In the closing years of the 20th-century, tens of thousands of workers realized the ultimate American Dream: they became millionaires. And as part of their welcome to the country's most exclusive club, the new rich received an unexpected perk: a lower rate of federal taxes.

This is because during last half of '90s, the percentage of total income paid by millionaires in federal taxes actually declined. According to the Washington, DC-based Citizens for Tax Justice, a millionaire in 1995 paid 31.4 percent of her or his income as federal taxes. By the end of the decade, according to the group's analysis of IRS data, millionaires were paying 28 percent of their wealth in taxes.

Someone had to make up the difference. So everyone else -- the non-millionaires -- ended up paying slightly higher taxes. In 1995, the Non-Millionaires' Club paid 12.5 percent of its income in federal taxes; by 1999, that edged up to 12.8 percent.

This is important because the personal income tax has been a leveler of sorts for the US tax system. At the state and local level, key taxes -- namely property taxes and sales taxes -- tend to hit the poor and middle class much harder than they do the rich. Everyone, regardless of income, pays seven percent sales tax for a new TV set, for example. But a rich customer pays a smaller portion of their overall wealth than someone of modest means. Thus, as previously reported (see "Taxing matters," News, January 25), the poorest Rhode Islanders pay 14 percent of their incomes in state taxes; the middle class, 11 percent; and the richest, less than 10 percent.

Income taxes, where rates increase, step by step, as people get wealthier, hit the rich harder. But because of federal capital gains tax cuts in the late '90s, federal taxes for the wealthy fell, and other taxpayers had to pick up the slack.

Here's what happened: Many American taxpayers joined the Millionaires' Club. In 1995, there were 87,000 taxpayers with that amount of adjusted gross income. By 1999, there were 205,000. The millionaires got richer, too. In 1995, according to Citizens for Tax Justice, their average income was $2.6 million. By 1999, it was $3.2 million, a 22 percent "raise."

Not to worry, the rest of American taxpayers got the same 22 percent raise. But since the non-rich started with a lower base -- $33,537 in 1995 -- their $41,005 income for 1999 meant a cash gain of only $7468, compared to a $568,383 increase for the millionaires.

With the number of millionaires exploding at the end of the stock market boom, it's not surprising that their share of the American pie grew. Some 205,000 millionaires held a little more than 11 percent of all income in 1999, and 127 million taxpayers earned the rest. But in 1995, millionaires had less than six percent of all income, while the non-millionaires claimed about 95 percent.

Issue Date: April 12 - 18, 2002