The top 1% of taxpayers, on average, pay a higher effective tax rate than middle-income people, contrary to a claim Joe Biden made on the campaign trail.
As a result of a low tax rate for capital gains earned by many wealthy Americans, Democratic presidential candidate Biden said in a speech at the Iowa State Fair that the top 1% pay “a lower tax rate than you do.”
Biden, Aug. 8: We’re in a situation where you have the top 1%, in fact, making — paying a lower tax rate than you do, because it’s mostly capital gains. … [M]ore than a teacher, a firefighter, a cop. It’s ridiculous. We should be rewarding work, not just wealth.
It’s true that the top personal tax rate on capital gains (20%, or 23.8% including the net investment income tax) is lower than the top rate on ordinary income (which is 37%). And it’s also true that capital gains are disproportionately earned by the very wealthy.
But, as we said, the top 1% on average pays a higher effective federal tax rate than middle-income earners.
According to an analysis by the nonpartisan Tax Policy Center, the top 1% — those making over $783,300 ($2.4 million on average) — will pay about an average federal tax rate of 30.2% in 2019. That’s a higher rate than any other income category below it.
Biden did not specify what income group he was talking about. He said only that the top 1% pay a lower rate “than you do” before listing several middle-income jobs — “a teacher, a firefighter, a cop.”
But those in the middle 20% of earners — with an expanded cash income of $50,001 to $87,300 — will pay an average federal tax rate of 12.4%, according to the Tax Policy Center analysis. That’s less than half the effective tax rate paid by the top 1%.
The Tax Policy Center analysis included all federal taxes paid, said Howard Gleckman, a senior fellow at the TPC — including “individual income taxes, corporate income taxes (which we distribute to workers and shareholders), payroll taxes, estate taxes, and excise taxes.”
“Do some individuals pay less? Sure,” Gleckman told us via email. “You can invest all your money in tax-exempt bonds and pay no federal income tax on the interest. Investors can avoid paying tax on capital gains by simply not selling the assets (but they’d also have no income). But in general, the federal tax system is very progressive. The more you make, the more you pay.”
Kyle Pomerleau, chief economist and vice president of economic analysis at the Tax Foundation, told us something similar. “There may be cases in which specific top income earners face a lower rate than a middle-income earner — especially if all of their income is long-term capital gains,” Pomerleau said, but that is “not typical.”
When we reached out to the Biden campaign, it pointed us to a fact sheet from the advocacy group Americans for Tax Fairness, which stated, “The richest 1% pay an effective federal income tax rate of 24.7% in 2014; someone making an average of $75,000 is paying a 19.7% rate.”
In addition to contradicting Biden’s claim, that information is dated.
In its April 2019 report “Fair Taxes Now,” Americans for Tax Fairness notes that in 2016 (the latest year for which data are available), the IRS individual income tax rate charts show that the top 1% of tax returns — those reporting over roughly $481,000 in adjusted gross income — paid an effective tax rate of nearly 27%. As a spokesman for the group pointed out to us, a middle-income worker with a minimum adjusted gross income of about $81,000 paid an effective tax rate of just under 18%.
However, the group argues that wealthy Americans ought to be paying more, and that tax cuts and breaks aimed at the wealthy have led to growing income inequality. The group’s report mirrors the language used by Biden, that the tax code provides preferential treatment to “wealth over work.” The report argues that simply raising the top marginal rate on ordinary income does not get at one of the great generators of income for the wealthy — long-term capital gains and dividends.
“Probably the biggest contributor to low effective tax rates among the wealthy is the reduced tax rates on long-term capital gains and dividends, which are taxed at a top rate of 20% (or 23.8% if including the Net Investment Income Tax),” the report states. “Such investment income is highly concentrated among the rich.”
As part of a health plan Biden unveiled in July, the former vice president said he would restore the top marginal tax rate to 39.6% and increase the top marginal income tax rate on long-term capital gains to 39.6% for taxpayers earning more than $1 million annually. As he did at the Iowa State Fair, Biden also has called for ending a tax break called “stepped-up basis” that allows some heirs to inherit investments without paying taxes on the capital gains earned.
We take no position on Biden’s plan or his argument that a lower capital gains tax inordinately rewards wealthy Americans.
As a result of the current tax rate on long-term capital gains, it is possible that some wealthy Americans have a lower tax rate than some middle-income Americans. But as Pomerleau at the Tax Foundation notes, “this is not typical and requires a caveat.”
“The very wealthy earn other types of income (wages, business income) that are taxed at ordinary rates,” Pomerleau told us via email. “In addition, a lot of capital gains are from the sale of corporate stock. This means that the capital gains ends up being the second tax on this stream of income — after the corporate income tax, which is 21% (it used to be 35 percent).”
“The result is that the top 1 percent ends up paying the highest effective tax rate amongst all income groups,” Pomerleau said.
According to the government’s nonpartisan Congressional Budget Office, he noted, the average effective tax rate of the top 1% in 2016 — the latest year for which data is available — was 33.3%, including all taxes and income. The effective rate for the middle 20% income group was 13.9%. (See “Data Underlying Figures,” Figure 4.) That was before the Republican-backed Tax Cuts and Jobs Act kicked in. Although that law resulted in big tax cuts for the top 1%, Pomerleau said, “I don’t think it would change the general point that the top 1 percent pays more.”
In other words, while there may be some exceptions, in general, people in the top 1% pay a higher tax rate than people who make less.