Billionaires vs. the Middle Class: Who Pays More in Taxes?
Written by
Caitlyn Moorhead
Edited by
Gary Dudak
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While the U.S. tax system has been imperfect for quite some time, President Trump’s Tax Cuts and Jobs Act — originally signed during his first term in December 2017 — has churned the fiscal waters and brought plenty of opinions and arguments from financial experts and economists back to the surface.
Taxes are a big platform for Trump, but that does not mean his decisions on them are consistent or backed by supporting IRS data. In fact, he seems to have a varying idea of what it means to have everyone pay their fair share. Higher taxes are never well received, but tax cuts for high-income individuals arguably do more harm.
Here’s a look at a timeline and breakdown of what taxes have really been paid when it comes to the super-rich compared to middle-class income households.
The Tax History of the Top 1% Hasn’t Actually Changed Much
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 1% of Americans today do not face an unusually low tax burden, by historical standards.”
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 1950s taxpayers and income levels only ended up giving up about 42% of their income in federal state and local government taxes, which means that the current tax marginal tax rate of 37% isn’t that much lower than the effective tax rate high earners faced in the 1950’s.
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.
However, according to the latest IRS data, the top 1% of earners paid 40.4% of all federal income taxes in 2022. This may outline the fact that it may seem the burden of the income tax system falls on taxpayers from the highest income groups, but this is only one side of the equation.
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 under-report income.
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 has 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.
As of 2025, The Tax Cuts and Jobs Act of 2017 will sunset in favor of a new overhaul with major tax policy changes for both individuals and corporations, including eliminating income tax. Though these plans are not enacted as of yet and could put more money in your pocket, many economists fear the negative implications could include inflation.
Zucman Claims That the U.S. Tax System Looks Like a Giant Flat Tax
Economist Gabriel 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.
Not surprisingly, the culprit that upset the tax system — according to Saez and Zucman — is Trump’s Tax Cuts and Jobs Act, though that will be put to rest in 2025, and a likely new plan will arise that could turn the tax system on its head.
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.
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 includes 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 the 0.1% do.
Billionaire investor Warren Buffet is known for saying that he pays less tax as a percentage than his secretary does. While that may seem impossible, it’s not. Buffet 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.
As with any economic theory 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. However, the assumption is that not all income is reported to the IRS. For their study, Saez and Zucman assumed that all households underreported 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.
Final Take To GO
The bottom line is that 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 three — to make. Here’s a preview of what you can look forward to in the future regarding these issues.
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.'”
Cynthia Measom contributed to the reporting for this article.
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