Figuring out your tax rate — or Elon Musk — requires assumptions about what counts as income and what counts as taxes.
But this is not so easy. To understand why, we’ll get to tax policy, but let’s start with fourth grade math. Part!
Percentages vary radically and each fraction, from the fat content of the food to the presidential approval rating, is a numerator and a denominator. If you don’t know how both are defined – saturated fat or all fat? Potential Voters or Registered Voters?—You don’t know what you’re measuring.
Income tax rates are the same. There are tax portions. Income is the denominator. Finding your rate – or that of Elon Musk’s – is easy. Correct?
Not so, and the complications are significant as Congress debates the Biden agenda.
In writing the White House study, administration economists Greg Leeserson and Danny Yagan chose a numerator and denominator to reflect their approach to analyzing tax policy.
First, the denominator.
These include an increase in unrealized capital gains. This is a change in the value of assets, including shares that have not been sold. Such benefits make up a significant portion of the wealthiest Americans’ net worth; The administration’s approach effectively assumes that paper profits should be income subject to taxation.
Unrealized gains are not included in the traditional analysis and the current income tax law. Advocates of the traditional approach note that such gains fluctuate with the markets and that taxpayers may be forced to sell assets to pay taxes. However, Garrett Watson, senior policy analyst at the Tax Foundation, said, “It’s another thing if they’re using it to borrow to buy yachts.” In fact, wealthy people often borrow against assets at low rates to fund their lifestyles.
How the administration measures the tax rate on the rich affects its policy priorities. President Biden points to lower tax rates to justify his call for higher taxes. He proposes to tax unrealized gains on death and set the top capital gains rate at 43.4%. Both the plans are falling apart in Congress.
Currently, unrealized benefits escape personal income tax upon death, although they may face an estate tax. Mr. Biden also supports annual taxes on billionaires’ unrealized gains. House Democrats offered a more modest plan to set the top capital-gains rate at 31.8%. Legislative negotiations continue.
The numerator, like its denominator, in the White House study is selective, a point the authors acknowledge. Excluding corporate and property taxes, it lowers the tax rate and focuses the analysis on personal income taxes and gaps in that part of the tax system. But corporate taxes can be important to billionaires. Warren Buffett, who advocates higher taxes on the wealthy, often notes lower income taxes of his own. They would be higher if they included the corporate taxes paid by their holding company, Berkshire Hathaway. Inc.
Indeed, Democrats often defend higher corporate taxes because they take money from wealthy shareholders. They shouldn’t overlook that effect when calculating tax rates, said Daniel Hemel, a law professor at the University of Chicago.
Property taxes should also be included in the fraction, said Columbia University economist Wojciech Kopzuk. Many wealthy people avoid them through creative estate planning or charitable bequests. But some pay.
So if you want to compare yourself to a billionaire, can you use Form 1040 to put total taxes in the numerator and adjusted gross income in the denominator?
Not for the apples-to-apples comparison with the White House estimate.
Let’s start again with the denominator. Adjusted gross income is a comprehensive income measure, but does not include tax-exempt employer-provided health insurance or retirement contributions. That doesn’t include tax-free benefits in retirement accounts or 529 savings plans, which are brimming with billionaires’ stocks. It Ignores Rising Home Values, the Small Analogue of Mr. Musk’s Tesla Inc.
“If you include unrealized capital gains in some taxpayers’ analysis, you should for all,” said Alex Brill, an American Enterprise Institute economist and former GOP congressional aide.
Arithmetic is also difficult for middle-income families. Federal payroll taxes are not part of personal income taxes, and they are more significant in the middle than at the top. That’s why they can’t be ignored – and that would lead to an increase in federal tax rates.
With that mess in mind, let’s return to the 8.2% estimate.
This is well below the traditional estimates of government numbers crunchers, which largely exclude unrealized capital gains. Recent estimates from a broad group of wealthy people from the Congressional Budget Office, the Treasury Department and the Joint Committee on Taxation come in at between 23% and 26%.
Economists Emmanuel Saez and Gabriel Zuckman, in their 2019 book “The Triumph of Justice: How the Rich Dodge Taxes and How to Make Them Pay,” found that the top 400 households by income paid an average personal income tax rate of 9.2% . Adding other taxes, including corporate and property taxes, brought the average to 23%. Their analysis generally did not include unrealized gains.
The White House figure seems shockingly low for a country that favors progressive taxes where the burden increases with income.
“It is worthwhile,” said Mr. Hemel. “Jeff Bezos is getting very rich. And Elon Musk is getting very rich, and the federal government is getting a very small piece of it.
who is right?
It depends what point you are trying to make. Concepts are buried within every definition of income and taxes. How you choose to measure – and how you apply fourth grade math – can reflect your attitude towards policy and money.