It’s been repeated often: billionaires pay less taxes than the traditional working class.
But though it’s been repeated, that doesn’t necessarily make it true. While billionaires have many methods of reducing their taxes, these are the same methods that are open to the working class as well. As a whole, many working people get refunds and credits back, and may not pay much in taxes at all.
Let’s look at the truth behind billionaires and the taxes they pay.
The Difference Between Assets and Income
First: the major misunderstanding many people have has to do with assets and income. A “billionaire” may have a company worth $1,000,000,000, but may only have a salary of $100,000.
This salary is the only money they are going to pay income tax on, because the “billion dollars” that they have is wrapped up in the company itself. This is money that is stimulating the economy, paying for the jobs of others, and (most importantly) not actually contributing to the billionaire’s lifestyle.
A pensioner with a $300,000 house and $20,000 of income every year is treated the same: they aren’t taxed on being a person with “$320,000 in equity,” they are taxed solely on the $20,000 worth of income (and they wouldn’t pay much, if anything).
If Jeff Bezos sees Amazon stock go up, his net worth may go up by $500,000,000 immediately. But that doesn’t mean he’s gained that money: it’s just an asset. The next year, that net worth may go down again, because the stock has gone down. Most billionaires are not “realizing” a lot of income, they’re just seeing their assets go up and down.
Effective Tax Rates vs. Real Tax Rates
Most people aren’t paying their actual tax rate. They’re paying an “effective tax rate”: the amount that they’re actually charged based on their income. This is because there are credits and deductions available. Lower income households generally pay an effective tax rate of about 2.9%. The effective tax rate for households making between $100,000 to $200,000 is 4.9%.
Tax credits are generally targeted towards those with low to moderate income, and those with low to moderate income are more likely to be able to use tax credits and tax deductions to get a refund. Comparatively, billionaires are less likely to have these types of deductions or credits. Since tax rates are expressed as a percentage, these tax credits and tax deductions are a significantly greater percentage of taxes for regular households than billionaires.
It’s been reported that the billionaires in America paid an effective rate of 23%. That does seem much higher than the tax rate for the working class, at 24%. But as seen from other numbers, most people do not pay a tax rate of 24%, or anywhere close to it. Effective tax rates are far closer to 5% than they are to 24%.
The Problem with Tax Rates
As mentioned, it’s more than possible for a billionaire to pay less in taxes than a regular, working class individual: after all, they could take no income at all, if they already have assets. If they aren’t realizing income such as interest (and instead holding things in stocks and bonds), they could theoretically have limitless assets without any realized income.
But, the issue is that billionaires generally hold their income in areas that are supporting the economy or paying for other jobs, which is why many have pushed back against the idea of taxing them more. In fact, the analysis of the 400 top earning families in the United States might not even include the richest people in the United States, because not all of them may have taken income, in the forms of selling stocks, gaining dividends, or capital gains.
The bottom line, of course, is that it’s very unlikely that billionaires are paying lower tax rates than working households, because the effective tax rates for working households are much lower than it may seem. There’s little way to validate these numbers, but even in the unlikely event that billionaires were paying less in taxes, there would be some reasonable reasons for them doing so.
Of course, the comparison between billionaires and workers is less about the exact amount of money that’s paid, and more about whether billionaires need to be contributing more to the current tax arrangements. Many billionaires do agree that billionaires could be taxed more, but it’s arguable how much that would actually help, for the aforementioned reasons.