However, the Tax Foundation3 found that in 2020 (the latest year of data), the top 1% of taxpayers received 22.2% of taxable income and paid an average tax rate of 26.0%.

Policy makers must remember that while much wealth takes the historical form, buildings and heavy machinery, considerable contemporary wealth comes in digitized ideas, which can be sent across the globe at the touch of a few computer keystrokes and at the speed of light. In short, added taxes on “extreme wealthy” Americans can unavoidably impair the economic futures of non-wealthy Americans.

A Wealth Tax Reality Check

By Richard B. McKenzie

At every opportunity, President Joe Biden has pressed a central tenet of his social agenda: “Extremely wealthy Americans don’t pay their fair share of federal income taxes” (emphasis added). By Internal Revenue Service definitions of income, top income earners generally pay a far greater federal income-tax share than do lower income groups. Without saying so, the President has greatly expanded wealthy Americans’ income to include their considerable unrealized capital gains, dramatically lowering their income-tax rate, which he uses to advance his wealth-tax case. To initiate wealth taxation, Biden proposes a “minimum billionaires tax,” under which wealthy Americans will pay at least 20% of their “total income”—including unrealized capital gains—in federal income taxes.1 A sizable majority (59%) of diverse Americans2 also favored a wealth tax in 2022.

Political support for a wealth tax appears to be built on two incorrect presumptions: First, wealthy Americans pay precious little income taxes (conventionally defined). Second, workers’ “income” and the wealthy’s “capital gains” are conceptually the same. As explained, given the economics of wealth accumulation, the wealthy (especially those self-made) should be celebrated, not denigrated, because of the resulting far greater gains provided non-wealthy Americans.

The Wealthy’s “Low” Tax Rates?

President Biden stresses that extremely wealthy Americans pay a meager 8% income-tax rate, giving the impression that he’s using IRS definitions. However, the Tax Foundation3 found that in 2020 (the latest year of data), the top 1% of taxpayers received 22.2% of taxable income and paid an average tax rate of 26.0%. The top half of taxpayers, who received almost 90% of taxable income, paid an average tax rate of 14.8%. The bottom half received 10.2% of taxable income and paid an average tax rate of 3.1% (with many paying nothing). In short, the top 1% of taxpayers received 2.2 times the income share of the bottom half but paid an average income-tax rate 8.4 times the tax rate of the bottom half.

The Tax Foundation also found that the top 1% in 2020 paid 42.3% of all federal income taxes, or 18 times the share of the bottom half, which was 2.3%. The top 10% of taxpayers received almost half the total income but paid almost three-quarters of all income taxes. Moreover, the income-tax share paid by the top income groups has risen substantially since 1980, while the share of the bottom half of taxpayers was more than halved (findings dramatized in a National Taxpayers Union Foundation4 chart).

Did the wealthy pay their “fair share” of income taxes? The tax-share statistics surely leave more room for debate than Mr. Biden suggests.

Biden’s Income Definition

In the press for a wealth tax, Biden’s economic advisors5 have expanded substantially the definition of taxable income (but only for the extremely wealthy), arguing that

• When an American earns a dollar of wages, that dollar is taxed immediately at ordinary income tax rates. But when they gain a dollar because their stocks increase in value, that dollar is taxed at a low preferred rate, or never at all. Investment gains are a primary source of income for the wealthy…

Because many non-wealthy Americans have little to no investments (so claimed), the President’s advisors have declared that the tax system favors the wealthy by lowering their tax payments (and undercutting funding for social programs). Because worker earnings and capital gains are measured in dollars, Biden’s advisors see them as conceptually equivalent, but are they? Not really—and treating them the same is a political sleight-of-hand.

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