Although the U.S. tax system has been flawed for quite some time, Trump’s Tax Cuts and Jobs Act — signed in December 2017 — churned the fiscal waters and brought plenty of opinions and proposed actions to surface.
Some of those opinions and proposed actions bubbled up in October 2019, with the release of economists Emmanuel Saez and Gabriel Zucman’s book “The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay.” Although Saez and Zucman make a case that wealth inequality is a growing problem in America, the burning question is, “Do U.S. billionaires really pay less in taxes than the middle class?”
Last updated: Dec. 13, 2019
The Tax History of the Top 1% Isn't Much Different Than How Things Are Now
When people begin arguing about how much the wealthiest Americans have paid in taxes in the past versus how much they’re paying now, it’s helpful to have some context. According to the Tax Foundation, “The top one percent of Americans today do not face an unusually low tax burden, by historical standards.”
Top Marginal Rates for Taxes Have Fallen Drastically Since the 1950s -- or Have They?
In the 1950s, the top marginal tax rate was 91%. Today it’s 37%, which seems like a drastic drop. But, according to the Tax Foundation, the top 1% of taxpayers in the 1950s only ended up giving up about 42% of their income in federal, state and local government taxes. This means that the current marginal tax rate of 37% isn’t that much lower than the effective tax rate high-earners faced in the 1950s.
The 91% Tax Rate Was the Exception -- Not the Rule
The reason for the 42% tax rate was that the 91% federal income tax rate only applied to households that had income exceeding $200,000, which were in the minority. And that high tax rate only became effective when a household’s income exceeded $200,000. And even then, the higher rate only applied to the dollars above the $200,000 threshold, not every dollar earned.
Average Income Tax Rates for the Top 0.1% Have Remained Relatively Stable
Average income tax rates have remained relatively stable for the wealthiest Americans. In the 1950s, the top 0.1% of households faced average effective income tax rates of 21%, versus 20.7% as of 2014, according to data from the Tax Foundation.
Higher Marginal Tax Rates Don't Always Translate Into Higher Revenue Collection
You might wonder how a top marginal income tax rate of 91% could translate into an average income tax rate of just 21% for the top 0.1% in the 1950s.
As stated earlier, the 91% tax rate only applied to amounts earned over $200,000. In addition, tax avoidance behaviors and lower reported income were also likely factors. As marginal tax rates rise, it’s not unusual for taxpayers to tend to under-report income.
Does the US Tax System Look Like a Giant Flat Tax?
In a November 2019 phone interview with Capital & Main, Zucman described how he perceives the U.S. tax system — as a giant flat tax where each segment of the population, except for the wealthiest Americans, commits around 25% to 30% of its income in taxes. The wealthiest Americans pay a lesser rate of 23%, which means that the tax system becomes regressive at the top.
Economists Claim the Tax System Has Been Turned On Its Head
Not surprisingly, the culprit that upset the tax system — according to Saez and Zucman — is Trump’s Tax Cuts and Jobs Act that was signed into law in December 2017. Although the president repeatedly stated that the TCJA would benefit the middle class — and it has, to a point — many experts point out that the wealthiest Americans are the ones who have benefited the most from the tax cuts.
How the Trump Tax Cuts and Jobs Act Has Benefited the Wealthy
According to authors and economists Saez and Zucman, the Tax Cuts and Jobs Act have benefited the ultra-rich. According to their research, they concluded that in 2018, the top 0.1% — the billionaires of America — paid an average effective tax rate of 23%, which factors in all federal, state and local taxes. The bottom 50% of U.S. households, however, paid a higher rate of 24.2% toward income tax.
The Top 0.1% Pay a Lower Rate Than Other Household Groups, Too
According to Saez and Zucman, it’s not only the bottom 50% of households who pay more — which include many in the middle class — it’s also those in the upper-middle class and in the top 1% who pay more in taxes than those in the 0.1% do.
Warren Buffett Explains One Reason Why the Rich Pay Lower Tax Rates Than the Middle Class
Billionaire investor Warren Buffett is known for saying that he pays less tax as a percentage than his secretary does. While that may seem impossible, it’s not. Buffett and other billionaires are mainly taxed on capital gains income as investors — not salary or income earned as an employee. And capital gains income is taxed at a lower rate than ordinary income is.
The Tax Cuts and Jobs Act Even More Specifically Benefits the Super Rich
Zucman and Saez claim in their book that capital income is becoming tax-free, due to provisions like these that were implemented as part of the TCJA:
- Corporations enjoy a lower tax rate, which was reduced from 37% to 21%.
- A 20% deduction applies to business income for many taxpayers.
Saez and Zucman’s Conclusions May Not Be as Reliable as Some Think
As with any economic theories based on data, opponents have been able to poke holes in the theories presented by Saez and Zucman. Here are some points to consider.
Subsidy Programs Are Left Out of Saez and Zucman's Calculations
Saez and Zucman did not include refundable tax credits and benefit programs that aid in offsetting the cost of excise, payroll and sales taxes. The omission of these particular credits and benefits is significant. For example, the refundable portions of the child tax credit and earned income tax credit can keep many low-income workers – mainly those who have children — from owing federal payroll tax on their earnings. The result of failing to include these credits and benefits in the calculations can make it appear that the lowest income-earners are paying more in taxes than they actually are.
