Ohio’s pool of rich taxpayers is growing again after declining sharply during the recession.
In 2011, about 6,287 taxpayers who lived in Ohio earned $1 million or more, up 40 percent from 2009, the worst year of the downturn, according to an analysis of state tax data by the Dayton Daily News.
The number of wealthy taxpayers did not return to pre-recession levels, but the group is expanding because of the improving economy and rising stock market, experts said.
“It’s gone up because the really wealthy get a much larger share of their income from investments as opposed to labor,” said William Even, Glos professor of economics with the Farmer School of Business at Miami University.
Some economists said the growth in high-income Ohioans benefits the state’s economy because they are important employers, investors and taxpayers.
But some researchers said the economic recovery has disproportionately benefited the rich, while everyone else have seen minimal improvements in their finances.
“We are seeing job growth and one would anticipate that will eventually lead to capital formation and increasing salaries,” said Greg Lawson, a policy analyst for the Buckeye Institute for Public Policy Solutions. “However, we also can’t ignore that our labor force has also been shrinking.”
Getting rich from stock market
In 2011, more than 7 in 10 taxpayers who lived in Ohio earned $60,000 or less, according to data released last month by the Ohio Department of Taxation. Another quarter of tax filers earned between $60,000 and $175,000.
About 0.1 percent of resident taxpayers earned $1 million or more. Membership in this highly exclusive group contracted sharply during the recession.
The number of rich taxpayers decreased by 12 percent in 2008 and 35 percent in 2009. Ohio’s overall tax base slipped by 3 percent in both of those years. About one-third of tax returns are joint filers.
The economy finally started recovering in June 2009, and the stock market began to rebound. Stocks plodded upward in 2010 and picked up some momentum in 2011.
The gains in the stock market played a significant role in increasing the number of high-income taxpayers, experts said. This is because the wealthy are much more heavily invested in the financial markets than other income groups.
In 2010, almost one-quarter of the incomes of Ohio taxpayers earning $1 million or more came from capital gains, compared to less than 1 percent for everyone else, according to the most recent IRS data. Capital gains are the profits resulting from the sale of properties or investments.
“This (income tax data) is indicative of the volatility in incomes for the high-income taxpayers, because much of their income tends to come from investments, capital gains, dividends and business income,” said Scott Hodge, president of the Tax Foundation, a Washington, D.C.,-based think-tank.
In fact, the top 0.1 percent of income earners is a constantly changing group, because the incomes of the wealthy often fluctuate from year to year, Hodge said.
“When we did a study a few years ago looking at a nine-year time period, 60 percent of the millionaire filers in that time were only on the list once,” he said. “It means their millionaire tax status probably came from the sale of a business or a large amount of stock — that level of income tends to be episodic.”
As stock profits rose, the number of wealthy tax-filers in the state grew by 25 percent in 2010 and then again by 12 percent in 2011.
During recessions, capital gains and business profits typically experience larger declines than the earnings of workers, unless those workers are laid off, said Even, with Miami University.
“The main sources of income for the very rich are going to be more cyclical, and they will go down faster during a recession, but they will come back quicker during an expansion,” he said.
Wealth offers promising news
The growth in the high-income population is encouraging because they contribute to the economy through investments, tax proceeds and entrepreneurial activities, Even and Hodge said.
Wealthy people provide funding for innovative products and start-ups. They own and operate businesses that employ many people. They are consumers who buy goods and services. Their taxes help support public infrastructure and services.
“I think this is good news for Ohio,” Even said. “The rich are paying more in taxes, they are out buying more, and many are business owners … and if Ohio businesses are doing better and are more profitable, that is a good signal for future hiring.”
In the last two years, there has also been growth in the number of taxpayers in most income categories, but the largest percentage increases were among the higher earners.
The incomes of the wealthy were pummeled by the recession, but they have seen significant gains while other groups have been left behind, said Heidi Shierholz, labor market economist with the Washington, D.C.,-based Economic Policy Institute.
“We are in a phase of this recovery where the high end of the income distribution is bouncing back strongly, and they are seeing a good recovery,” she said. “But the labor market is where most people make ends meet, and the labor market has barely seen improvements… Our economy would be better off if our income growth were more broadly shared.”
Most people receive nearly all of their income from salaries and wages — not capital gains — and those have not seen especially meaningful growth in Ohio, said Amy Hanauer, executive director of Policy Matters Ohio.
The stock market’s recovery is better than the alternative, and it will benefit the retirement savings of some Ohioans, she said. But the vast majority of the nation’s income growth has been captured by the highest earners, and that is not conducive to a healthy and thriving economy in the long run.
“What you really want is middle-income people having more to spend, because they will be responsible for real job growth in Ohio by creating demand,” she said.
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