Some Wealthy Still Escape Income Tax

Despite repeated government efforts to close loopholes, some wealthy Americans are still able to scrape together enough deductions to avoid paying any U.S. income tax, the Internal Revenue Service said Wednesday.

Of 557,848 couples and individuals who reported income of $200,000 or more on returns filed in 1988, 472 with total income of $211 million paid no income tax. Two of them, both unidentified, even reported receiving unemployment compensation.

The most popular deduction was for interest paid, which exceeded income on 29 of the 472 no-tax returns. Income was exceeded by deductions for theft, fire and other casualty losses on 12 returns.

Of the high-income people who paid taxes, about 9,300 paid less than 5%. Another 17,082 reduced their liability to less than 10%, which is about the same as paid by the average $35,000-a-year family.

In its annual report on the tax liabilities of high-income people, the IRS said 58% of those with income of $200,000 and up reported capital gains--profits from the sale of investments--that averaged $384,476. By comparison, salaries averaged $291,646.

The study, prepared principally by Allen H. Lerman of the Treasury Department’s Office of Tax Analysis, is based on raw tax returns. Some of the non-taxpayers could be moved onto the tax rolls after IRS audits.

The report said 3,396 people with high incomes would have avoided federal income taxes altogether had it not been for the alternative minimum tax. This levy--a special net designed to ensure that high-income people pay some tax regardless of how many legitimate deductions they claim--cost 35,223 top earners a total of $1 billion.

However, the reach of the minimum tax plunged from the previous year, when the levy took $4.8 billion from 158,903 high-income filers.

One of the provisions Congress wrote into a major deficit-reduction bill last week to raise the tax burden on the rich boosts the 21% rate of the minimum tax to 24%.

Through the years, the number of tax-free rich people has been only a tiny fraction of the wealthy. The most recent IRS report showed the 557,848 taxpayers in the $200,000-and-over group paid a total $72.7 billion, an average of $130,276 apiece.

The report said 381 high-income people who paid no tax claimed itemized deductions totaling $161.3 million, an average of $423,000.