What’s the Tax Rate for the Forbes 400?

US billionaires pay tax rates 50 percent higher than typical Americans. 

By Adam Michel of Cato. Excerpts:

"Official US Treasury estimates show that the top 10 percent of income earners pay more than 60 percent of all federal taxes and 72 percent of income taxes."

"New research shows that billionaires pay tax rates at least 13 percentage points higher than those of ordinary households."

"Depending on the definitions and assumptions, estimates of the effective tax rate for the Forbes 400 range from 38 percent to as high as 73 percent, when including charitable giving. Recent estimates that claim billionaires pay lower tax rates than the average American rest on flawed methods"

"A new National Bureau of Economic Research working paper by Akcan Balkir, Emmanuel Saez, Danny Yagan, and Gabriel Zucman (BSYZ) matches the Forbes 400 list of wealthiest Americans with individual, business, estate, and gift tax returns, including federal, state, local, and international taxes. The benchmark estimate finds that between 2018 and 2020, the wealthiest 0.0002 percent of Americans (367 taxpayers) paid an effective tax rate of about 24 percent of their annual economic income, six points lower than the estimated 30 percent average for the overall population.

In a detailed critique, economist David Splinter argues the BSYZ estimate is still likely 13 percentage points too low. The researchers double-count income, fail to account for dynastic family wealth spread across multiple tax returns, and miss important taxes. After making adjustments, Splinter finds the effective tax rate for the wealthiest 0.0002 percent (hereafter Forbes 400) is 38 percent.

His corrections include three major steps:

• The original estimate double-counts some corporate profits by imputing a measure of unrealized “pure” capital gains in addition to dividends and realized gains. Excluding “pure” gains raises the Forbes 400 effective tax rate by 3 percentage points.

• Many Forbes 400 fortunes are spread across multiple tax returns (siblings, children, etc.). Correctly distributing dynastic wealth to a more accurate subset of tax returns reduces the denominator estimate of wealth and income for the individual tax units and pushes effective rates up by 8 points.

• Following tax law changes in 2017, federal administrative tax data appear to underreport state and local taxes paid by 57 percent. Adding these likely missing taxes raises the effective tax rate by 3 points."

"Following standard practice, Splinter counts transfers (e.g., Social Security and unemployment benefits) as income and subtracts refundable credits from taxes. With these adjustments, the average effective tax rate for the population falls from 30 percent to 25 percent."