Tax Policy Center analyst on whether billionaires pay a lower tax rate than you do: “Probably not.”

Following up on our post last week examining the Tax Foundation’s report on the progressive federal income tax, we want to acknowledge a good tax discussion by Tax Policy Center senior fellow Howard Gleckman. As he points out, we’re again in the middle of a media, political, and academic debate on whether the rich pay too little in taxes. A new book by prominent academics has launched the debate.

Economists Emmanuel Saez and Gabriel Zucman of the University of California at Berkeley have a new bookthat has generated an enormous amount of attention. One key conclusion: The richest 400 families in the US paid an average effective tax rate of 23 percent in 2018, while the bottom half of US households paid 24.2 percent of their income in taxes. For a geeky bit of tax data, their conclusion has produced a storm of tweets and some eye-popping headlines:

“The Rich Really Do Pay Lower Taxes Than You” The New York Times, October 6, 2019

“For the first time in history, U.S. billionaires paid a lower tax rate than the working class last year” The Washington Post, October 8, 2019

“America’s richest 400 families now pay a lower tax rate than the middle class” CBS News, Oct 9, 2019

But are the Berkeley profs right or is this just hype? The answer is by no means straightforward. It depends on what you are measuring and how you are doing it. And the choices Saez and Zucman have made were necessarily arbitrary and more than a little controversial.

Gleckman, formerly a journalist, breaks the controversy down clearly. It’s a short post, so we recommend you read the whole thing. He briefly addresses the issue of state and local taxes, including the ITEP study effectively critiqued by the Washington Research Council. Gleckman writes,

The EITC and CTC are part of the federal income tax code. They are administered by the IRS. Yes, they feel in many ways like spending. But they were created to help offset the burden of payroll taxes and should be treated like taxes for the purposes of distributional analysis.

That’s how my colleagues at the Tax Policy Center do it. And TPC concludes that the lowest income 20 percent of households pays an effective federal tax rate of just 2.9 percent. The next 20 percent pays an effective federal rate of 7.6 percent.  Overall, TPC finds that federal taxes are highly progressive, with effective federal tax rates ranging from 2.9 percent for the lowest income 20 percent to 30.6 percent for the top 0.1 percent (about 120,000 households).

State and local taxes are less progressive than federal taxes, and some are regressive. State income tax rates, for example, often top out at very low levels of income. And everyone pays the same sales tax rate, though low income people spend a larger share of their income than higher-income consumers, and often for goods that are more likely to be taxable.

In 2018, the Institute on Taxation and Economic Policy (ITEP) calculated the average effective tax rate for the lowest income 20 percent of households was 11.4 percent while the next 20 percent paid an average effective rate of 10.1 percent. ITEP used the 2018 tax law (including the TCJA) but based its analysis on 2015 state economic data.  It also included only taxpayers under age 65.

The WRC finds that ITEP overestimates the burden on lower income taxpayers. Which makes this observation by Gleckman even more persuasive.

Because they are calculated differently, you can’t just add TPC numbers and ITEPs. And even if you could, you couldn’t quite compare them to Saez and Zucman. But as very rough measures, the two sets of estimates suggest that average effective rates for low- and moderate-income households are far lower than Saez and Zucman figure.  

Over problems – including the ridiculously small population of billionaire taxpayers – complicate calculations of the tax burden of the ultra rich. 

His conclusion touches on two issues. Proper calculation of tax incidence only clarifies the problem; it doesn’t end the debate. He writes,

Arguments about methodology shouldn’t mask Saez’s and Zucman’s bigger point: Incomes of the very rich are rising faster than for all other income groups. And the TCJA cut the taxes of high earners by more on average than for low- and moderate-income households, as a share of after-tax income. But that doesn’t mean that “billionaires paid a lower tax rate than the working class.”     

As he writes in his headline, they probably didn’t.