What do the wealthy pay?
Generally, a much lower percent-
age of their incomes than the
middle class. A White House study
released in September found that
America’s 400 wealthiest families
paid an average federal income tax
rate of just 8.2 percent from 2010
to 2018. The rich do pay other
taxes not included in the White
House analysis, such as estate
taxes, but in recent decades, most
kinds of taxes on the wealthy
have been substantially cut. The
marginal tax rate for the top tax
bracket held at above 63 percent
between 1932 and 1982, spiking
as high as 92 percent in the 1950s.
Now, after decades of cuts that
started during the Reagan administration, the top marginal rate
stands at 37 percent. In addition, payroll taxes to finance Social
Security and Medicare are levied on laborers and CEOs at the
same rate, and only up to $142,800 in income. If you include all
taxes, such as sales and state taxes, the country’s top 1 percent
earn about 21 percent of total income and pay about 24 percent
of total taxes, making our tax system progressive—but mildly so.
Why isn’t it more progressive?
In writing and amending the tax code over the decades, Congress
has been heavily influenced by the political contributions of
wealthy Americans and large corporations, and the armies of lob-
byists they send to Washington. Investment income is taxed at a
much lower rate than salaries, on the theory that this encourages
business growth and stimulates the
economy. The tax code is also filled
with loopholes and deductions only
the wealthy can take. An analysis by
ProPublica earlier this year, based on
a trove of leaked IRS data, showed
that mega-billionaires Jeff Bezos, Elon
Musk, and Warren Buffett have paid
no federal income taxes at all in some
years, and a very low percentage on
their massive gains in wealth. Bezos,
one of the world’s richest men, paid
$973 million in personal federal taxes
on $4.2 billion in reported income
between 2014 and 2018. His wealth,
mostly in the form of Amazon stock,
increased by $99 billion during that
same time period, giving him a “true
tax rate” of 0.98 percent, ProPublica
said. Corporations pull similar tricks:
Between 2018 and 2020, 39 S&P or
Fortune 500 companies managed to
pay no income tax while recording a
combined $122 billion in profits.
How do they do it?
Corporations and the super-affluent
can employ accountants and lawyers
who know how to manipulate
their capital gains, interest, and
dividends. Executives paid in
stock, for instance, can sell their
losing investments at the end of
the year to zero out their tax-
able growth. The wealthy also
engage in asset-based lending—
borrowing money against their
portfolio rather than selling
appreciated investments that
may incur capital gains taxes.
Rich Americans can keep wealth
in the family by passing assets to
heirs and exploiting a loophole
called “step-up in basis.” This
means the value of an inherited
asset generally adjusts to what
it’s worth on the date of its
original owner’s death—meaning years or decades of gains before
that date instantly become tax-free. “As long as you’re adhering to
the law,” says Sharif Muhammad, founder and CEO of Unlimited
Financial Services, “everything’s fair game.”Can wealth itself be taxed?
Oregon Sen. Ron Wyden and some other Democrats recently
pushed for a “billionaire tax” that would tax the richest
Americans on unrealized capital gains. But such a tax would face
constitutional challenges, and billionaires quickly accused progres-
sives of waging class warfare. “Eventually, they run out of other
people’s money and then they come for you,” tweeted Musk, the
Tesla CEO, who’s worth roughly $280 billion. From a practi-
cal standpoint, taxing unrealized gains would require a major
revamping of the tax system, giving
an already overwhelmed IRS (see box)
the tricky task of valuing assets such
as private businesses.Who does the tax code favor?
It has a strong bias for investment
income over wages, and thus worsens
income inequality. The top 10 percent
now own 70 percent of the wealth,
up from 60 percent in 1990, and any
attempt to alter the status quo runs
into powerful, well-financed opposi-
tion. The Biden administration’s plans
to raise taxes for spending bills, for
example, have met a torrent of orga-
nized corporate opposition on Capitol
Hill. “We’re doing it in every way you
can imagine,” said Aric Newhouse,
the senior vice president for policy
at the National Association of
Manufacturers. So far, those lobbying
efforts have been successful; though
a 15 percent corporate minimum tax
and a surtax on incomes over $10 mil-
lion remain on the table, proposals to
increase tax rates on the wealthy and
corporations have been dropped.12 NEWS Briefing
Bezos, Musk: Their astronomical wealth gains are largely tax-free.Who pays America’s taxes
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)How the IRS was gutted
The IRS has never been America’s most popular
government agency, and conservatives have
harbored suspicions about its usefulness since
the 1990s. Their hostility escalated dramatically in
2013, with reports that “Tea Party” groups seeking
tax-exempt status were receiving extra scrutiny.
The IRS also targeted groups with “progres-
sive” and “green” and other partisan labels in
their names, but enraged Republicans accused
the agency of bias and political persecution.
They escalated their efforts to cut the IRS budget,
reducing the number of auditors by one-third. In
2017, the IRS conducted 675,000 fewer audits than
it did in 2010, a drop of 42 percent, and auditors
are stretched so thin that they are reluctant to
take on complex returns filed by the wealthiest
citizens. As a result, the IRS now audits Americans
who receive the earned-income tax credit—whose
incomes are about $20,000—at about the same
rate as people earning $500,000 to $1 million. For
this to change, Pam Reicks, a former IRS manager,
told ProPublica, the IRS needs a bigger budget
and more employees. “You can see all this abuse
and fraud and people not paying their taxes,” she
said, “but can’t use your hands to get it.”During the debate over spending bills, Democrats proposed raising taxes on the wealthy. Do the rich pay a fair share?