At every opportunity, President Joe Biden has pressed a central tenet of his social agenda: “Extremely wealthy Americans don’t pay their fair share of federal income taxes” (emphasis added). By Internal Revenue Service definitions of income, top income earners generally pay a far greater federal income-tax share than do lower income groups. Without saying so, the President has greatly expanded wealthy Americans’ income to include their considerable unrealized capital gains, dramatically lowering their income-tax rate, which he uses to advance his wealth-tax case. To initiate wealth taxation, Biden proposes a “minimum billionaires tax,” under which wealthy Americans will pay at least 20% of their “total income”—including unrealized capital gains—in federal income taxes.1 A sizable majority (59%) of diverse Americans2 also favored a wealth tax in 2022.

Political support for a wealth tax appears to be built on two incorrect presumptions: First, wealthy Americans pay precious little income taxes (conventionally defined). Second, workers’ “income” and the wealthy’s “capital gains” are conceptually the same. As explained, given the economics of wealth accumulation, the wealthy (especially those self-made) should be celebrated, not denigrated, because of the resulting far greater gains provided non-wealthy Americans.

The Wealthy’s “Low” Tax Rates?

President Biden stresses that extremely wealthy Americans pay a meager 8% income-tax rate, giving the impression that he’s using IRS definitions. However, the Tax Foundation3 found that in 2020 (the latest year of data), the top 1% of taxpayers received 22.2% of taxable income and paid an average tax rate of 26.0%. The top half of taxpayers, who received almost 90% of taxable income, paid an average tax rate of 14.8%. The bottom half received 10.2% of taxable income and paid an average tax rate of 3.1% (with many paying nothing). In short, the top 1% of taxpayers received 2.2 times the income share of the bottom half but paid an average income-tax rate 8.4 times the tax rate of the bottom half.

The Tax Foundation also found that the top 1% in 2020 paid 42.3% of all federal income taxes, or 18 times the share of the bottom half, which was 2.3%. The top 10% of taxpayers received almost half the total income but paid almost three-quarters of all income taxes. Moreover, the income-tax share paid by the top income groups has risen substantially since 1980, while the share of the bottom half of taxpayers was more than halved (findings dramatized in a National Taxpayers Union Foundation4 chart).

Did the wealthy pay their “fair share” of income taxes? The tax-share statistics surely leave more room for debate than Mr. Biden suggests.

Biden’s Income Definition

In the press for a wealth tax, Biden’s economic advisors5 have expanded substantially the definition of taxable income (but only for the extremely wealthy), arguing that

  • When an American earns a dollar of wages, that dollar is taxed immediately at ordinary income tax rates. But when they gain a dollar because their stocks increase in value, that dollar is taxed at a low preferred rate, or never at all. Investment gains are a primary source of income for the wealthy…

Because many non-wealthy Americans have little to no investments (so claimed), the President’s advisors have declared that the tax system favors the wealthy by lowering their tax payments (and undercutting funding for social programs). Because worker earnings and capital gains are measured in dollars, Biden’s advisors see them as conceptually equivalent, but are they? Not really—and treating them the same is a political sleight-of-hand.

The advisors have defined taxable income for wealthy Americans to include their annual capital gains and certain “consumption” expenditures, mainly their now legally tax-deductible charitable contributions.6 The advisors’ redefined income-tax rate for extremely wealthy Americans—meaning Forbes’ top 400 wealthiest families—is an imputed 8.2% for 2014-2018 (one-third the conventionally computed tax rate for the top 1% above). The advisors have estimated that during 2014-2018, Forbes 400 paid $149 billion in total income taxes on their newly defined taxable income of $1.82 trillion, making for the 8.2% rate. Biden’s advisors make no effort to impute similar tax rates for lower wealth groups, on the claim that only the extremely wealthy have significant capital gains (even though 58% percent of Americans owned stocks in 2022 and their retirement accounts were valued at $40 trillion in 2021).

The Income/Wealth Conceptual Divide

“Presidential advisors assert that the wealthy’s capital gains are conceptually the same as worker earnings, except they escape taxation. But that’s not the case.”

