The 400 richest families in the U.S. — worth between $2.1 billion and $160 billion and representing the top 0.0002% of all taxpayers — paid an effective tax rate of 8.2% between 2010 and 2018, according to a new analysis released by a pair of Biden administration economists.
The analysis is part of the White House’s effort to pay for new social spending by increasing the tax burden on the country’s wealthiest households, who don’t pay “their fair share in taxes,” as President Biden put it earlier this week.
How do the ultra-wealthy get away with paying such low effective tax rates? Here’s how White House economists Greg Leiserson and Danny Yagan explain it:
The wealthy pay low income tax rates, year after year, for two primary reasons. First, much of their income is taxed at preferred rates. In particular, income from dividends and from stock sales is taxed at a maximum of 20% (23.8% including the net investment income tax), which is much lower than the maximum 37% (40.8%) ordinary rate that applies to other income.
Second, the wealthy can choose when their capital gains income appears on their income tax returns and even prevent it from ever appearing. If a wealthy investor never sells stock that has increased in value, those investment gains are wiped out for income tax purposes when those assets are passed on to their heirs under a provision known as stepped-up basis.
Unrealized capital gains are a big part of the story, but are also controversial when it comes to measuring income and taxation, since technically such gains aren’t income unless and until the underlying assets are sold. But the White House economists included capital gains as income in their analysis, arguing that they are an important source of wealth that can be “tapped to finance consumption and can improve financial wellbeing.”
As Jim Tankersley of The New York Times notes, other analyses of taxes paid by the ultra-wealthy have found higher average rates. An analysis by the Tax Policy Center, for example, found that the top 0.001% — roughly 1,400 households — paid an average effective tax rate of 24% in 2015, compared to an average effective rate of 14% overall. TPC did not include unrealized capital gains in its analysis, producing lower income estimates and higher tax rates for wealthy households.