— President Biden, remarks in Raleigh, N.C., Jan. 18
There are some “facts” that Biden likes to recite in almost every speech. In the past year, in more than 30 appearances, the president has referred to billionaires paying about 8 percent in federal income taxes. He said it in his last State of the Union address, and odds are he will say it again when he addresses Congress in March.
The line is a key part of his argument to impose a minimum 25 percent tax on all taxpayers with wealth greater than $100 million. That would raise about $360 billion over 10 years, the administration estimates.
But if you check Treasury Department calculations for what the richest Americans already pay in taxes, you would see that the richest 1 percent pay in excess of 20 percent in income taxes and more than 30 percent in all federal taxes. Even if you drill down to the top 400 wealthiest taxpayers — data that was publicly available on an annual basis until President Donald Trump killed the report — they paid an effective tax rate of 23.1 percent in 2014. These taxpayers — with $127 billion of income — that year paid $29.4 billion in income taxes, or more than 2 percent of all income taxes, the IRS said. That’s more than the bottom 70 percent of taxpayers combined.
Here’s the funny thing: Biden’s 8 percent estimate is derived from that same tax data on the top 400 taxpayers. So what’s going on? The president is describing a tax system that he wished existed — not the system in place.
Under the 16th Amendment of the Constitution, ratified in 1913, “Congress shall have power to lay and collect taxes on incomes, from whatever source derived.” Biden’s startling statistic depends on an expansive definition of income.
A person’s effective tax rate is determined by the percentage of their income that is devoted to paying taxes. If a person earned $50,000 a year and paid $5,000 in taxes, then their average tax rate would be 10 percent.
But what is a person’s income? Many economists would say it is more than just the numbers on your paycheck. Your employer pays half of the Social Security payments that are due and might also include health insurance benefits and contributions to a 401(k) retirement plan. Most economists would say your salary is reduced by the value of those contributions, so it should be counted as part of income.
Indeed, when the Treasury Department determines average tax rates, it includes such items (and other income streams, such as welfare payments) in its calculations.
So let’s assume in our example of the $50,000-a-year salary that those additional employer benefits added $15,000 to that person’s income, for a total of $65,000. That would reduce the effective tax rate to 7.6 percent.
In the 1920s and 1930s, two economists, Robert Haig and Henry Simons, proposed a broad definition of income that included any gain in asset value, whether the assets were sold. The idea was to capture a person’s economic well-being. Under the current tax system, a person generally pays a capital-gains tax (20 percent) when they sell an asset, such as shares in a company, that has gained in value. But under Haig-Simons, any gain in asset value during a year would be a taxable event.
Suppose our taxpayer earning $65,000 in salary and benefits lives in a house that rose in value $35,000 in one year. Under Haig-Simons, the person’s income would be $100,000, even though the house had not been sold. If they paid $5,000 in taxes, their tax rate would be only 5 percent. So, just by fiddling with the income figures,…
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