Some Too Rich To Pay Taxes

Many wealthy Americans achieve what millions of taxpayers and armies of accountants dream about this time of year: They don’t pay a cent in federal income tax.

Despite a law aimed at making sure everyone pays at least some minimum tax, the number of rich tax avoiders - people making more than $200,000 - totaled 1,137 in 1994, the IRS says.

The figures are contained in an Internal Revenue Service study of 1994 tax returns, released last week, which examines the unaudited information taxpayers report to the IRS.

The report makes clear the few rich folks who avoid paying federal taxes are the exception, not the rule.

“You’re still looking at the reality that 99.9 percent of returns still pay tax,” said IRS spokesman Don Roberts. Non-payers represented 0.102 percent of all wealthy tax returns, down from the peak 0.225 in 1983. The decline is due to a crackdown on tax shelters and other legal tax avoidance schemes.

And as a group, the 1.1 million taxpayers making more than $200,000 shelled out 28.5 percent of the income taxes paid in 1994, IRS data show.

An alternative minimum tax, or AMT, was created in 1969 to ensure that all taxpayers pay at least some minimum amount of tax, even if they make generous use of tax deductions and exemptions. But as the IRS study shows, the “AMT doesn’t capture everything,” Roberts said.

Phil Brand, a former IRS executive now with KPMG Peat Marwick LLP, said avoidance of AMT results in the rare cases when taxpayers make such extensive use of tax incentives aimed at furthering specific social or economic goals. Investments in tax-free municipal bonds or deductions for interest expense arising from investments can allow taxpayers to avoid AMT tax liability.

“If an individual chooses to invest in a type of investment that is beneficial to public arena, that’s one enticement,” Brand said. “They are being encouraged to make investments in a certain part of the economy.”

Still, one prominent lawmaker said the study points to the inherent flaws in an income tax.

“Any income tax rests on complexities where the highest paid tax consultants are able to reduce the tax burden,” said House Ways and Means Chairman Bill Archer, R-Texas. Archer favors replacing the current tax code with a national sales tax, which would capture consumption, not income.

The most commonly used deduction for the wealthy tax avoiders was for interest on money borrowed for investment, 38 percent; net casualty or theft losses, 18 percent; and medical and dental expenses, 9 percent. Others included charitable contributions, interest paid and state taxes paid.

“We’re not talking about people making up things,” Roberts said. “These are all things the law provides for.”

After peaking in President Reagan’s first term, the percentage of wealthy non-payers fell to a low of 0.095 percent in 1992, but began to edge upward after then.

One probable reason for the rise is a 1993 tax law change that permitted wealthy individuals to donate appreciated stock or artwork to charities or museums, said Robert McIntyre of the Citizens for Tax Justice, a labor funded research group.

“What it means is, you can take deductions for income you never declared,” he said.

Although the number of rich who avoid federal taxes is up slightly, it pales against the 24 million or so middle and lower income taxpayers - those making less than $50,000 - who also didn’t owe income taxes in 1994.

That group includes taxpayers who receive the earned income tax credit, which is aimed at helping low income workers, and part-time workers who don’t earn enough to owe federal taxes.

The IRS study showed its category of wealthy returns grew by 116,000 from 1993 to 1994, up 11.7 percent.

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