other thing - I do not consider Social Security a transfer payment - workers paid for that - as opposed to food stamps, welfare, ect. Many who recieve those do not even pay federal tax

July 30 2013 at 6:14 PM Report abuse rate up rate down Reply
saltcitybaptist

Yes, those in higher tax brackets make a good portion from investments - which may not be taxable (esp social security).

This is the reason, I support the Automatic Electronic Tax. Any time that money is spent by check or credit card a (very low) % tax is charged. This way everyone pays taxes - there are no exceptions http://www.electronicflattax.com/

July 30 2013 at 6:11 PM Report abuse rate up rate down Reply
godblshu

The rich pay nearly all income taxes and get very little if any transfer payments. The capital gains rate does benefit the rich because they typically have more capital gains, however, it will also adversely affect the less affluent if those rates increase. The rich get virtually no benefit from the government that equals their tax rate, but instead the rich pay for the transfer payments that go to the poor and less affluent. This may seem unfair that those who work harder, or are smarter, or who happen to be lucky, or who chose a better career, or have special expertise in sports, acting, money management, politics, etc, earn more, but life isn't fair. We aren't born with equal talents. Also, the poor enrich athletes and actors paying too much for their services (those being the most overpaid of the rich). God made these decisions when he allowed us to be born as we are born and into the families we are born in. However, we can choose to excel if we overcome our circumstances. Don't begrudge those who make more than you do. I don't. I prepare tax returns for many people who make more than me, and I have never been jealous for a moment. I am happy that they do well, and by the way, my richest clients are providing many jobs for people, who wouldn't have a job if that rich person didn't have the desire to be rich, and didn't assume the risk of losing everything to be rich, and didn't work extremely hard to be rich. It's all about the commandment about not coverting that which is thy neighbor's.

July 30 2013 at 12:32 PM Report abuse +3 rate up rate down Reply
detkoncp

The majority of those top income earners worked their way through college or created a business to elevate themselves over the takers. Just because they worked their asses off and had the forsight to learn how to invest and did it correctly and became successful is no reason now to punish them.

July 30 2013 at 10:54 AM Report abuse +2 rate up rate down Reply
1 reply to detkoncp's comment
HiBarbRayAndMeg

How the heck are they being punished.. Income taxes are at historic lows, and have been since the bush tax cuts. The spin from the right is deafening and inaccurate. The article should of also pointed out many rich hide their money in hedge funds paying 15% (now 20%) or offshore at zero. I wish I had a penny for every misinformed comment by cons, I would be more rich than I am.

July 31 2013 at 1:11 AM Report abuse +1 rate up rate down Reply
1 reply to HiBarbRayAndMeg's comment
dopey.obamite

Which one of you is rich?

August 01 2013 at 8:24 AM Report abuse rate up rate down
pdbliz

DO NOT WORRY about the RICH and where they got there money...!!!!!!!
,,I know where they got there money.......WORKING HARD..!!!! SOME HAD 2 JOBS..
Yes,,I know some were born into it,,,,,,,,,,,,,,,,,BUT,,,, SOME GOT IT,,SOME DO NOT...
I HAVE A IDEA,,,The government has programs for Endangered Speices....And,,,some programs for over population of speices...
Let us do away with WELFARE PEOPE WHO ABUSE THE SYSTEM.!!!!!

July 30 2013 at 9:36 AM Report abuse +1 rate up rate down Reply
f4180

Oh , I get it , the article explains that people who work don't get their money from the government .

July 30 2013 at 8:46 AM Report abuse +3 rate up rate down Reply
1 reply to f4180's comment
kayo1025

But we have to send plenty to the government to give to those who don't work ("don't", not "can't" is the operative word). We could take better care of those who "can't" if those who "don't" would work.

July 30 2013 at 12:20 PM Report abuse +2 rate up rate down Reply
1 reply to kayo1025's comment
toebo1

Bingo! These clowns that want to give $ to any and all because "it's the right thing to do" don't realize that if that if we, make that if the FEDS, did their job and stopped welfare abuse, the truly needy could get double, triple, maybe more, than they receive now. But, it's all about "buying votes".

July 30 2013 at 9:39 PM Report abuse rate up rate down