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Who isn’t fascinated with the machinations of our plutocratic overlords? That is why the recent ProPublica publication of the tax returns of our country’s 25 richest multibillionaires has generated such buzz. It turns out to the surprise of no one, the super-rich do not pay income taxes.
The reason the rich pay so little is that their wealth arises from the sharply climbing value of their assets. These gains are considered unrealized under the U.S. tax code until they are sold.
ProPublica calculated that the average income tax paid as a percentage of their increase in wealth by the 25 richest Americans during the five years ending 2018 was just 3.4 percent. During the same time period, an equivalent tax rate on wealth increases for the average American was 95 percent.
This begs the question: Should the richest Americans pay more? After all, the rich are, as was famously said by President Bush the Younger, job creators. Sure a 3.4 percent tax rate seems ridiculously small but would a higher tax rate on the rich make the average American better off, or would a higher tax rate on the rich disincentivize investment, thereby destroying jobs, perversely making average Americans worse off.
Taxing wealth will reduce wealth and, on the margin, this means fewer jobs. But studies show the effect is small. The rich, after all, are rich because they save a lot and saving behavior is remarkably insensitive to taxes.
And then there are the benefits from government programs financed by taxing the rich. Infrastructure expenditures funded by increased taxes on the rich, by reducing the cost of doing business, create jobs offsetting, in part or in full, the jobs lost from increased taxes. The high return of pre-K programs, for example, are well documented. President Biden has proposed funding universal pre-K programs by increasing taxes on the rich. The net return to the U.S. economy is almost certain to be positive.
The rich benefit disproportionately from many government programs compared to the middle class and the poor. Public education, for example, improves worker productivity, which increases profits, disproportionately benefiting the rich. Public roads, used by workers to travel to and from work and for delivery of products to customers, also contribute to corporate profits, again benefiting the rich. Defense spending benefits the rich in that should there be an invasion, the rich have more to lose.
Even programs that are supposedly designed to directly help the poor provide benefits to the rich by limiting the risk of social unrest. Take for example the widespread protests during the 2020 summer of Covid. Consider what might have happened if the protest had not been just about police violence, but also about widespread starvation and homelessness.
The solution to undertaxed billionaires is not easy. Rich people have lots of money and they use that money to hire tax experts to avoid taxes. In the extreme, rich people have the resources to migrate—like an Elon Musk fleeing California for Texas—to low tax jurisdictions.
Christopher A. Erickson, Ph.D., is a professor of economic at NMSU. He wishes he was rich enough to hire tax experts. The opinions express may not be shared by the regents and administration of NMSU. Chris can be reached at firstname.lastname@example.org.