Ultra-Wealthy Allegedly Pay Below Average Tax Rate

Ultra Wealthy

Two economists who advise presidential candidates Elizabeth Warren and Bernie Sanders say that the 400 wealthiest families pay a lower tax rate than the middle class.

It seems that it isn’t just politicians that have axes to grind, as we now have a report out there from a couple of politically motivated economists that is making the rounds in the media suggesting that the wealthiest people in America, the wealthiest 400 families to be specific, pay a lower tax rate overall than the middle class do, 23% instead of the common person’s 24%.

This is supposed to show that we no longer have an effective progressive taxation system, in practice anyway, and is obviously meant to rile up people and seek to get more support for the politicians that they advise, namely left-wing presidential candidates Bernie Sanders and Elizabeth Warren.

The conclusion of this data is that Trump’s recent tax cuts benefited the wealthy too much, and needs to go. We can only imagine what sort of reversal of this either of them would wish to pursue, but you can bet that they both would love to take the concept of progressive tax rates to a new level of progression.

While economists count themselves as scientists, economics is a social science, which means that the scientists may impart their social and political views into their conclusions, or at least allow them to shape them.

This actually happens a lot with the so-called hard sciences as well, as our research is always shaped by our hypotheses and studies get shaped by bias all the time. This economic study is a clear example of selecting the conclusion that you want first and then seeking to present data that supports it, in this case, that the ultra-wealthy have been unfairly benefited by recent changes to taxation and now pay less of their fair share presumably.

In contrast, if we were looking to use this data in a less biased fashion, or even in a way that could be taken as valid, we would need to point out that while the wealthy do pay higher income tax rates, when you add in other taxes that are not progressive, the overall tax rate for this group is a bit lower.

It’s not clear how they came up with the number 400, but to make this trick work, you do need people wealthy enough that the extra from the highest income tax bracket is offset by other forms of tax that are assessed independent of one’s income, which includes a number of other taxes.

Perhaps 500 was too many, but when we’re only talking 400 families in the entire country, that’s a very small percentage and not one that would be valid if the scope extends beyond this small group, as in the wealthy in general or even multi-millionaires. They do want to suggest that more than just these 400 don’t pay enough tax, and as presented, any conclusions need to be limited to this group only.

You don’t repeal laws that apply to millions based upon an effect of just 400 people, so anything suggesting this won’t fly, although needing to fly isn’t usually a limitation. We do need to flesh out evidence though so that we are at least drawing the right conclusions and interpreting the data correctly.

Seeking Fairness Needs to Involve Looking at the Whole Picture

We cannot deduce from this that these people do not pay enough income tax, as how much they pay isn’t even part of the discussion. Several commentators have pointed out that this approach does try to suggest that their tax rate needs to be higher, even though if we just look at what rate they pay, it is a lot higher than what the middle class pay, by a good margin, as it is designed to be.

The fact that these people pay much more in taxes than the average person got left out of the discussion, and if someone is paying millions of dollars in tax and the ordinary person pays tens of thousands, and you’re trying to use the word “less” in the discussion, it at least needs to be put into perspective of overall tax paid.

Total amounts paid always is going to mean something if you’re arguing from a point of fairness, and some may instead argue that paying more at all isn’t fair, even though we have as a society accepted this practice, whether it be fair or not.

We therefore use escalating tax rates according to income, where if you make enough, you both pay more in tax and a higher percentage of your income as well. What you pay in sales tax, for instance, or for other fixed percentage taxes, really has no bearing on your income tax rate, unless we are looking to muddy up the waters by including these other taxes in the calculation and then suggesting that progressive tax isn’t in effect and we need to raise the ceiling.

As it turns out, the ultra-wealthy spend a lower percentage of their income and therefore save more of it than the average person, and this is what puts down their overall taxes as a percentage of their income. Since they therefore pay less consumption tax relative to what they make, this skews the overall results.

Consumption taxes are designed to be static and not progressive though, and we really wouldn’t have a good way to make them so. If your goal is to raise tax rates on the wealthy though, you may need to resort to trying to fool us with a study like this is because there really aren’t any good arguments to use in its place.

We could always just look to expand it anyway, make it more progressive, the reverse of what Trump did when he cut back on this, and politicians don’t really need an excuse to do these things if they really wish, as their personal biases are more than sufficient cause for them to act.

Regardless of whether you think it’s fairer to raise the top tax bracket or whether you think it’s just right now or too high already is one thing, but there are practical consequences to taxation and especially among the wealthy. Trump’s tax cuts benefited the U.S. economy significantly, and these benefits extend beyond the wealthy to everyone by way of the greater economic prosperity that they promote.

If our intent here was to inform and not just persuade, we would need to present the consequences of these tax changes alongside the fact that this anomaly with the lower overall percentage of your income paid in tax was lower than average for 400 people. What is going on with such a small handful of people isn’t going to materially affect our lives, whereby the economy certainly does.

What Happens to our Economy When we Tinker With Taxes Has to Matter

If we’re going to take a position and promote a certain view, for instance that the wealthy should pay more tax than they do, it is wholly irresponsible to look to do so without carefully examining the consequences.

It may very well be that, once we do, we may benefit overall by lowering these tax rates further, but that presumes that the public interest is our main concern. If we punish a very small percentage of people by having them pay more but we all end up with less as a result, that’s simply not rational.

All discussions of tax reform therefore need to have the consequences of what is being proposed at the forefront, to be considered right alongside what is being argued as the reasons for it. We might be envious or angry with the wealthy, but if we let these personal feelings cloud our judgement to the point where our ability to reason is impeded, we risk seeking out a worse outcome for everyone through our ignorance.

We can take a completely utilitarian approach to these problems, where when the interests of individuals conflict with the greater good, the greater good is to preferred, and this is the fundamental basis behind progressive taxation or even having anyone pay an above average amount.

This still requires us to examine what limitations there may be with progressive taxation where we look to set this at a level close to optimal, and set progressive rates at the level that does promote the greater good the most.

We know that Trump’s tax cuts meet this criterion as this has effectively promoted the greater good by increasing economic prosperity. Perhaps another cut would be in order, which we can only get a good idea of by studying its effects and not just be satisfied with shaking our fists at people and limit our intellectual involvement in the matter to expressing our sense of injustice.

The risk here is that if either of these two make it to the White House, and they do manage to get any of their ideas implemented, the greater good will take a hit, and likely a big one. The threshold here where even those completely ignorant of the way the economy works, which clearly includes any politician who does not consider economic consequences in their platforms, will ultimately become breached as we push this too far, when the fat hits the fire it will smack everyone in the face.

The evidence presented in this study is not anything that would have taken Sanders and Warren off the warpath against the wealthy, but when something like this is prominently displayed in the media, without much of an explanation of the real issues, this can serve to win some support.

The media doesn’t think much about the economy either, and consists of people who may be able to write well enough but often lack even a proper understanding of the issues. When the politicians don’t get it, and the media doesn’t get it, it’s a good bet that a lot of voters won’t either.

You would think that they could rely on a more honest approach to this issue, and simply declare that wealthy people pay a higher income tax rate but they want the power to make them pay more, because they want to and people want them to as well.

Sadly, this is sufficient, so for those who at least want to avoid being reckless with the way we limit our economy need to worry about their being in the minority and that we are indeed at risk of seeing some real damage occur before the flames burn high enough to be seen by those who prefer to turn away from the real consequences of their actions.

Monica

Editor, MarketReview.com

Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.