The rich are getting richer, but it has nothing to do with their paychecks

The richest Americans are getting richer. Everyone knows that. But it doesn’t mean their paychecks are getting bigger. New IRS data shows that the salaries and wages of the 400 highest-income tax-returns has in fact, relative to everyone else’s pay, fallen off dramatically in recent years.

The data, highlighted by Al Jazeera’s David Cay Johnston, highlights a few salient points about what’s driving inequality in the US. It’s not just the rich’s percent of wage income that has fallen off. The average salaries and wages on these 400 returns totaled around $16.5 million in 2010. That’s a fantastically huge sum of money for many of us, but it’s only around 6.4 percent of the total average adjusted gross income those returns reported. That 6.4 percent is down from 26.2 in 1992. That’s a huge fall in the importance of wages and salaries to these Americans.

So where are the rich getting all their money? As the Washington Post’s Matt O’Brien points out today, they are reaping by far the largest portion of capital gains — these 0.0003 percent of tax returns were from people and households that took in nearly 16.2 percent of those gains last year. Not only that, but they accounted for more than 7 percent of the dividends and almost 5 percent of the taxable interest income — interest from, say, bonds or bank accounts. Here’s a new chart that puts that salaries and wages line from the above chart into perspective.

That salaries/wages line is just inching along the bottom. What makes the rich’s incomes different is that they reap rewards from their other investments.

What this highlights is, first of all, the different way in which the rich make their money compared to the rest of us. And in fact, in some ways the tax code makes this happen. For example, the tax code disincentivizes high CEO salaries, in favor of giving CEOs “performance-based pay” in the form of stock options, for example.

Of course, this matters in far more than a “the-rich-aren’t-like-you-or-me” way. It matters because of how these types of income are taxed. As Johnston highlights, the average tax rate of these 400 taxpayers is just 18 percent. That represents a heavy slide from 1995, when the top 400 tax returns had a rate of around 30 percent, by the IRS’s data. And that lower tax rate is because there are lower tax rates on some types of non-wage income, like capital gains.

What does this mean? Some experts suggest a higher marginal tax rate. A recent paper from economists at the University of Pennsylvania and the University of Bonn found that the optimal marginal top income tax rate would be 90 percent, as opposed to the current 39.6. But at the very least, the IRS data suggests that focusing on income taxes alone can only do so much good.