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: Billionaires’ income taxes are a tiny fraction of what they make, White House says. Here’s their average tax rate

Billionaires sit on vast pools of money and assets, and only a tiny portion of their wealth goes toward federal incomes taxes — they’ve paid an average income tax rate of 8.2% over roughly the last decade.

That’s according to a new report from analysts at the White House’s Council of Economic Advisers and the Office of Management and Budget — and it’s another justification, they say, for increasing tax rates for the richest Americans and changing how capital gains taxation is applied.

From 2010 to 2018, the country’s richest 400 families paid an average income tax rate of 8.2% on $1.8 trillion of income, a figure that researchers arrived at by factoring in powerful sources of untaxed income such as unsold stock. 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 stepped-up basis — a provision of tax law that allows wealthy taxpayers to wipe out unrealized capital gains for income tax purposes when they pass assets to their heirs — contribute to this low tax rate,” said the researchers, Greg Leiserson, senior economist at the Council of Economic Advisers and Danny Yagan, chief economist at the Office of Management and Budget.

The White House analysis differs from other estimates of the real tax bill for the very wealthy, the researchers acknowledge. For example, America’s richest 715,000 families will have an effective 26% income tax rate in 2021, according to Congress’ nonpartisan Joint Committee on Taxation.

But the new analysis looks at a smaller group and it weighs the value of “unrealized” capital gains, supplying more fodder for the Biden administration insistence that America’s richest households pay their “fair share” of taxes as income inequality worsens and the economy rebounds from the pandemic.

The tax code’s rates already get steeper the richer a person becomes, some critics counter. Pointing to research from groups like the Joint Committee on Taxation, Erica York, economist at the right-leaning Tax Foundation, said “the U.S. tax and fiscal system as it exists today is highly progressive and redistributive.”

“A better approach to raising the tax burden on the wealthy would be to pursue progressive consumption taxes as they could further increase the progressivity of the tax and fiscal system with fewer administrative and economic costs than what policymakers are pursuing now,” York told MarketWatch.

The total net worth of U.S. households climbed to a record $141.7 trillion by the end of June, according a Federal Reserve report released Thursday tallying assets against liabilities.

Taxing wealth vs. taxing work

Factoring in unsold “paper gains” is teeing up an unfair hypothetical measure, York noted. It would be like “telling a middle class family that they are undertaxed because they didn’t pay income taxes on the appreciation in their home value or the growth of their retirement plan every year,” she said.

Earlier this week, IRS filing statistics showed rich families were moving fast to report capital gains on their 2020 returns — something that could be happening because they want to take advantage of current capital gains rates, before any future increase. By the end of July, households worth at least $1 million had reported $22 billion more in capital gains and/or losses than at the same point one year earlier.

On paper, income tax brackets run from 10% to the top rate of 37%, which was lowered from 39.6% during a Trump-era tax code overhaul of 2017. Meanwhile, the top capital gains rate is now 20%, increased from 15% in 2013 during the Obama administration.

If President Joe Biden gets his way, the top income rate would go back to 39.6% and people worth at least $1 million would pay 39.6% (plus an existing 3.8% Net Investment Income Tax) on their capital gains.

Matching the income tax rate with the capital gains rate is meant to correct the tax code’s current unfairness where work is taxed more than wealth, in the eyes of White House officials.

That’s a big reason why billionaires got to the projected 8.2% average rate in the first place, researchers said.

A dollar in wages is taxed immediately at ordinary income tax rates, but a dollar from a stock’s rise is taxed at the lower capital gains rate, 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 the wealthiest Americans,” they wrote.

Corporate tax hikes could create indirect costs

York said it’s worth noting the new analysis is not counting the indirect costs that people might also have to pay in the wake of a corporate income tax hike. When the cost of a corporate income tax hike gets passed on to shareholders in the form of smaller after-tax returns, she said.

Biden has previously said he’s open to a corporate income tax rate between 25% and 28%, up from the current 21%.

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

Ending the ‘step up in basis’

“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,” they said. This occurs due to the rules on the so-called step up in basis, where the “cost basis” of the inherited asset resets to the fair market value at the date of death.

So if kids receive stock that’s already soared in value, they could be avoiding a lot of capital gains taxes under current law if they sell.

The Biden proposal would find a way to get at these “unrealized” gains by ending the step up for gains above $1 million. It would be $2.5 million for a married couple when incorporating other real estate exemptions, the White House has said. Some experts have said this is the way to tax wealth amassed by the elite who can shrink their tax exposure as they pull down meager salaries and borrow against their holdings.

Though the White House analysis highlights the Biden plan, that’s not the only tax hike proposal out there.

The Ways and Means Committee recently unveiled a plan that would raise the top capital gains rate to 25%. While it delves into tax law changes for retirement accounts, the Ways and Means Committee proposal does not offer changes to the rules surrounding the step up in basis.

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