Are The Rich Paying Their Fair Share In Taxes?
While attending the 2019 World Economic Forum in Switzerland, Billionaire Bill Gates commented on Alexandria Ocasio-Cortez’s (D-NY) proposition to raise the marginal tax rate on the highest income tax bracket from the current 37% to 70%. A supporter of changes to the tax system himself, Mr. Gates said that, “If you focus on that, you're missing the picture.” (CNBC)
What Mr. Gates meant was that the wealthiest Americans’ do not make enough in actual salaried income to make a real dent in raising income tax revenue. His suggestion was to focus on ideas such as a progressive estate tax which would tax the wealthiest Americans’ home values and more. This begs a two-part question. One, what do the rich pay in taxes to begin with, and two, is that contribution legitimately fair compared to other Americans’ contributions?
Who Are The Rich?
According to the Economic Policy Institute, on average a family salary of above $421,926 is required to be considered the top 1% of earners in the United States. Besides salary, some Americans' have an enormous amount of accumulated wealth. According to Forbes, The top 3 Americans' by wealth are Jeff Bezos of Amazon ($160 Billion), Bill Gates of Microsoft ($97 Billion), and Warren Buffett of Berkshire Hathaway ($88.3 Billion), but this wealth is different from their salaries. Jeff Bezos’ salary as CEO of Amazon is a modest $81,840 per year as of 2017. Bill Gates earns $14,700,000 per year from Microsoft. Warren Buffet earns $100,000 per year as CEO of Berkshire Hathaway. There are also individuals who inherit wealth. According to the People’s Policy Project, over 40% of individuals in the top 1% have received inheritances.
These mega-wealthy folks make most of their money not from salaried income, but from capital gains. According to a 2015 study by the non-partisan Tax-Policy Center, earners making over $10 Million in income get only 15% of their money from salary and wages, the rest being mostly capital gains, followed by dividends and other sources. Therefore, someone such as Jeff Bezos may only have an $81,840 salary for being CEO of Amazon, but to fund his lifestyle or other business ventures, he can liquidate some of his Amazon stock. For example, to fund Blue Origin, his space company, he liquidates (converts to cash) $1 Billion in Amazon stock a year (Business Insider). And if Bezos wants to buy a new jet, or perhaps mansion, all he has to do is liquidate stock to pay. For extra taxable income, the wealthiest Americans also write books or charge to speak at an event, amongst other things.
So with these examples, what kinds of taxes do the wealthy pay?
The Federal Income Tax has been around for more than a century, and the amount an individual pays depends on their income. This tax is broken down into a bracket system, where a percentage of an individuals income for every bracket they are a part of. The current brackets are below in Figure 1:
The Pew Research Center did a tax revenue study with 2015 data to show how many individual filing Americans' (the single largest source of tax revenue) fit into certain income groups, and what those groups in America paid as a share of all income tax, with the average effective tax rate. Those results are in Figure 2:
This research shows that the poorest Americans', making less than $30,000 in adjusted gross income, contribute 1.4% in all income taxes paid, while making up almost 44% of all filers. Whereas Americans' making over $2 Million in adjusted gross income make up 0.1% of all filers and contribute over 20% of paid taxes while boasting the highest effective tax rate at 27.5%.
The highest marginal tax rate of all time was during WW2, where Americans' paid a 94% tax rate on salary over $200,000. The highest percentage rates occurred between the Great Depression and through the 1970’s, where the highest rate (the income bracket minimum changed occasionally) was above 63% from 1932 to 1981 and equal to 50% in 1982 (NTU). Since 1986, the highest bracket tax rate has never reached 40%.
Most states also levy state income taxes, but the focus of this article will be on federal taxes only.
Wealthier Americans' also pay taxes on Dividends. Dividends are paid out to stockholders of a company after the net profit of the company is taxed at the corporate tax rate. Companies such as Amazon do not distribute dividends at all, instead letting their massive stock price increases be an incentive to continue to invest, and using that profit to pay off things such as debt. Depending on whether they are qualified or unqualified, dividends paid to stockholders are taxed at different rates. Most of the time, dividends are qualified, which means the recipient only pays up to a 20% tax on the value, regardless of their salary and respective income bracket. Companies such as Target, CVS, and Intel pay out dividends to stock holders.
