Taxes on billionaires’ income are only a tiny fraction of their wealth, according to the White House. Here is the average rate they pay

Billionaires sit on vast reserves of money and assets, and only a tiny fraction of their wealth goes to federal income tax – they paid an average tax rate of 8.2% over the course of over the past decade or so.

That’s according to a new report by analysts from the White House Council of Economic Advisers and the Office of Management and Budget – and that’s another rationale, they say, for raising tax rates on Americans. the richest and change the way capital gains taxation is applied.

From 2010 to 2018, the country’s 400 richest families paid an average tax rate of 8.2% on $ 1.8 trillion in income, a figure the researchers arrived at by factoring in powerful sources. wealth such as unsold inventory. The analysis weighed statistical data from the Internal Revenue Service, the Fed’s Survey of Consumer Finances, and Forbes’ annual estimates of America’s richest people.

“Preferential capital gains rates and a higher base – a provision in tax law which allows high net worth taxpayers to write off unrealized capital gains for income tax purposes when they transmit assets to their heirs – contribute to this low tax rate, ”said researchers Greg Leiserson, senior economist at the Council of Economic Advisers and Danny Yagan, chief economist in the Office of Management and Budget.

The White House analysis differs from other estimates of the actual tax bill for the very rich, the researchers admit. For example, the richest 715,000 families in the United States will have an effective tax rate of 26% in 2021, according to the Congressional Non-partisan Joint Committee on Taxation.

But the new analysis focuses on a smaller group and assesses the value of “unrealized” capital gains, providing more fodder for the Biden administration’s insistence that America’s richest households pay their “fair share”. share ”of taxes as income inequalities worsen and the economy rebounds. the pandemic.

The rates of the tax code are already all the higher as a person gets richer, retort some critics. Referring to research from groups like the Joint Committee on Taxation, Erica York, a right-wing Tax Foundation economist, said that “the US tax and tax system as it exists today is very progressive and redistributive.”

“A better approach to increasing the tax burden on the rich would be to pursue progressive consumption taxes as they could further increase the progressivity of the tax and tax system with less administrative and economic costs than what policymakers are currently seeking,” said York at MarketWatch.

Taxing fortune vs taxing labor

The inclusion of unsold “paper earnings” is an unfair hypothetical measure, York noted. It would be like “telling a middle class family that they are under-taxed because they did not pay income tax on the appreciation in the value of their house or on the growth of their house. pension plan every year, ”she said.

Earlier this week, IRS filing statistics showed wealthy families were moving fast to report capital gains on their 2020 returns – which could happen because they want to take advantage of capital gains rates current, before any future increase. At the end of July, households worth at least $ 1 million had reported $ 22 billion more in capital gains and / or losses than in the same period a year earlier.

On paper, the income tax brackets range from 10% to the maximum rate of 37%, which was lowered from 39.6% in a 2017 overhaul of the Trump-era tax code. , the rate of surplus value is now 20%, from 15.% in 2013 under the Obama administration.

If President Joe Biden gets what he wants, the top income rate would drop to 39.6% and people worth $ 1 million or more would pay 39.6% (plus a tax on net investment income existing 3.8%) on their capital gains.

Matching the income tax rate with the capital gains rate aims to correct the current injustice of the tax code where labor is taxed more than wealth, in the eyes of White House officials.

This is one of the main reasons billionaires hit the expected average rate of 8.2% in the first place, the researchers said.

A dollar of wages is taxed immediately at the regular tax rate, but a dollar from a rise in a stock is taxed at the lower rate of capital gains, the researchers said. “Investment gains are a primary source of income for the wealthy, making this preferential treatment of investment gains a valuable benefit for wealthier Americans,” they wrote.

Corporate tax hikes could create indirect costs

York said it’s worth noting that the new analysis does not take into account the indirect costs people might also have to pay as a result of an increase in corporate income tax. When the cost of an increase in corporate income tax is passed on to shareholders in the form of lower after-tax returns, she said.

Biden has previously said he is open to a corporate tax rate of between 25% and 28%, down from 21% currently.

But the share’s gain might not be taxed – and that’s the second big reason for the 8.2% estimate, White House researchers said.

Ending “basic recovery”

“If a wealthy investor never sells stocks that have increased in value, those investment gains are written off for income tax purposes when those assets are passed on to their heirs,” they said. This happens because of the so-called “step up in” rules, where the “base cost” of the inherited asset is reset to fair market value on the date of death.

So if kids are given stocks that have already skyrocketed in value, they could avoid a lot of capital gains taxes under the current law if they sell.

Biden’s proposal would find a way to achieve those “unrealized” gains by ending the increase in earnings above $ 1 million. It would be $ 2.5 million for a married couple when incorporating other real estate exemptions, the White House said. Some experts have said this is the way to tax the wealth amassed by the elite who can reduce their tax exposure by cutting their meager wages and borrowing from their assets.

Although the White House analysis highlights the Biden plan, it is not the only tax hike proposal.

The Ways and Means Committee recently unveiled a plan that would raise the maximum rate of capital gains to 25%. Although it looks at changes to the tax legislation for retirement accounts, the Ways and Means Committee’s proposal does not offer changes to the rules surrounding the base increase.

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