Why do billionaires pay much less tax than the average American ?
Last week Jeff Bezos made an unexpected contribution to the debate about taxation in the United States, claiming that billionaires like himself pay a lot of tax and that it would be pointless to ask them to pay more.
Coming from someone who, famously, paid zero income tax in 2011 and even received a tax credit for his children, this predictably did not go very well.
But it’s not just billionaires like Bezos, with a clear interest in maintaining the status quo, who express this sentiment. There is a common view that the US tax system is progressive, that the super-rich must pay a lot of tax and the working class does not contribute to funding the government.
So it’s worth looking at what the research says on this issue. My colleagues and I have spent several years trying to assemble the most comprehensive estimates of who pays the taxes in the United States.
To begin with, it’s worth dispelling a common myth. Contrary to what we often hear, the working class pays a lot of tax in America. Bezos, echoing conservative commenters, claimed last week that the top 1% pays 40% of taxes and the bottom 50% only 3%.
But this claim is misleading. It captures just one tax – the federal income tax – and ignores all the rest: payroll taxes, state income taxes, sales taxes, excise duties, etc., many of which are regressive.
If one takes a comprehensive view of taxation in the United States, here’s the picture that emerges.
All social groups pay broadly the same effective tax rate today – around 25%-30% of income, including all taxes – with billionaires having the lowest tax rate: 24% on average in 2018–20.
Working class people significantly contribute to funding American society today. Payroll taxes and consumption taxes absorb a high fraction of their income.
For the middle class, the income tax starts kicking in on top of these. And for the rich, the corporate tax becomes significant.
Of course, low-income Americans also receive government transfers. If one views these transfers as a “negative tax” (which is problematic for the reasons explained in this article), then the tax rate of the working class falls.
But the tax rate of the middle-class barely changes. No matter how one looks at it, billionaires pay much less tax than the average American.
The second myth worth dispelling is the notion that the superrich pay a significant amount of tax. The case of Bezos himself is a good illustration of why that is not the case.
Based on public data it is possible to estimate Bezos’s total effective tax rate: the total amount of tax he pays personally plus indirectly through Amazon, relative to his income (not including unrealized capital gains).
Bezos’s total effective tax rate was just 15% in 2018.
Meanwhile, the average person in the US pays around 30% of their income in taxes.
More broadly, if one looks at the 400 wealthiest Americans, recent research shows that billionaires tend to have low individual income tax rate.
Simply put, the ultra-wealthy can easily structure their wealth so that this wealth will generate little – sometimes even no – taxable income. Hence no income tax owed.
And things are getting worse: the effective tax rate of billionaires has fallen sharply after the Tax Cuts and Jobs Act of 2018.
In a context where billionaire wealth is booming, this deprives governments of very significant revenue.
And even more importantly, it fuels the rise of inequality — or rather, the rise of plutocracy, which now far exceeds its Gilded Age peak.
In 1910, the top 0.00001% wealthiest Americans – who became known as the Robber Barons, extracting immense wealth from their monopolies, free of tax – owned wealth equivalent to 4% of US national income.
Today that same fraction of the population – which now includes 19 households – own the equivalent of 14% of US national income in wealth.
It is high time we fix this anomaly, and I will have more to say about this very soon.
Thanks for your tireless work on this on both sides of the Atlantic.
This is SUCH an important comment. Every Democratic political candidate should make this and corruption the central issues in their campaigns.
The direct impacts of taxes also mask regressivity in taxes’ indirect impact that arises from market power. For example, Zhao et al (AJAE forthcoming, https://onlinelibrary.wiley.com/doi/abs/10.1111/ajae.70034?campaign=wolearlyview) show that grocery taxes enable retailers to extract additional funds from poorer consumers in the US. Windfall profits for a few on the backs of the working class. Yet too few recognize or publicly decry such things. Bravo, Gabriel, for your invaluable work!