The richest Americans win the tax game, no matter which metric you use. ProPublica published an article, based on a vast mine of unpublished information from the IRS, which reveals the paltry amount of taxes paid by the ultra-rich compared to their massive accumulation of wealth.
But this wealth of IRS data also reveals new information about how little tax the richest 25 Americans pay on the most conventional measure: income. Not all are able to minimize their income and avoid taxes; some bring in very large sums. But even then, the data – and new analysis from ProPublica – shows they are still paying surprisingly low rates.
That’s lower than the rate a single worker earning $ 45,000 a year could pay if you include Medicare and Social Security taxes.
The federal tax system is designed to be progressive: the more money people make, the higher the tax rate they are supposed to pay. Today, a married couple pays a 10% tax rate on their first $ 19,900 of taxable income (after deductions), increasing to 37% for anything they earn above $ 628,300.
But these are just the rates on paper. To get a more accurate picture, IRS analysts look at the taxes people actually pay. This is called the “effective tax rate”. If you had earned $ 10 million and paid $ 2.5 million in taxes, you would have had an effective rate of 25%.
Looking strictly at income taxes, IRS statistics show that effective tax rates actually increase with income. In 2018, the latest year for which data is available, taxpayers earning between $ 500,000 and $ 1 million paid on average twice the tax rate as taxpayers earning between $ 100,000 and $ 200,000. Taxpayers earning between $ 2 million and $ 5 million paid 27.5%, the highest of all taxpayers. But, at this point, the climb stops.
From there, rates go down as income goes up. By the time you reach the most rarefied income group whose data is released by the IRS – the richest 0.001% of taxpayers, a collection of 1,400 people who each disclosed incomes in excess of $ 69 million – the rate fell to 23%.
But as ProPublica’s new analysis shows, the top 25 pay even less than that.
How is it possible?
Typically, the wealthy of all stripes keep their tax rates low in several ways. Some are simple: they avoid forms of income, like wages, which are taxed at a high rate, 37%, and derive most of their money from capital gains and investment dividends, most of which are taxed. at 20%. (Among those with the highest annual incomes and highest capital gains are elite hedge fund managers.) Large charitable donations reduce taxable income. Other tax-saving approaches are more obscure: everything from the deduction for things like interest payments to various credits for business owners.
The top 25 are taking these strategies and applying them on an epic scale, ProPublica found. The wealthiest can also choose when to collect income, matching their deductions to lower their bills. By using their large stocks of stocks, they can make large charitable grants. This achieves the double feat of avoiding any taxes on the growth of the stock while obtaining tax deductions for full value.
To understand how low the personal tax burden of the nation’s wealthiest Americans is compared to typical wage earners, you need to count other forms of federal taxes as well. Social security and health insurance obligations, which are automatically withheld from employee paychecks, hardly hit the ultra-rich, as they tend to avoid the forms of income, like wages, to which taxes apply. ProPublica found that these taxes had a negligible effect on the total burden of the 25 richest. If we include them in our calculation above, it would increase the average tax rate of the richest from 15.8% to 16%.
Most workers, however, pay more in Social Security and Medicare levies than in income taxes – although they probably don’t know it. The taxes for these retirement and health programs are administered in a way that makes them almost invisible: not only are they subtracted automatically with each pay period, but the burden is shared. Half is taken directly from employees’ salaries and the other half is paid by employers.
Take the typical worker we quoted above, who had a salary of $ 45,000 in 2018. With the standard deduction, that worker’s income tax bill would be $ 3,800, or a rate of 8. %. But now add payroll taxes. The worker paid just over $ 3,400 directly during the year; in addition, the worker’s employer paid an amount equivalent to his share of the worker’s social security and health insurance taxes. Government agencies and most economists typically count both contributions – a total of nearly $ 6,900 in this case – as a tax that is effectively borne by workers since it is part of the cost of paying their wages. The logic is that employers take these costs into account when hiring and would hire fewer people or pay them less because of the tax burden.
In total, our worker paid $ 10,700 in taxes. Taken as a percentage of the worker’s total compensation (including a typical health plan), this gives a rate of 19%.
Yes, that’s higher than the average rate of the 25 richest Americans.