Who Pays US Taxes? | The week
During the debate on spending bills, Democrats proposed to raise taxes for the rich. Are the rich paying their fair share? Here’s all you need to know:
What do the rich pay?
Usually a much lower percentage of their income than the middle class. A White House study released in September found that the 400 richest families in the United States paid an average federal tax rate of just 8.2% from 2010 to 2018. The rich pay other taxes not included in White House analysis, such as property taxes, but in recent decades most types of taxes on the rich have been drastically reduced. The marginal tax rate on the top tax bracket remained at over 63% between 1932 and 1982, reaching 92% in the 1950s. Today, after decades of cuts that began under the Reagan administration, the top marginal rate is 37%. In addition, payroll taxes to fund Social Security and Medicare are levied on workers and CEOs at the same rate, and only up to $ 142,800 in income. If you include all taxes, such as sales and state taxes, the richest 1% in the country earns around 21% of total income and pays around 24% of total taxes, making our system progressive tax, but moderately.
Why is it not more progressive?
In writing and amending the tax code over the decades, Congress has been heavily influenced by the political contributions of wealthy Americans and big business, as well as the armies of lobbyists they send to Washington. Investment income is taxed at a much lower rate than wages, in theory that this encourages business growth and stimulates the economy. The tax code is also full of loopholes and deductions that only the rich can take. A ProPublica analysis earlier this year, based on a mine of leaked IRS data, showed mega-billionaires Jeff Bezos, Elon Musk, and Warren Buffett paid no federal income tax in some years, and a very small percentage of their income gains massive wealth. Bezos, one of the richest men in the world, paid $ 973 million in federal personal taxes on $ 4.2 billion in reported income between 2014 and 2018. His wealth, mostly in the form of Amazon stocks, grew by $ 99 billion over the same period, giving it a “true tax rate” of 0.98%, ProPublica said. Companies are pulling similar tips: Between 2018 and 2020, 39 S&P or Fortune 500 companies managed to pay no income tax while recording combined profits of $ 122 billion.
How do they do?
Businesses and the super-rich can employ accountants and lawyers who know how to manipulate their capital gains, interest, and dividends. Executives paid in stocks, for example, can sell their lost investments at the end of the year to zero their taxable growth. The rich also engage in asset-based lending – borrowing money from their wallets rather than selling popular investments that can result in capital gains taxes. Wealthy Americans can keep the wealth in the family by passing the assets on to their heirs and exploiting a loophole called “base augmentation.” This means that the value of an inherited asset usually adjusts to its value on the date of the death of its original owner, meaning that years or decades of earnings before that date instantly become tax-exempt. “As long as you obey the law,” says Sharif Muhammad, founder and CEO of Unlimited Financial Services, “everything is fair”.
Can fortune itself be taxed?
Oregon Senator Ron Wyden and other Democrats recently argued for a “billionaire tax” that would tax wealthiest Americans on unrealized capital gains. But such a tax would face constitutional challenges, and billionaires were quick to accuse progressives of waging a class war. “Eventually they run out of other people’s money and then they come for you,” tweeted Musk, the CEO of Tesla, which is worth around $ 280 billion. From a practical standpoint, the taxation of unrealized gains would require a major overhaul of the tax system, giving an already overburdened IRS the delicate task of valuing assets such as private companies.
Who does the tax code favor?
It strongly favors investment income over wages, and thus worsens income inequalities. The richest 10 percent now own 70 percent of the wealth, up from 60 percent in 1990, and any attempt to change the status quo faces powerful and well-funded opposition. The Biden administration’s plans to raise taxes on expense bills, for example, have met a torrent of organized opposition from businesses on Capitol Hill. “We are doing it in every way imaginable,” said Aric Newhouse, senior vice president of policy at the National Association of Manufacturers. So far, these lobbying efforts have been successful; Although a 15% minimum corporate tax and a surtax on income over $ 10 million remain on the table, proposals to raise tax rates for the rich and corporate have been scrapped.
How the IRS was gutted
The IRS has never been the most popular government agency in the United States, and the Conservatives have harbored suspicions about its usefulness since the 1990s. Their hostility escalated dramatically in 2013, with reports that the Tea Party groups seeking tax-exempt status were under closer scrutiny. The IRS has also targeted groups with “progressive” and “green” labels and other partisan labels in their names, but rabid Republicans have accused the agency of bias and political persecution. They have stepped up their efforts to cut the IRS budget, reducing the number of auditors by a third. In 2017, the IRS performed 675,000 fewer audits than in 2010, a drop of 42%, and auditors are so stressed that they are reluctant to accept complex statements filed by the wealthiest citizens. As a result, the IRS now controls Americans who receive the Working Income Tax Credit – whose incomes are around $ 20,000 – at roughly the same rate as people earning $ 500,000 to $ 1 million. of dollars. For that to change, Pam Reicks, a former director of the IRS, told ProPublica that the IRS needs a bigger budget and more people. “You can see all this abuse and fraud and people not paying their taxes,” she said, “but you can’t use your hands to get it.”
This article first appeared in the latest issue of The week magazine. If you want to read more, you can try six risk-free issues of the magazine. here.