Presidential advisors assert that the wealthy’s capital gains are conceptually the same as worker earnings, except they escape taxation. But that’s not the case. The most prominent difference? The extent to which the two forms of “income” are realized. Workers’ annual earnings are realized in their paychecks—and are spendable and savable, and not subject to future losses! By contrast, the market value of wealth holdings—say, corporate stocks—is best approximated by the present value of market estimates of companies’ ever-changing future and yet unrealized profit streams, appropriately discounted for time and risks that expected future profits will not be realized. And those unrealized gains can’t be realized until… well, the future arrives.

With the future always unrealizable today, shareholders will unavoidably carry risks of their unrealized capital gains evaporating or morphing into losses. And unrealized future profit streams can vary with errant government (say, tax and regulatory) policies and a multitude of ever-changing economic, social, geopolitical, and environmental forces (among others) over which wealth holders have no control.

Risk costs may only be expected and seem ephemeral, but they can become real as products and firms fail. Remember Sears? When Sears was the world’s top retailer in 1969, many shareholders likely had unrealized capital gains, subject to unrealized (and unrecognized) risks. Then, many Sears executives had probably not heard of Walmart expanding in small Southern markets. Walmart was, surely, a force in the emergence of Sears’ losses in the 21st century, with its last store closing in 2021.

Wealth-tax proponents need a reality check: Most firms’ anticipated future profits are never realized, partially because most new firms fail (half in their first five years). Remember Kmart, Radio Shack, and Blockbuster? Their stockholders once had unrealized capital gains. Bed, Bath & and Beyond’s stock price doubled to $35 in 2021, which left some stockholders flush with capital gains—but also with considerable risk that the company’s future was in jeopardy. Its future would have been further jeopardized had the IRS then drawn off some of the shareholders’ capital gains, taking a portion of the failing company’s desperately needed capital. As it was, BBB’s stock plunged after 2021, dipping below a dime at this writing (April 2023).

Wealth-tax advocates seem to imagine the extremely wealthy’s wealth as granite, readily quarried. Well, Forbes 400 lost a half-trillion of their $4.5 trillion total wealth in 2022. Jeff Bezos alone lost $57 billion7. If the Forbes 400 had paid unrealized capital gains taxes in 2020, would wealth-tax proponents have refunded their taxes (or covered their realized losses) in 2022? Do advocates want American taxpayers to assume market risks, or are they proposing only to share in the wealthy’s gains, but not their pains?

Errant Fiscal and Monetary Policies

Because stock prices today are founded on discounted future profit streams, they are sensitive to interest-rate movements. And stock prices do move counter to interest rates. This means Federal Reserve rate cuts can, and do, lead to unrealized capital gains, as experienced in the run-up to the 2007-2009 Great Recession. As bankers (and economists) began re-learning in 2022, unrealized capital gains can be bolstered but then undercut by prolonged easy monetary policy meant to hold interest rates down to near zero, partially to monetize the string of trillion-dollar federal deficits. The Fed and wealthy and non-wealthy shareholders also re-learned in 2022 how unrealized capital gains can evaporate with monetary-induced jumps in the inflation rate that feed into higher interest rates and lower equity prices.

To properly evaluate the “fairness” of an unrealized capital gains tax, wealth-tax advocates need to understand that the extremely wealthy will be twice hit by a wealth tax. First, they will pay taxes on their current capital gains. Second, market investors will see taxes on future profits become capitalized today into lower stock prices. Fearing today’s narrowly applied wealth tax will be broadened, investors will be more inclined to sell and more resistant to buying stocks. Thus, a capital gains tax can put downward pressure on today’s stock prices and impair firms’ investment in innovative products, leading to slower growth in workers’ real incomes and retirement accounts. Non-wealthy stockholders will, of course, share lost capital gains from any market downturn.

Biden and company are unlikely to concede on the fairness of wealth taxation, especially since they see capital gains as income, and untaxed at that. If fairness is their banner, might they not understand that any wealth-tax proposals should be accompanied by an allowance for risk costs? Without such an allowance, investors will shift toward safer assets, to avoid paying a tax on risk costs embedded in higher returns on riskier investments. Granted, a risk-cost allowance would likely throttle enthusiasm for a wealth tax for a practical reason: How can risk costs possibly be computed with reasonable accuracy across all ever-changing portfolios, especially when such costs can be imputed (to varying extents) into stock prices?

