Total effective tax rates for the 400 wealthiest Americans have declined sharply in recent years, and they now pay a smaller percentage of their true income in taxes than the average American, according to new economic research from UC Berkeley.
For that highest cadre of the economic elite - the top 0.0002% - the effective tax rate fell from 30% in 2010-2017 to 23.8% in 2018-2020, says the new research. The wealthy paid lower overall taxes because they were able to shelter more of their business income from taxes, and on the income they did report, tax rates were lower, the authors said.
"When taking a comprehensive view of taxation and income, ultra-high-net-worth individuals appear less taxed than the average American," they concluded.
The findings were reported in "How Much Tax Do U.S. Billionaires Pay? Evidence from Administrative Data," a working paper published by the National Bureau of Economic Research. The research was conducted by influential faculty economists Emmanuel Saez, Danny Yagan and Gabriel Zucman, and by UC Berkeley Ph.D. student Akcan S. Balkir.
The paper's innovative methods have won recognition, and the bottom-line findings are likely to radiate into the U.S. policy sphere, where intense debates are underway about tax laws and policies that appear to be driving an expanding gap between the rich and other Americans.
When taking a comprehensive view of taxation and income, ultra-high-net-worth individuals appear less taxed than the average American.
For roughly a century, the U.S. tax system has been designed to be progressive, with the wealthiest people paying the highest tax rates. But the fortunes of the wealthiest Americans have been booming in recent decades, and the new research appears to show that when all taxes are combined, the ultra-wealthy pay a lower rate than many people of lesser wealth.
For example: The overall effective tax rate for the top 100 wealthiest in the 2018-2020 period was 22%, but 26.6% for the next 300. The effective tax rate was 45% for top earners who made their income from wages and salaries, as opposed to those whose wealth came from ownership or investment.
The effective tax rate for the U.S. population as a whole was 30.2% in the 2018-2020 period, which corresponds to the final three years of President Donald Trump's first term.
Expanding power, expanding benefits
The researchers also found that, overall, the amount of corporate tax paid by the top 400 on their businesses fell by one-third between the period 2014-2017 and the period 2018-2020. In 2018, U.S. law slashed the federal corporate tax rate from 35% to 21%.
As a result of the changing landscape, the authors found, the top 400 wealthiest own so much wealth that it amounts to one-fifth of the U.S. gross domestic product (GDP).
The authors cite data from Forbes magazine, which compiled its first list of the 400 richest Americans in 1982. At the time, the top 400 owned 0.9% of total household wealth in the U.S., compared to 4.1% today. Using a different metric, the wealth of the top 400 in 1982 accounted for 2% of total U.S. GDP; now they control 20%.
Most of that increase results from the growing wealth of the 100 richest Americans, the study says.
The authors were able to calculate the taxes paid by the 400 wealthiest Americans by using publicly available administrative tax statistics, including tax and financial documents for individuals and their businesses, and even foreign corporate taxes. This creates a more comprehensive picture than they could achieve using only individual income tax returns.
It appears to be the first time researchers have been able to achieve such a precise assessment for any country.
