The Biden administration recently claimed that the top 400 wealthiest families in the US paid just 8%. The analysis used publicly available data and was completed by the Office of Management and Budget and the White House Council of Economic Advisers, not the IRS.
The IRS published data on tax returns, including the Top 400 earners and it publishes this data over history. We can see the number of individuals and their relative income tax rates over time in the table below. The IRS does not publish specific tax rates to protect identities but instead publishes the number of filers inside ranges.
We found that those paying 25-30% and 30% to 35% declined the most under President Clinton. Those paying 20-25% and 35% or more decline under President George W. Bush.
The IRS data shows the majority of the top 400 pay 15% to 30% with 17.7% of the Top 400 (or 71 of 400) paying less than 15% and only 4.5% or 18 of the top 400 paying less than 5%.
To find an average tax rate of the Top 400 we calculated the sum of the weighted averages across all years using the midpoint of each bucket. We found that the average tax rate paid by the Top 400 was 22.9%.
We cross-referenced this finding with 2019’s IRS data (the latest available). The top 1% paid 25.6% of their income and the largest percentage of their income out of any tax bracket.
So, how could we see such a large discrepancy between what the IRS shows and what the Biden administration claims? The OFB’s analysis starts with the IRS Statistics of Income SOI and multiply it by an adjustment factor constructed using the Survey of Consumer Finances. Yes, a survey. However, they did not feel that “the adjustment factor could not be directly measured in publicly available data” because the Top 400 wealthiest are not included in this survey. Because of this, they make two assumptions. First, The top 400 pay taxes the same way as the top 1000 wealthiest from the survey. Second, they assumed that the Forbes 400 and the top 400 wealthiest are the same. They assumed an overlap of 100. More overlap would lead to a higher adjustment rate with a higher adjustment factor leading to a higher resulting tax rate estimate. We cannot state if this is reasonable or not but we can point to this being an assumption that can drastically change the outcome.
In addition, they changed the definition of income to be the Haig-Simons definition of income. The Haig-Simons definition of income attempts to also capture the change in wealth and doesn’t just measure income – it also attempts to capture the gain in wealth over the period. Wealthy people tend to have more appreciation in stock than your average person. This accounts for the divergence. The 8% attempts to capture the wealth appreciation as income, even though it does not meet the IRS standard or everyday definition of income.
Nowhere in the OFB’s release does it state what your average American’s tax rate would have been under the same method. We expect it would also be lower than the average taxes (13.3%) paid as homeowners and appreciation in homes would also be included. The average income in the U.S. was $53,200. The average value of a home increased by $60,200 in the U.S. in 2021. Using these averages we estimate this same methodology would show the average American pays 5.2% of their Haig-Simons income in taxes, Nearly 3% less than the top 400.