ROANOKE TIMES
Copyright (c) 1997, Roanoke Times
DATE: Friday, April 18, 1997 TAG: 9704180081
SECTION: NATIONAL/INTERNATIONAL PAGE: A-1 EDITION: METRO
SOURCE: THE NEW YORK TIMES
Tax-exempt interest from municipal bonds, taxes paid to state and local governments, and taxes paid to foreign governments were the deductions most frequently cited.
Nearly 2,400 Americans with the highest incomes paid no federal income taxes in 1993, up from just 85 individuals and couples in 1977, the latest available information from the Internal Revenue Service shows.
While the number of Americans who make $200,000 or more grew more than 15-fold from 1977 to 1993, the number of people in that income category who paid no income taxes grew 28-fold, or nearly twice as fast, according to a quarterly statistical bulletin issued by the IRS.
The report also shows that another 18,000 Americans with high incomes paid less than 5 percent of their income in taxes. And it cast doubt on the effectiveness of the Alternative Minimum Tax, which was designed to ensure that the wealthy paid at least some income taxes.
Tax lawyers and other tax experts said Thursday that the number of Americans with incomes over $200,000 who pay little or no income taxes had certainly grown since 1993.
The IRS did not specify how the 2,392 individuals and couples were able to avoid paying income taxes, but figures in 24 pages of statistical tables it released indicate that three-fourths of them received tax-exempt interest from municipal bonds. Because municipal bond interest is generally not taxable, the interest rates paid to owners are typically less than for corporate bonds.
On one-fourth of the returns, a combination of interest deductions and taxes paid to state and local governments was the most frequent reason for eliminating federal income taxes, the information shows. Income taxes paid to foreign governments, which generally are offset dollar for dollar against U.S. income taxes, were the primary reason no taxes were due in about one-fifth of the cases.
Losses from limited partnerships and S corporations also were major reasons no taxes were due. These types of business entities pay no income taxes, but money taken from them is included in the taxable income of partners and owners.
Economists and other experts interviewed Thursday said they also believed that falling audit rates were a significant factor in explaining how people making $200,000 or more could pay little or no income taxes.
Experts also said the IRS' figures raised questions about the effectiveness of the Alternative Minimum Tax, which Congress adopted in 1969 after an outcry over the disclosure by Treasury Secretary Joseph Barr that 155 individuals and families made more than $200,000 that year but paid no income taxes.
The Alternative Minimum Tax is a separate income tax system that allows fewer deductions and exemptions than the regular income tax. In 1986, Congress strengthened the alternative minimum tax and shut down most tax shelters.
Henry Aaron, a Brookings Institution economist, said the 1986 changes did not go far enough to eliminate differences in how various investments were treated for tax purposes. He said that having so many Americans with high incomes paying no taxes ``is highly demoralizing'' and will weaken support for the income tax system.
Barry Bosworth, another Brookings Institution economist, said the number of high income Americans who pay no taxes is the predictable result of ``a decade of highly complex changes in the tax code and their unintended consequences.''
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