During a recent speech on the economy in Cleveland, President Joe Biden sought to highlight the difference in tax burdens between the wealthiest Americans and more typical taxpayers.
“Billionaires in America – there are about 789 of them. You know what average federal income tax they pay? 8%,” Biden said on July 6. “Each of you has a job (in which you pay) more than 8% (in taxes) – all of you. If you’re a cop, a teacher, a firefighter, a trade unionist, you probably pay two to three times as much. “
However, tax experts say Biden’s comparison is flawed. First, the 8% figure is a low estimate that uses a hypothetical calculation. And second, Biden’s statement ignores that most of the middle-income households he refers to pay tax rates between zero and 15 percent.
“This claim is dishonest and misleading,” said Alex Muresianu, federal policy analyst at the Tax Foundation.
Do the wealthiest Americans pay an average federal income tax of 8%?
The first part of Biden’s statement is misleading.
The White House told PolitiFact the figure comes from a White House report that looked at what would happen if the United States were to tax unrealized equity gains. Currently, if someone sees the value of their shares increase over time, those gains are not taxed until the shares are sold. If the shares are never sold, they are never taxed, and under current law — which Biden has proposed changing — they can be passed on to the next generation with little or no taxation. (Despite the similar-sounding name, unrealized gains are different from capital gains taxes; capital gains taxes are levied when the stock is sold.)
The White House report found that if you include unrealized gains when calculating the incomes of America’s 400 richest families, their taxes paid would amount to just 8.2% of their income.
Economists and policymakers have long debated whether government should tax unrealized gains. But Biden gave the impression that 8% was the standard rate today, not what would happen under a future proposal.
What is the actual tax burden under the current tax code for the wealthiest Americans? IRS data from 2019 shows the top 1% of taxpayers paid an average federal tax rate of 25.6%, about three times the White House estimate. A more elite group, the top 0.001% — which in 2019 meant people earning around $60 million or more — paid a percentage that was only slightly lower, 22.9%.
“Using the existing definition of taxable income, the truly wealthy pay an average federal income tax rate in the mid-20s,” said Howard Gleckman, senior fellow at the Urban Institute-Brookings Institution Tax Policy Center. “If you want to include unrealized gains in your denominator, as the White House does, the average rate would drop significantly.”
Do typical workers pay tax rates two to three times higher than wealthy Americans?
Biden is also irrelevant on middle-class tax rates.
For starters, Biden’s statement ignores that 43.6% of households paid zero or negative net federal personal income taxes in 2019, according to the Urban Institute-Brookings Institution Tax Policy Center. (The percentage was higher in 2020, but that was due to temporary tax relief provisions during the coronavirus pandemic, so tax experts said it’s best to use the 2019 pre-pandemic figure. )
That’s a lot of Americans who pay no federal income tax. They may have paid payroll taxes or other federal taxes, and potentially state or local taxes, but Biden specifically cited “federal income tax” in his remarks.
To give a sense of scale, the bottom 40% of American earners in 2018 included those earning less than around $43,000 a year.
The specific occupations cited by Biden earn just over $43,000. The median annual non-overtime income for police officers is $64,605; it’s $50,939 for firefighters and $67,080 for K-12 teachers.
Yet, measured by actual taxes paid under current law, the effective tax rate for income in this bracket is not two or three times what the wealthiest pay.
For households with adjusted gross income between $50,000 and $100,000, the Tax Policy Center found that a plurality of 42% paid an effective tax rate between 5% and 10%, while 30 % additional paid an effective rate between 10% and 15%. In addition, 15% of these households paid an overall effective rate of less than 5%, and another 5% paid nothing at all or received money from the government.
Additionally, while ordinary Americans have smaller stock holdings than wealthier families, many middle-income Americans have retirement accounts with lots of unrealized income. Biden’s comparison takes into account unrealized income for the wealthiest Americans, but not for ordinary Americans.
Biden said the “average federal income tax” paid by the wealthiest Americans is “8 percent.” … If you’re a cop, a teacher, a firefighter, a trade unionist, you’re probably paying two to three times that.
Today, the wealthiest Americans pay an effective tax rate of more than 20% of their reported income under the current tax code, not 8%.
Meanwhile, among households earning between $50,000 and $100,000 a year, the vast majority were paying effective tax rates between 0 and 15%, not two to three times the rate the most rich.
Biden’s statement is not accurate. We mark it False.