Wealth as a Fixed-Pie

Progressives have often pressed for wealth taxes based on modern versions of the fixed pie theory of income and wealth that both Adam Smith (1723-1790) and Karl Marx (1818-1883) adopted. Given wealth’s presumed fixity, many of today’s wealth-tax proponents imagine that the national wealth pie can only be divvied up among people (or groups). Capitalists, presumably, can’t grow the pie (because labor, not capital, is considered the sole source of value). If a billionaire’s wealth increases, others must suffer smaller slices, a point that a progressive New York Times columnist8 has crystalized: “[W]e have spent the last 30 or so years transferring trillions of dollars from the middle class to the people at the very top” [my added emphasis], implying that the wealthy have largely taken their wealth from others, not by increasing the wealth pie.

Thieves are infamous for forcibly taking what others have. But is (zero-sum) thievery the way wealthy people build their fortunes? Amazon’s Jeff Bezos, Microsoft’s Bill Gates, and Tesla’s Elon Musk have largely accumulated fortunes in an old-fashioned way: by offering their buyers added value for their dollars (a prerequisite for inducing buyers’ voluntary purchases). In treating wealth accumulation as zero-sum, wealth-tax advocates exploit an asymmetry in the measurement of gains from purchases. They point to the exact dollar wealth of billionaires: “Jeff Bezos has $123.7 billion in wealth today, up four-fold from 2014.” Advocates don’t consider the economic gains of Amazon’s buyers—because their gains aren’t measured—and can’t be! Buyers’ gains are subjective, which are realized in enhanced product quality, beauty, convenience, faster delivery, and so forth.

If asked to monetize their added gains, many Amazon buyers might assess them on individual purchases as no more than nickels and dimes. Across the company’s 200 million-plus global buyers, however, those small gains, when totaled, can be far larger than Bezos’ wealth. Given the measurement asymmetry, however, buyers as voters can be forgiven if they (wrongly) deduce that Bezos’ gains are far greater. Can that be, other than in, say, car jackings? If Amazon buyers didn’t gain from their purchases, how could the company have so many (eager) repeat buyers? An obvious uncomfortable implication for the wealthy’s critics: Absent force, growth in the wealth of the wealthy will, generally, be accompanied by growth in the economic gains of others, including the non-wealthy.

The Added Profits Extracted from Firms Added Value Streams?

Extremely wealthy people—like Bezos—build their fortunes partially by drawing down their firms’ profits, which wealth-tax advocates seem to imagine represent a sizable percentage of revenues. Are their impressions on target? Across industries, corporate net profit margins (revenues minus cost of goods and operating expenses) averaged 8.9% in 2022 (with wide variation). And the average profit margin isn’t net of a nontrivial business cost, risk.

Being in retail, Amazon has an expected low net profit margin. In 2022, its net margin was only 1.42% (highly variable but consistently low). Bezos must have built his fortune by developing a huge value stream for his customers. And he did, with annual sales reaching $514 billion in 2022.9

Developing a more credible assessment of founders’ wealth takes is fraught with estimation problems. However, MIT economist William Nordhaus10 has taken up the challenge. He has estimated the extra (above-competitive) profits technology firm founders received in 1948-2001. Nordhaus estimated that company founders appropriated only 2.2% in extra profits from their firms’ added-value streams (suppressed mainly by rapid entry of imitators). Overall, Nordhaus estimated that of the $6 trillion in their total added value, tech entrepreneurs were able to capture only $400 billion, leaving $5.6 trillion of added value for others, mainly buyers. In addition, Nordhaus estimated that innovators’ added profits covered annually only .19% of their capital replacement cost.


Wealth, especially great wealth, is a tempting tax target. It is easily attacked as unearned, undeserved, unfair, as well as unneeded, and an economic drain on others (with base drives of envy and covetousness coloring policy advocacy). The wealthy’s riches can be seen solely as enabling the wealthy to acquire, say, expensive cars and wardrobes. In truth, the wealthy wouldn’t be wealthy for long if they didn’t put much of their wealth to work productively.

President Biden and other wealth-tax proponents should reconsider how the wealth-tax debate has lacked balance. The wealthy pay more income taxes (conventionally defined) than widely presumed. The asymmetry in measuring sellers’ and buyers’ gains from trades has left the impression that only the wealthy have gained from trades, a mockery of how wealth accumulation works. Buyers’ gains have generally been far greater than sellers’ gains. Also, it has been all too easy for wealth-tax advocates to overlook and forget the untold uncompensated hours, sleepless nights, and risks many of today’s wealthy endured in their pasts with only a glimmer of hope that they would be wealthy today.