Capital Gains Tax
Capital gains taxes are levied on an individual’s assets growth. There are two main kinds of capital gains taxes, short term and long term. Short term applies to investments of those less than one year. If you invested in a stock for $1,000 in July and sold that same stock for $1,200 in September of the same year, making $200, that money would be taxed at the same rate as your highest income tax bracket. If you made the same investment of $1,000 in July and sold for $1,500 in November of the next year, making it a long term capital gain, that $500 profit is taxed at only 15% (Unless more than $450,000 is earned annually, where the rate then rises to 20%).
There is also the Estate Tax (Tax Policy Center), which applies when an individual passes away and leaves their estate to someone else. Generally, the estate is taxed at around 40% with a $11.2 Million exemption. The estate tax makes up less than 2% of the overall IRS revenue.
Proposed Changes in Taxes
Besides Capital Gains taxes, Dividend taxes, estate taxes, and Income taxes, what else are wealthy Americans' taxed? If Elizabeth Warren (D-MA) gets her way, there would be a new wealth tax. Elizabeth Warren has proposed taxing Americans' assets that are worth over $50 Million at 2% a year, with an additional 1% tax if over $1 billion. If enacted, approximately 75,000 households impacted would generate $2.75 Trillion in revenue in 10 years. Her reasoning brings us back from an earlier point on salary, which is further reinforced by the Walton Family, the owners of Walmart. The CEO of Walmart (just one of the Waltons) makes a high salary of $22 Million per year. However, their wealth is estimated at over $45 Billion.
Warren Buffet pays himself a $100,000 salary for operating Berkshire Hathaway, whereas his wealth in stocks is at around $84 Billion. He only pays taxes on that salary, and any gains from selling his stock, if he even sells (which would be a 20% tax of the increased stock value only). If Senator Warren’s plan was enacted, Warren Buffet alone would suddenly owe around $2.5 Billion more in taxes every year to the IRS. The revenues from this sort of a deal would be substantial, but how the wealthy would manage their money and how that would impact the economy and their respective investments is unknown.
Bernie Sanders (D-VT) has also come forth with a plan which would levy a higher 77% top tax rate on estates worth more than $1 Billion. And the exemption of $11.4 Million discussed earlier would drop to $3.5 Million, along with bumping up the tax rate from 40% to 45%. These changes would effectively double the tax liability of people such as Jeff Bezos, putting him at over $100 Million in taxes owed. One could argue that the wealthy would find ways to skirt around these taxes and find new loopholes. Republicans have proposed some ideas including removing the estate tax all together. A recent Fox News poll found that a majority of Republicans (54%), Independents (71%), and Democrats (84%) support generally higher taxes on the rich who make over $10 Million a year (Fox Poll page 33)
What Should the Wealthy Pay?
When it comes to taxing the wealthy, there are many more kinds of taxes levied on the wealthy which the average person would never have, such as capital gains or dividends. Ironically, the salaries of some of the mega-wealthy are relatively similar to the middle class, where the wealthy skirt by higher income tax brackets using invested wealth. At the same time, would taxing the rich at even higher rates for making high return financial investments could discourage the wealthy from some investments. The wealthiest Americans’ run companies that employ millions of people, who are paid. If higher taxes were levied on someone such as Jeff Bezos to the point where it wouldn’t make sense for him to liquidate $1 Billion in stock to fund his space company, Blue Origin, would that be a disservice to potential human technological advancement? At the same time, one could argue that amount of money being taxed at even double or triple the rate it is now may not make that much of an impact to someone with billions more stowed away.
There are other forms of tax revenue, such as excise taxes, corporate taxes, and tariffs. But when it comes to taxes on forms of income, have the rich been contributing enough?