Fact Sheet: Taxing Wealthy Americans

Fact Sheet

August 12, 2014

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Key Facts

The richest 1% of Americans own 30% of the nation’s wealth. The bottom 80% own just 11% of the nation’s wealth.
In the 1950s and 1960s, when the economy was booming, the wealthiest Americans paid a top income tax rate of 91%. Today, the top rate is 37.0%, far less than half as much.
The richest 1%—those earning more than $680,000 a year—paid an effective federal income tax rate of 25.9% in 2021; that is a full quarter less than what the top 1% paid in income taxes in 1980 (an effective rate of 34.5%).
The average federal income tax rate of the richest 400 Americans was just 22% between 2013 and 2018. The average annual income within this elite group was $268 million.
Taxing investment income at a much lower rate than are salaries and wages loses $2.4 trillion over 10 years.
Billionaires Jeff Bezos, Michael Bloomberg, Elon Musk and George Soros have paid zero federal income tax in several years this century.

Talking points

It’s time for the wealthiest Americans and big corporations to pay their fair share of taxes. When they take unfair advantage of the many loopholes in the tax code the rest of us pick up the tab.
Instead of cutting education funding for our children, we should ask millionaires to pay a tax rate at least as high as their secretary’s.
Instead of cutting Social Security and Medicare, we should ask the wealthy to give up a few tax loopholes so that we can make sure everyone has a secure retirement.

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Overview

The federal income tax is designed to be progressive — tax rates increase in steps as income rises. For decades this helped restrain disparities in income and helped provide revenue to make public services available to all Americans. Today the system has badly eroded — many multi-millionaires and billionaires pay a lower tax rate than average American families.

Ironically, this has happened while the gap between the wealthy and everyone else has grown wider than ever. The extremely rich aren’t only earning and owning more — many are also passing wealth to their heirs tax free, creating a new American aristocracy with vast fortunes.

How the rich avoid paying taxes—and what to do about it

Tax income from investments like income from work. Billionaires like Warren Buffett pay a lower tax rate than millions of Americans because federal taxes on investment income (unearned income) are lower than the taxes many Americans pay on salary and wage income (earned income). Because Buffett gets a high percentage of his total income from investments, he pays a lower income tax rate than his secretary. Currently, the top statutory tax rate on investment income is just 23.8%, but it’s 40.8% on income from work. To reduce this inequity, we should raise tax rates on capital gains and dividends so they match the tax rates on salaries and wages. These loopholes lose $2.4 trillion over 10 years.
Cap tax deductions at 28% for the wealthiest Americans. The rich are able to get much bigger tax breaks for the same tax deductions taken by the middle class. For example, a wealthy family living in a McMansion gets a much bigger tax deduction on the interest on their large mortgage than a middle-class family gets on the interest on their small mortgage on a two-bedroom house. One solution to this problem would be to cap the value of deductions at 15% of income. In other words, the rich would get the same tax benefit per dollar of deductions as a household in the 15% tax bracket, but not more (as they do now) at the higher 37% bracket. This reform would raise $1.4 trillion over 10 years.
Strengthen the estate tax. Some of the ultra-rich are able to take advantage of loopholes so they pay almost nothing in inheritance taxes. Others take advantage of the fact that the exemption levels for the estate tax are very high: $13.6 million per individual ($27.2 million per couple) in 2024, with the amount rising each year with inflation. Sen. Bernie Sanders (I-VT) proposes to restore the exemptions to their 2009 levels — $3.5 million for an individual ($7 million for a couple), with a graduated tax rate that begins at 45% for estates worth $10 million and less, and rises to a top rate of 65% for estates worth $1 billion and more. This and other reforms would raise $546 billion over 10 years.
Another way to ensure that large inheritances are taxed is to close the income tax loophole that lets wealthy people avoid capital gains taxes by holding their assets until they die. Their heirs then escape paying taxes on these gains. President Biden has proposed closing this loophole on gains that exceed $10 million per couple. This reform, along with ending the investment-income tax discount on capital gains and dividends (see above) exceeding $1 million would raise $289 billion over 10 years . We should also end specialized trusts that allow families, such as the Waltons who own more than half of Walmart, to completely avoid paying estate and gift taxes.

Other ways to close tax loopholes for the wealthy

Pass the Buffett Rule. The Buffett rule, inspired by billionaire Warren Buffett, would require millionaires to pay a minimum tax rate of 30%. This will guarantee that the wealthy will not pay a smaller share of their income in taxes than a middle-class family pays. When last proposed by President Obama in 2016, it was estimated the Buffett Rule would raise $70 billion over 10 years.
Enact special taxes on billionaires and centi-millionaires. Both President Biden and the chairman of the Senate Finance Committee have proposed placing a minimum tax on the nation’s handful of wealthiest households, one that would take into account their largest source of income: so-called “unrealized gains”. Both plans would raise more than $500 billion over 10 years.
Close the Wall Street carried interest loophole. Wealthy private equity managers use a loophole to pay the lower 23.8% capital gains tax rate on the compensation they receive for managing other people’s money. We should close this loophole so that they pay the same rate as others at their income level who receive their compensation as salary. This would raise $63 billion over 10 years.
Eliminate the payroll tax loophole for S corporations. This loophole allows many self-employed people to use “S corporations” to avoid payroll taxes. Used by Newt Gingrich and John Edwards to avoid taxes, closing this loophole would require treating this income as salary rather than profit, making it subject to payroll taxes. This would raise $393 billion over 10 years.

What conservatives say—and why it’s wrong

Conservatives claim the wealthy are overtaxed. But the truth is that the highest-income Americans—those with annual income over $1 million—are paying federal income taxes at about half the rate they were in the middle and latter part of the last century, when our economy worked better for everyone. The highest-income 1% pay an effective federal income tax rate of 25.9%. That is a little more than the 16.2% rate paid by someone making an average of about $70,000. And in several years this century, billionaires Jeff Bezos, Mike Bloomberg, Elon Musk and George Soros paid zero federal income taxes.

Conservatives claim that the estate tax is a “death tax,” wrongly implying that the tax is paid when every American dies. In fact, the tax primarily is paid by estates of multi-millionaires and billionaires. In 2019, only the richest eight families out of 10,000 paid the estate tax.

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