University of Michigan economist Justin Wolfers tweets:
Stunning new estimates suggest that the 400 wealthiest American families paid an average Federal tax rate of only 8.2%.
Wow, I thought. That is stunning. It’s true that a large percent of Americans have a zero average federal tax rate. But many higher income people like Justin and me don’t. I think my wife’s and my average, not counting my hefty Social Security taxes, is between 15 and 18 percent.
But then when I read the first paragraph of the study that Justin quoted, I wasn’t surprised at all.
Here’s what it says:
Abstract: We estimate the average Federal individual income tax rate paid by America’s 400 wealthiest families, using a relatively comprehensive measure of their income that includes income from unsold stock.
It’s well known that you don’t pay taxes on capital gains until you sell the asset. Very wealthy people typically have huge amounts of stock and stock prices have risen a lot recently.
So there’s no real news here. Instead the White House economists who did the study, Greg Leiserson and Danny Yagan, have redefined income.
UPDATE: See also Greg Mankiw’s insight about the study. Here’s a key paragraph from Greg’s post:
The problem is that this question has little connection to the policies now being discussed. As I understand it, the essence of the plan under consideration is not a tax on the unrealized capital gains of the 400 richest families. Instead, the plan aims to raise the corporate tax rate, which in turn is paid by the many shareholders, workers, and customers of the companies. (Economists debate the relative incidence.) In addition, the plan aims to raise the the tax rates applied to the already-taxed income earned by people making more than $400,000 a year. I would guess that this latter group includes about 1.5 million taxpayers. Needless to say, 1.5 million is a much larger number than 400. And the finances of the 400 are in no way representative of the finances of the 1.5 million.
Greg adds, “Don’t get distracted by this shiny object.” Justin Wolfers did.
READER COMMENTS
Floccina
Sep 23 2021 at 4:24pm
Someone should publish how much taxes they pay in relationship to their consumption which would be much more valid. Consumption matters much more than numbers in databases of who owns what stocks at the latest market price.
Frank
Sep 23 2021 at 4:48pm
Yes, absolutely, and that over the life-cycle.
David Henderson
Sep 23 2021 at 9:38pm
Floccina,
Good point.
Matthias
Oct 3 2021 at 2:53am
Yes, that would be interesting.
Do keep in mind that you can still tap your raising stock wealth without selling it:
You can borrow against the stock.
The technique is called buy-borrow-die. The last part happens because as a quirk of American tax law, the cost basis for capital gains taxes resets on death.
Thomas Lee Hutcheson
Sep 24 2021 at 6:35am
But certainly one could impute the (inflation adjusted) gains and losses year by year rather than wait until the are realized. It would avoid some of the inefficient financial acrobatics for timing gains and losses.
Christophe Biocca
Sep 24 2021 at 8:01am
That would make founders lose controlling ownership of their company pretty rapidly, and force companies to go public or get outright sold much earlier.
And can you imagine the headlines after a market crash? “Jeff Bezos paid MINUS $25B dollars in taxes this year, in the middle of the worst recession in recent history”.
Evan Sherman
Sep 24 2021 at 9:06am
I could be missing something, but doesn’t that proposal dismiss the productive uses, for all of us, of having money invested? That is to say, money invested (vs., say, stuffed in a dollar-sign bag under a mattress) is doing productive work (thus the returns), and so taxing it yearly reduces the amount of money doing work every year before the asset is sold. Right?
Even if the tax $ theoretically comes from a different pot and not directly from the asset, the effect would be the same; the investor would have to come up with the money somehow, and the outcome would certainly be less money set aside for further ongong investments. Whereas, if you tax the gains only when the asset is turned into spendable liquid money anyway, you are only costing the investor-taxpayer money that they would have spent for their own consumption purposes and ensuring that all of the capital invested does as much work for as long as possible. (Really, I think a consumption tax vs. an income tax of any kind would be better. Original opinion alert! 🙂 )
Really could be missing something here. E.g. Maybe people really do anticipate the capital gains taxes when the asset is sold such that their willingness to keep $ in productive investments is the same as it would be if the gains were taxes yearly? It seems clear to me that this wouldn’t happen , though – and that people would be less interested in keeping more invested if they had to pay the taxes on the gains yearly.
Thomas Lee Hutcheson
Sep 24 2021 at 9:13pm
Your argument, that I agree with conceptually, is that we should tax only (or at least preferentially) consumption. What one does not consume is left to grow wealth. That would be a big change, but we could move in that direction by raising the deductible amounts added to retirement savings.
robc
Sep 24 2021 at 9:18am
Thomas,
I thought you favored a progressive consumption tax?
While not perfect, not taxing unrealized gains gets us part way there. The other part would be not taxing the realized gains, as long as they were reinvested.
Knut P. Heen
Sep 24 2021 at 8:12am
I suppose stockholders also should get a subsidy every time the stock price drop?
This is what Richard Feynman called Cargo Cult Science. People who misrepresent income like that is lacking the scientific integrity Feynman was asking for.
Alan Goldhammer
Sep 24 2021 at 8:41am
The Dems are just coming forth with a lot of pie in the sky thinking on taxes without any practical solutions. It almost wants to make me into a Republican (like that will ever happen!!). The one thing they could do is eliminate the abuse of Roth IRAs that allow stock trading and capital gains accumulation without any tax payment at all (Peter Thiel is a serial abuser of this loophole).
The simplest way to capture tax revenue is through a VAT which is self executing and based on consumption whether it is by the individual or the corporation. Eliminate all the tax preferences and do away with the corporate income tax which will always be gamed by smart tax lawyers. Simplicity is always best!!!
robc
Sep 24 2021 at 9:21am
If we are going on simplicity, the SLT is better than the VAT.
Plus its morally better too. And less deadweight loss too.
Its just better.
SLT>Sales Tax>VAT>income tax.
Frank
Sep 24 2021 at 5:35pm
SLT? State and Local Tax? Could be anything.
Sales tax and VAT are the same, just two different ways of collecting a consumption tax.
Dylan
Sep 25 2021 at 7:31am
I believe Rob is referring to the Single Land Tax.
Frank
Sep 25 2021 at 1:17pm
Cool! Yup, the Land Tax is the best tax.
robc
Sep 25 2021 at 6:33pm
Yes, single land tax.
Sales tax and vat are same thing, bur former isnt hidden, so better.
Just like an income tax without withholding is better than the same income tax with withholding.
Justin
Sep 24 2021 at 9:19am
Funny how you never see these types of arguments from the left after stock market crashes. I guess “Government Owes 400 Wealthiest Americans Billions in Tax Refunds” wouldn’t go over well with their customers.
Oddly enough I also haven’t seen the economists who went into a fervor over the previous CEA’s cubic COVID extrapolation graph, who clearly have a principled opposition to fallacious arguments damaging the CEA’s credibility, raise a similar fuss over this.
robc
Sep 24 2021 at 9:23am
Knut and Justin,
When my last business closed, my pastor helped me move furniture out of the building. I told him I was taking a big loss that year and asked if the tithe meant the church was going to cut me a check for 10% of my losses. He laughed.
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