Although the U.S. tax system has been flawed for quite some time, Trump's Tax Cuts and Jobs Act -- signed in December 2017 -- churned the fiscal waters and brought plenty of opinions and proposed actions to surface.
Some of those opinions and proposed actions bubbled up in October 2019, with the release of economists Emmanuel Saez and Gabriel Zucman's book "The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay."
Furthermore, President Biden certainly thinks that there's an imbalanced tax code as he's proposed recent changes to the way America's wealthiest citizens are taxed. Do U.S. billionaires really pay less in taxes than the middle class? Keep reading to find out.
The Tax History of the Top 1% Isn't Much Different Than How Things Are Now
When people begin arguing about how much the wealthiest Americans have paid in taxes in the past versus how much they're paying now, it's helpful to have some context. According to the Tax Foundation, "The top 1% of Americans today do not face an unusually low tax burden, by historical standards."
Top Marginal Rates for Taxes Have Fallen Drastically Since the 1950s -- or Have They?
In the 1950s, the top marginal tax rate was 91%. Today it's 37%, which seems like a drastic drop. But, according to the Tax Foundation, the top 1% of 1950s taxpayers only ended up giving up about 42% of their income in federal state and local government taxes, which means that the current tax marginal tax rate of 37% isn't that much lower than the effective tax rate high-earners faced in the 1950's.
The 91% Tax Rate Was the Exception -- Not the Rule
The reason for the 42% tax rate was that the 91% federal income tax rate only applied to households that had income exceeding $200,000, which were in the minority. And that high tax rate only became effective when a household's income exceeded $200,000. And even then, the higher rate only applied to the dollars above the $200,000 threshold, not every dollar earned.
Average Income Tax Rates for the Top 0.1% Have Remained Relatively Stable
Average income tax rates have remained relatively stable for the wealthiest Americans. In the 1950s, the top 0.1 % of households faced average effective income tax rates of 21%, versus 20.7 % as of 2014, according to data from the Tax Foundation.
Higher Marginal Tax Rates Don't Always Translate Into Higher Revenue Collection
You might wonder how a top marginal income tax rate of 91% could translate into an average income tax rate of just 21% for the top 0.1% in the 1950s. As stated earlier, the 91% tax rate only applied to amounts earned over $200,000. In addition, tax avoidance behaviors and lower reported income were also likely factors. As marginal tax rates rise, it's not unusual for taxpayers to under-report income.
The Trump Tax Cuts and Jobs Act Has Benefited the Wealthy
According to authors and economists Saez and Zucman, the Tax Cuts and Jobs Act has benefited the ultra-rich. According to their research, they concluded that in 2018, the top 0.1% -- the billionaires of America -- paid an average effective tax rate of 23%, which factors in all federal state and local taxes. The bottom 50% of U.S. households, however, paid a higher rate of 24.2% toward income tax.
Zucman Claims That the U.S. Tax System Looks Like a Giant Flat Tax
In a November 2019 phone interview with Capital & Main, economist Gabriel Zucman described how he perceives the U.S. tax system -- as a giant flat tax where each segment of the population - except for the wealthiest Americans -- commits around 25 to 30% of its income in taxes. The wealthiest Americans pay a lesser rate of 23%, which means that the tax system becomes regressive at the top.
Economists Claim Tax System Has Been Turned on Its Head
Not surprisingly, the culprit that upset the tax system -- according to Saez and Zucman -- is Trump's Tax Cuts and Jobs Act that was signed into law in December 2017. Although the president repeatedly stated that the TCJA would benefit the middle-class -- and it has to a point -- many experts point out that the wealthiest Americans are the ones who have benefited the most from the tax cuts.
Capital Gains Tax on Stocks: What It Is and How To Minimize It
The Top 0.1% Pay a Lower Rate Than Other Household Groups, Too
According to Saez and Zucman, it's not only the bottom 50% of households who pay more -- which include many in the middle-class -- it's also those in the upper middle class and in the top 1% who pay more in taxes than the 0.1% do.
Warren Buffett Explains One Reason Why the Rich Pay Lower Tax Rates Than the Middle Class
Billionaire investor Warren Buffet is known for saying that he pays less tax as a percentage than his secretary does. While that may seem impossible, it's not. Buffet and other billionaires are mainly taxed on capital gains income as investors -- not salary or income earned as an employee. And capital gains income is taxed at a lower rate than ordinary income is.
As with any economic theories based on data, opponents have been able to poke holes in the theories presented by Saez and Zucman. Here are some points to consider.
Subsidy Programs Are Left Out of Saez and Zucman's Calculations
Saez and Zucman did not include refundable tax credits and benefit programs that aid in offsetting the cost of excise, payroll and sales taxes. The omission of these particular credits and benefits is significant. For example, the refundable portions of the Child Tax Credit and Earned Income Tax Credit can keep many low-income workers - mainly those who have children -- from owing federal payroll tax on their earnings. The result of failing to include these credits and benefits in the calculations, can make it appear that the lowest income-earners are paying more in taxes than they actually are.
Unreported (Untaxed) Income Is Overestimated
Estimated average tax rates are determined by dividing the taxes paid by the income. But the assumption is that not all income is reported to the IRS. For the purposes of their study, Saez and Zucman assumed that all households under-reported income in proportion to their reported income, even when IRS taxpayer audit data shows that's not true. Unfortunately, misallocating under-reported income inflates the income of the highest earners, which, in turn, drives down the estimated tax rate. The result: It can look like the highest earners are paying less in taxes than they really are.
Where Do We Go From Here?
One thing is for sure -- the issues surrounding whether the wealthiest in the U.S. are paying less taxes than the middle-class won't rest. From economists to presidential hopefuls to tax policy organizations, everyone has a point -- or three -- to make. Here's a preview of what you can look forward to in the future regarding these issues.
Biden's Proposed Billionaire Minimum Income Tax
In March 2023, Biden's budget request to Congress proposed that the wealthiest Americans -- 0.01% -- pay a minimum 25% tax rate due to his acknowledgement that America currently has an imbalanced tax code.
In a March 2022 press release, the White House stated, "Under current law, when an American worker earns a dollar of wages, that dollar is taxed as they earn it. But when a billionaire earns income because their investments increase in value, that gain is too often never taxed at all." This is an echo of what Warren Buffett said.
Additionally, the White House press release stated that the minimum tax rate for the wealthiest Americans would apply to their full income -- even unrealized appreciation from investments.
Even so, the Washington Post reported that Biden's proposal of a minimum 25% tax rate for the wealthiest of Americans is unlikely to pass Congress, largely due to the fact that Republicans are once again in control of the House of Representatives.
Final Answer: Do Billionaires Pay a Lower Tax Rate Than the Middle Class?
It depends on who you ask. If you were to ask Saez and Zucman the questions, the answer would be a resounding yes. If you were to ask Biden, the answer would be yes, such as if the wealth increase is due to a uptick in the value of investments and not actual income.
Perhaps, Forbes senior contributor Howard Gleckman stated it best, "Arguments about methodology shouldn't mask Saez's and Zucman's bigger point: Incomes of the very rich are rising faster than for all other income groups. And the TCJA cut the taxes of high earners by more on average than for low- and moderate-income households, as a share of after-tax income. But that doesn't mean that "billionaires paid a lower tax rate than the working class."
More From GOBankingRates
This article originally appeared on GOBankingRates.com: Billionaires vs. the Middle Class: Who Pays More in Taxes?