March 20, 2020 Reading Time: 3 minutes

The IRS has released new tax data that demonstrate how much we’ve been fooled by claims that the rich aren’t paying their fair share. Those claims are based on statistical errors and incomplete data. Now that we have the complete data, we gain more perspective.

We’ve written a piece in the Wall Street Journal that explains it all. Excerpts below.

Emmanuel Saez and Gabriel Zucman asserted that 2018 was the first year in U.S. history that the average tax rate on the 400 wealthiest income earners dipped below the rates paid by the lower-middle class and poor.

Finally, we had proof the rich weren’t paying their fair share. But new data from the Internal Revenue Service suggest it isn’t true.
The Saez-Zucman analysis raised eyebrows among other economists who study tax data, in part because they claimed it reflected the first full year under the new tax rates. At the time they published their study, the IRS had yet to release the data necessary to make the calculations they described. Preliminary numbers for 2018 income-tax returns, covering all filings made by last year’s Oct. 15 extended deadline, came out only last week. These data tell a very different story: America’s wealthiest earners still carry the lion’s share of the tax burden.

Closer inspection reveals that Messrs. Saez and Zucman imputed the tax rates they claim for 2018 from records that predated the Trump tax cut, and therefore didn’t capture its effect on the measured distribution of income. They built in opaque assumptions that now appear to have exaggerated the tax cut’s benefit to high-income earners.

This wasn’t the only problem with the Saez-Zucman statistics. Their alleged 23% tax rate paid by the highest earners—encompassing all federal, state and local taxes—fell below the Congressional Budget Office’s estimates for the top income percentile’s federal tax rate alone. The two economists’ tax rates for the poor also looked suspiciously high. A 25% rate for the lowest quintile of earners would be almost twice the level found in other estimates, including those using better-established data from the Congressional Budget Office and the nonpartisan Institute on Taxation and Economic Policy. The discrepancy arose from Messrs. Saez and Zucman’s exclusion of the earned-income tax credit for low-income households, artificially inflating the amount of tax the poor really pay.

The new IRS numbers now provide reason to doubt Messrs. Saez and Zucman’s entire narrative of a regressive U.S. tax system designed to favor the rich at the expense of the poor. The IRS reports effective income-tax rates on the adjusted gross incomes of different groups of earners. That’s the percentage of income that people actually pay to the government, as distinct from the statutory tax rate.

According to the IRS, the top 0.01% of earners—those with incomes above $10 million—paid a 24.8% effective federal income-tax rate in 2018. This isn’t very different from the 25.3% the group paid in 2017, and is higher than the average rate of 22.5% on the same group during the George W. Bush administration. As these rates only encompass federal income taxes, most filers can expect to add another 8% to 12% of income from other forms of taxation, placing their total burden well above the Saez-Zucman numbers.

How does that affect the claims of regressivity? It’s true the remainder of the top 1% (those with incomes between roughly $500,000 and $10 million) paid a slightly higher effective rate, at 26.5%, than the top 0.01% did. But tax rates drop rapidly from there, with filers in the $50,000 to $75,000 reporting bracket (approximately the median U.S. family income) facing an average federal income-tax rate of 8.4%.
People who earned between $15,000 and $40,000 paid an average federal rate of merely 4% of their adjusted gross incomes in 2018. And thanks to the earned-income tax credit and others like it, the poorest earners paid very little if any federal income tax at all.

In short, the federal income-tax structure still places the unambiguous bulk of its burden on the highest earners. The Trump tax cut hasn’t changed that. In 2018, the top 1% of U.S. earners paid roughly 37% of all federal income taxes. The top 5% paid around 58%. This suggests that policy makers wishing to mitigate regressive features of the tax system should look elsewhere. State and local sales and property taxes may be a more promising area for reform….

Stephen C. Miller

Stephen C. Miller

Stephen C. Miller is the Adams Bibby Chair of Free Enterprise and an Associate Professor of Economics in the Manuel H. Johnson Center for Political Economy at Troy University. He is also an AIER Summer Fellow alumnus and Voting Member of AIER. The views and opinions expressed are those of the author and do not imply endorsement by Troy University.

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Phillip W. Magness

Phil Magness

Phillip W. Magness works at the Independent Institute. He was formerly the Senior Research Faculty and F.A. Hayek Chair in Economics and Economic History at the American Institute for Economic Research. He holds a PhD and MPP from George Mason University’s School of Public Policy, and a BA from the University of St. Thomas (Houston). Prior to joining AIER, Dr. Magness spent over a decade teaching public policy, economics, and international trade at institutions including American University, George Mason University, and Berry College. Magness’s work encompasses the economic history of the United States and Atlantic world, with specializations in the economic dimensions of slavery and racial discrimination, the history of taxation, and measurements of economic inequality over time. He also maintains an active research interest in higher education policy and the history of economic thought. His work has appeared in scholarly outlets including the Journal of Political Economy, the Economic Journal, Economic Inquiry, and the Journal of Business Ethics. In addition to his scholarship, Magness’s popular writings have appeared in numerous venues including the Wall Street Journal, the New York Times, Newsweek, Politico, Reason, National Review, and the Chronicle of Higher Education.

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