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Tax Rates Dropped for the Very Richest in 2010, New IRS Data Show

An IRS report released the day before Thanksgiving shows that the very rich had something more to be thankful for. Tax rates fell in 2010 for every income group above $500,000. And the very wealthiest – those whose incomes exceeded $10 million in 2010 – saw the biggest drop in tax rates.

Taxpayers with incomes over $10 million paid an effective federal income tax rate of 20.7 percent in 2010, down from 22.4 percent in 2009. (The “effective” federal income tax rate refers to the percentage of adjusted gross income a taxpayer actually pays in federal income tax, after lower tax rates on certain kinds of income, deductions, exemptions, and credits are taken into account.) Taxpayers with incomes between $5 and $10 million paid an effective tax rate of 24.2 percent in 2010, down from 25.2 percent in 2009.

As a Wall Street Journal blog explains: “The reason for the drop in average tax rates [among the very wealthy] is no secret. It’s the special 15 percent top rates for capital gains and dividends that President George W. Bush pushed through.”

In 2010, investment income soared for wealthy investors. In 2010, income from capital gains and dividends accounted for nearly half (48.5 percent) of the total income of taxpayers with income above $10 million, compared to 35.8 percent in 2009. So the very wealthy got a double boost: lower tax rates on top of higher incomes.

Congress can help restore fairness to the tax code by letting the Bush-era tax cuts for the richest two percent expires – and extending tax cuts for those who need them.

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