In 2012, U.S. taxpayers received $612 billion from pensions and annuities, plus $231 billion from individual retirement accounts, new research shows.
The Tax Foundation unveils this finding in a survey of sources of income in 2012, as reported by taxpayers on lines 7 to 22 of their 2012 Form 1040. The report’s authors undertook the research to better understand the makeup of the government’s revenue base, and to learn how rewards to economic activity are distributed in the U.S. economy.
The report aims also to clarify findings of a similar 2011 report issued by the Congressional Budget Office. While labeling the income categorizations used by the CBO as “defensible,” the Tax Foundation finds the 2011 survey could also be misleading.
The foundation notes, for example, that capital income as defined by the CBO was “unevenly distributed.” Key reason: Only the most affluent Americans depend on capital as a substantial source of income. The foundation also cautions against conflating two ideas addressed by the CBO survey.
The first idea — that middle-class Americans don’t report many dividends or capital gains on their 1040s — is true,” the foundation states. “A second idea that would appear to follow logically — that middle-class Americans don’t earn substantial returns to capital—is false.
“Middle-class Americans just wisely put their capital in retirement accounts — where it enjoys a proper tax structure— instead of keeping the money out of retirement accounts and subjecting it to a poor tax structure,” the foundation adds.
Among the report’s additional findings:
Taxpayers reported $9.2 trillion from all sources of income in 2012, up substantially from the $8.4 trillion reported in 2011.
68 percent ($6.3 trillion) of total income reported on individual income tax returns is in wages and salaries. And about 83 percent of all tax filers report wage income.
To substantially increase revenues, policymakers must look to labor compensation as the main tax base because of its scale.
Business income is a large feature of the individual tax code. Some businesses, like S-corporations, sole proprietorships, or partnerships, file their taxes through the individual tax code.
Capital gains and dividends accounted for about $883 billion in income in 2012, which is about equal to income from business ($839 billion) and retirement accounts ($843 billion).
The slides starting on the next page recap highlights from the Tax Foundation survey.
As shown in the above table, salaries and wages accounted by far for the largest source of Americans’ income: $6.3 trillion. Capital gains less losses ($623 billion), taxable pensions and annuities ($612 billion), partnerships and S-corporation net income ($535 billion) and business net income ($304 billion) were also among the top 5 sources of income.
This slide indicates that income from salaries and wages greatly exceed investment income: $6.3 trillion versus $883 billion ($623 from capital gains income plus $260 billion from dividend income). The difference between the figures, the report states, undermines two popular notions: (1) that corporations favor owners over workers in the distribution of revenue; and (2) that increasing taxes on investment income would substantially lower the U.S. budget deficit.
As Figure 2 above shows, retirement income makes up the biggest share of total income for taxpayers reporting between $50,000 and $100,000 of income. Upshot: only a minority of middle-class taxpayers — the retirees — depend significantly on this, but the majority (working-age taxpayers) do not.
“While pensions aren’t critical to every analysis of personal income, it is worth remembering a few things,” the report states. “[P]ension income is, in economic terms, mostly a kind of capital income; it is about as important as any other kind of capital income; and it is most important to middle-class workers due to its employer-based structure.”
As the appendix table above reveals, the relative importance of investment income generally increases in tandem with total income. The highest earners — those who generate $1 million-plus annually — derived in the aggregate $614 billion from investment income 2012, or 44.1 percent from all income sources. This compares with:
10.9 percent of total income among those in the $200,000 to $1 million income bracket
3.8 percent of total income among those in the $100,000 to $200,000 income bracket
0.025 percent of total income among those in the $50,000 to $100,000 income bracket; and
0.028 percent of total income among those in the under $50,000 income bracket