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America’s richest 400 families pay a lower tax rate than ‘average’ taxpayer

September 23, 2021September 23, 2021 by Mike Robinson

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President Joe Biden speaks during a virtual Covid Summit of the United Nations General Assembly on Sept. 22, 2021 in Washington.

Alex Wong | Getty Images News | Getty Images

The wealthiest 400 American families paid an 8.2% average rate on their federal individual income taxes from 2010 to 2018, according to a White House analysis published Thursday.

According to a White House report, the 400 richest families are the highest 0.0002% of taxpayers.

The report was written by economists from the Council of Economic Advisers and Office of Management and Budget. It estimates that their tax rate of $8.8 trillion of income paid over nine years is low relative to other taxpayers.

By comparison, Americans paid an average 13.3% tax rate on their income in 2018, according to a Tax Foundation analysis. The figure is inclusive of all taxpayers, even the most wealthy.

This analysis is coming as Democrats propose raising taxes on corporations and the wealthy to fund investments of up to $3.5 trillion in education, paid leave and childcare, and other measures to combat climate change.

Republicans oppose the comprehensive tax package that would eliminate several tax provisions in their 2017 tax law. Rep. Kevin Brady (R-Texas), the ranking member of the House Ways and Means Committee, stated that a tax hike would “wast hard-earned tax money” and fund the “greatest expansion to the welfare state in human history.”

The report’s findings are similar to those of a recent ProPublica investigation, which found that some of the world’s richest men (Jeff Bezos, Michael Bloomberg, Warren Buffett, Carl Icahn, Elon Musk and George Soros) pay a tiny fraction of their wealth in tax.

According to the IRS confidential data, 25 of America’s wealthiest Americans saw their net worth increase by 401 billion and paid an effective federal tax rate 3.4% between 2014-2018.

Investment income

The wealthiest Americans leverage existing tax rules to pay a low rate, according to the White House.

Most income tax is paid out of wages earned on the job by those with low and moderate earnings. The wealthiest Americans, however, generate most of their income through investments. These are subject to a higher tax rate than wages if they have been held for more than one year.

While the federal top income tax rate for wages is 37% and that of dividends or assets, such as stocks and houses, is 20% when they are sold for gains, it is only 27%.

The rich can also escape tax on an asset’s appreciated value by not selling it. A “step up in basis” allows them to pass on investments to their descendants. This means that heirs would not have to pay taxes on the gains accrued during the original owner’s lifetime if the asset is sold.

The White House reports on income from “unrealized Capital Gains” or untaxed Asset Growth. This differs from traditional analyses which don’t always include this income measurement.

The report suggests that the 8.2% estimated tax rate by authors may be inaccurate due to insufficient data or methods. According to them, the tax rate can be as low or high as 6% or as high as 12.5%.

Greg Leiserson (senior economist at the Council of Economic Advisers) and Danny Yagan (chief economist at the Office of Management and Budget), co-authored the statement. “We stress that any estimation of tax rates for the wealthiest individuals is not certain and subject to revision due to limited data.”

Also, the analysis doesn’t include taxes such estate taxes. This 40% tax is levied on married couples whose estates exceed $23.4million.

President Joe Biden recommended raising the capital gains tax rate to 39.6%, the same as the wage rate, for people with incomes over $1million. He also proposed eliminating the step-up. House Democrats proposed a different approach — they would keep the step-up intact and levy a 25% top rate on capital gains.

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