Do the rich pay their fair share?

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This question motivates both sides of the aisle. The arguments go from billionaires shouldn’t exist to we should have a flat tax and everything in between. Let’s start with reviewing the current FEDERAL tax structure.

The married, filing jointly brackets for 2024 are (single income brackets are cut in half):

This is a progressive tax structure that means your income is taxed at each level, and your tax rate increases as you make more money. If you had $500,000 in taxable income, your first $23,200 is taxed at 10%, the next ~$70,000 ($23,201 to $94,300) is taxed at 12% and so on. So, your $500,000 is not all taxed at 35%. Only $13,000ish ($487,451 to $500,000) is taxed at 35%.

So with that covered, let’s look how this translates to the taxes the federal government receives from individual income taxes based on 2021 data.

The above chart shows that for federal income taxes, the top 1% of earners accounted for 45.8% of all federal income tax revenue. The top 50% accounted for 97.7%. The bottom 50% accounted for 2.3%.

Since we have a huge wealth gap, let’s look at it as a percentage of reported income. The top 1% accounted for 26.3% of reported income ($3.8 trillion) but paid 45.8% of income taxes ($1 trillion). The bottom 50% account for 10.4% of income ($1.5 trillion) but paid 2.3% of income taxes ($51 billion).

The top 1% paid an effective tax rate of 25.9%, and the bottom 50% paid an effective rate of 3.3%.

The source for all this data is the Tax Foundation.

Income tax is far from the only tax the federal government receives. Thankfully, I found another chart that compiles all the other taxes.

The light blue bar shows payroll tax. The bottom 50% pays a higher percentage of their income to this tax compared to everyone else because this is a flat tax for social security and medicare on only the first $132,900 of income. This means, as a percentage of income and tax paid, these programs are a higher burden on lower income families compared to the 1%. 

Even with regressive payroll taxes, the higher your income, the higher tax rate you pay.

So, if the top 1% are paying almost 50% of all federal income tax received, what could Democrats possibly be referring to when they say the rich need to pay their fair share?

Biden has claimed that a billionaire pays a lower tax rate than a school teacher. This is incorrect by any honest assessment of how our tax code works. 

The vast majority of income and net worth for high income families is in assets. Elon Musk, with a $300 billion net worth, doesn’t have $300 billion sitting in cash. 99% of his net worth is in the value of his stock in Tesla, SpaceX, X, xAI, Neuralink, The Boring Company, and others. 

You do not pay any taxes on an asset you haven’t sold. This benefits everyone who owns any assets.

Biden’s claim relies on including unrealized gains (asset appreciation) into the comparison. If you include the appreciated value of assets into an effective tax rate calculation, of course a billionaire pays a lower tax rate when 99% of the included value isn’t subject to any federal taxes! His claim completely ignores what is actually subject to taxes.

Billionaires and the 1% get away with tax protections using shell companies and trusts to shield income from taxes. Some follow the buy, borrow, die strategy by living off of loans, using their assets as collateral, rather than selling their assets and creating taxable income. They are just following tax law written and approved by the very same people claiming they don’t pay their fair share. Federal tax code is 6,871 pages. It is complicated by design. The 1% pay tax attorneys and accountants loads of money to make sure they pay exactly what they owe, not a penny more. 

Wilson’s Opinion: the rich pay their fair share at the federal level. The tax code is far too complicated. It benefits the top 1%. They are just playing by the rules congress passed. Don’t hate the player, hate the game. 

*Yes, they bribe, I mean lobby, congress to make sure the protections remain in place. Again, they are just playing by the laws legalizing this corruption, I mean lobbying.

Regardless of whether or not you believe the 1% needs to pay more taxes, Republicans and Democrats are not going to substantially change anything. Both Harris and Trump received millions of dollars from billionaire donors. Trump spends more time with Elon Musk than Melania these days. When running against Hilary Clinton in 2016, Trump said he would end the carried interest tax loophole but never did. When Bernie Sanders posed an actual threat to the Democrats’ status quo in 2016, the DNC rigged the primary to keep him out of the race.

The two party system is all about talking about the problems and not solving the problems. If the politicians solve a problem, what will they run on for reelection?? Making the rich pay their fair share, securing the border, and providing healthcare are issues that motivate the base to vote. The Democrats’ and Republicans’ playbook is “how to win elections” not “how to improve America.” 

Back to our regularly scheduled, personal finance talk next time. I promise.

What We’re Listening To:

Breaking Points. This is an independent news podcast that I highly recommend. The hosts, Krystal and Saagar, are former legacy media journalists who were sick of the biased networks. They focus primarily on political and foreign policy news.

Debrief on Deck

Next week is Thanksgiving! We won’t take away your time with family. The following week will be the November debrief.

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Until then, stay the course.

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