Unreported (Untaxed) Income Is Overestimated
Estimated average tax rates are determined by dividing the taxes paid by the income. But the assumption is that not all income is reported to the IRS. For the purposes of their study, Saez and Zucman assumed that all households under-reported income in proportion to their reported income, even when IRS taxpayer audit data shows that’s not true. Unfortunately, misallocating under-reported income inflates the income of the highest earners, which, in turn, drives down the estimated tax rate. The result: It can look like the highest earners are paying less in taxes than they really are.
Where Do We Go From Here?
One thing is for sure — the issues surrounding whether the wealthiest in the U.S. are paying less taxes than the middle class, won’t rest. From economists to presidential hopefuls to tax policy organizations, everyone has a point — or two or three — to make. Here’s a preview of what you can look forward to in the future regarding these issues.
The Institute on Taxation and Economic Policy Gives a Peek at TCJA in 2020
The Institute on Taxation and Economic Policy has estimated the effects of Trump’s TCJA in 2020. According to ITEP, the majority of the law’s benefits will go to the wealthiest 20% of Americans, and a considerable portion will go to foreign investors who own stocks in U.S. companies and will benefit from the corporate tax cuts that are part of the TCJA.
ITEP Estimated Data Shows TCJA Favors Wealthiest Americans
Here is a breakdown of ITEP’s estimates:
- ITEP estimates that in 2020 half of the law’s benefits that go to American taxpayers — $145 billion — will be received by the richest 5% of those taxpayers.
- ITEP also estimates that in 2020 72% of the law’s benefits that go to American taxpayers — or $205 billion — will be received by the richest 20% of those taxpayers.
- Finally, ITEP estimates that in 2020 foreign investors will receive $38 billion as a result of the Tax Cuts and Jobs Act corporate tax cuts.
Democratic Presidential Hopefuls Have Views Aligned With Saez and Zucman
It’s no secret that some of the Democratic presidential hopefuls are proponents of increased taxation for the wealthiest Americans. They’ve even been taking advice from Zucman. Here’s a look at what Sens. Elizabeth Warren and Bernie Sanders think about taxes.
Warren and Sanders' Tax Advisor Says 75% Is the Ideal Tax Rate for the Richest 1%
Zucman, who is advising Warren and Sanders on their wealth tax proposals, states in his co-authored book that the perfect federal marginal income tax rate would be 60%. But the perfect effective tax rate for combined taxes for the wealthiest Americans — including local, state, federal and payroll taxes — would be 75%, which is more than two times the current rate paid by the 1%.
Warren and Sanders Both Favor a Wealth Tax
But Warren and Sanders, as well as Saez and Zucman, agree that while increasing income taxes is needed, that alone won’t fix the growing inequality of wealth.
A Progressive Wealth Taxation study by Saez and Zucman, published in the Brookings Papers on Economic Activity, found that the accumulation of wealth among the top earners would be considerably less if a moderate wealth tax had been implemented in 1982. For example, instead of being worth $160 billion in 2018, Jeff Bezos, founder of Amazon, would be worth only $86.8 billion or less than half of his current net worth.
Both Warren and Sanders support a wealth tax to address income inequality. Warren’s wealth tax is considered the more moderate of the two, whereas Sanders’ example of wealth tax is considered extreme. Here’s a look at each plan.
Elizabeth Warren's Ultra-Millionaire Tax Applies To the Top 0.1%
Here are the facts of Warren’s wealth tax proposal:
- Only applies to households with a net worth of $50 million or more
- Roughly 75,000 U.S. households or top 0.1% would be subject to wealth tax
- Annual 2% tax on every dollar of net worth exceeding $50 million
- Annual 6% tax on every dollar of net worth exceeding $1 billion
- Over 10 years, the wealth tax will yield $3.75 trillion in revenue
Bernie Sanders' Wealth Tax Is Considered Extreme in Comparison to Warren's
Here’s a quick rundown of what Sanders’ plan entails:
- Annual tax that applies to top 0.1% of U.S. households
- Applies to net worths exceeding $32 million
- Those with net worths less than $32 million would not be affected
- Over 15 years, will raise around $4.35 trillion and cut the wealth of billionaires in half
Potential Problems Exist With a Wealth Tax
Even if a wealth tax sounds like a perfect solution to the growing income inequality between the 0.1% and the rest of Americans, that doesn’t mean there wouldn’t be issues. For example, tax avoidance and evasion would still occur. Plus, thriving entrepreneurs and business owners would be the hardest hit, which could negatively impact their ability to save, invest and hire new employees.
Final Answer: Do Billionaires Pay a Lower Tax Rate Than the Middle Class?
It depends on who you ask. If you were to ask Saez and Zucman this question, the answer would be a resounding yes. If you were to ask opponents of Saez and Zucman’s theories, the answer would likely be no.
Perhaps Forbes senior contributor Howard Gleckman stated it best, “Arguments about methodology shouldn’t mask Saez’s and Zucman’s bigger point: Incomes of the very rich are rising faster than for all other income groups. And the TCJA cut the taxes of high earners by more on average than for low- and moderate-income households, as a share of after-tax income. But that doesn’t mean that ‘billionaires paid a lower tax rate than the working class.'”
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About the Author
Cynthia Measom is a Texas-based writer specializing in finance, business, parenting and education. With almost a decade of online writing experience, her work has appeared on websites such as Chron.com, The Bump and The Motley Fool. Measom received a Bachelor of Arts in English from the University of Texas at Austin.