Wealth-tax proponents don’t seem to appreciate critical points: Foremost, people’s wealth today is founded on sequences of future evolving and interacting events that are unavoidably fraught with risks. Second, wealth taxes today may yield substantial current government revenues, because of much wealth’s short-term immobility. However, wealth’s long-term mobility is likely to be far greater than imagined, given that wealth taxes imposed today can lower firms’ expected future profit streams (apart from the taxes extracted) and undercut future investments—and the country’s taxable future wealth.

For more on these topics, see

Policy makers must remember that while much wealth takes the historical form, buildings and heavy machinery, considerable contemporary wealth comes in digitized ideas, which can be sent across the globe at the touch of a few computer keystrokes and at the speed of light. In short, added taxes on “extreme wealthy” Americans can unavoidably impair the economic futures of non-wealthy Americans.


[1] Under President Biden’s “Billionaire Minimum Income Tax,” American households with a net worth of more than $100 million—”the top one-one hundredth of one percent (0.01%)”—would be required to pay in federal taxes a minimum of 20% of their “full income,” including unrealized capital gains.

[2] Zhang, Sharon. “Majority of Voters Support Biden’s Billionaire Income Tax, Poll Finds” in Truthout. Available online at https://truthout.org/articles/majority-of-voters-support-bidens-billionaires-income-tax-poll-finds/

[3] York, Erica. “Summary of the Latest Federal Income Tax Data,” 2023 Update, January 26, 2023. Available online at https://taxfoundation.org/summary-latest-federal-income-tax-data-2023-update/

[4] Brady, Demian. Table 1. “Who Pays Income Taxes: Tax Year 2020.” Who Pays Income Taxes? National Taxpayers Union, December 13, 2022.

[5] Leiserson, Greg and Danny Yagan. “What Is the Average Federal Individual Income Tax Rate on the Wealthiest Americans?” The White House, September 23, 2021. Available online at https://www.whitehouse.gov/cea/written-materials/2021/09/23/what-is-the-average-federal-individual-income-tax-rate-on-the-wealthiest-americans/

[6] Making the wealthy’s charitable contributions taxable can be expected, of course, to draw opposition from the country’s multitude of charities that now benefit from the wealthy’s efforts to lower their income-tax payments.

[7] The 2022 Forbes 400 List of Richest Americans: Facts And Figures, Forbes, September 27, 2022. Available online at https://www.forbes.com/sites/chasewithorn/2022/09/27/the-2022-forbes-400-list-of-richest-americans-facts-and-figures/?sh=155fb02318e4

[8] Tomasky, Michael. “Bill Gates, I Implore You to Connect Some Dots,” The New York Times, November 11, 2019. Available online at https://www.nytimes.com/2019/11/11/opinion/billionaires-warren-wealth-tax.html

[9] A very rough (hardly satisfying and likely exaggerated) measure of Bezos’ extracted wealth from Amazon’s “added value stream” is the ratio of his wealth to Amazon’s annual revenues. In 2022, Amazon had a market cap of about $1 trillion. Bezos’ wealth was judged by Forbes to be $114 billion (down by $57 billion in March 2022). This means his wealth was then about one-seventh of Amazon’s annual sales, which greatly exaggerates his take. He built his wealth in multiple years of prior Amazon sales, and he likely invested his extracted profits in a diversified investment portfolio. Moreover, his wealth is the current discounted value of Amazon’s entire future profit stream, covering multiple annual sales with adjustments for unrealized risks.

[10] Nordhaus, William D. “Schumpeterian Profits in the American Economy: Theory and Measurement,” NBER Working Paper No. 10433, April 2004. Available online as PDF at https://www.nber.org/system/files/working_papers/w10433/w10433.pdf

*Richard B. McKenzie is the Walter Gerken Professor Emeritus in the Merage School of Business at the University of California, Irvine. His latest book is Reality Is Tricky: Contrarian Takes on Contested Economic Issues (2023).

For more articles by Richard McKenzie, see the Archive.