Are the Wealthiest Avoiding the Income Tax?

See A lesson for Minnesota media: income tax taxes income by John Phelan, an economist at the Center of the American Experiment.

"Minnesota’s media is in a state of excitement today over a new report from think tank ProPublica which “Reveal[s] How the Wealthiest Avoid Income Tax.”

There is much less to this report than meets the eye. The Star Tribune reports:

The federal tax code is meant to be progressive — that is, the rich pay a steadily higher tax rate on their income as it rises. And ProPublica found, in fact, that people earning between $2 million and $5 million a year paid an average of 27.5%, the highest of any group of taxpayers.

Above $5 million in income, though, tax rates fell: The top .001% of taxpayers — 1,400 people who reported income above $69 million — paid 23%. And the 25 very richest people paid still less.

How do they pull this off? Quite legally, it turns out:

The wealthy can reduce their tax bills through the use of charitable donations or by avoiding wage income (which can be taxed at up to 37%) and benefiting instead mainly from investment income (usually taxed at 20%).

In the first instance, then, the rich can reduce the amount they give to the federal government by increasing the amount they give to charity, which seems fair enough. In the second instance, investment income is generally more volatile than labor income so it is taxed at a lower rate to produce a competitive expected value: if that rate was increased, that expected value would fall and so would investment.

If that was just ho-hum, other points were just plain wrong. MPR News tweeted:

This is because income tax is levied on an individual’s income (the clue is in the name), not on the notional value of assets they hold.

ProPublica notes that the wealth of the 25 richest Americans collectively jumped by $401 billion from 2014 to 2018. But this is an estimate of the market value of their assets, it does not mean that their income increased by this amount so there is no reason at all to think that their income tax liability would increase commensurately. If these assets produce a yield (a stock dividend, say) or are sold, then the income resulting from that is taxed.

This is basic stuff. Income tax is levied on income, not wealth. Getting this right – telling the truth – ought to matter."