Billionaires vs. the Middle Class: Who Pays More in Taxes? (2024)

When people begin arguing about how much the wealthiest Americans have paid in taxes in the past versus how much they’re paying now, it’s helpful to have some context. According to the Tax Foundation, “The top 1% of Americans today do not face an unusually low tax burden, by historical standards.”

In the 1950s, the top marginal tax rate was 91%. Today it’s 37%, which seems like a drastic drop. But, according to the Tax Foundation, the top 1% of 1950s taxpayers only ended up giving up about 42% of their income in federal state and local government taxes, which means that the current tax marginal tax rate of 37% isn’t that much lower than the effective tax rate high-earners faced in the 1950’s.

Get Tax Debt Help

The reason for the 42% tax rate was that the 91% federal income tax rate only applied to households that had income exceeding $200,000, which were in the minority. And that high tax rate only became effective when a household’s income exceeded $200,000. And even then, the higher rate only applied to the dollars above the $200,000 threshold, not every dollar earned.

Average income tax rates have remained relatively stable for the wealthiest Americans. In the 1950s, the top 0.1 % of households faced average effective income tax rates of 21%, versus 20.7 % as of 2014, according to data from the Tax Foundation.

You might wonder how a top marginal income tax rate of 91% could translate into an average income tax rate of just 21% for the top 0.1% in the 1950s. As stated earlier, the 91% tax rate only applied to amounts earned over $200,000. In addition, tax avoidance behaviors and lower reported income were also likely factors. As marginal tax rates rise, it’s not unusual for taxpayers to under-report income.

According to authors and economists Saez and Zucman, the Tax Cuts and Jobs Act has benefited the ultra-rich. According to their research, they concluded that in 2018, the top 0.1% — the billionaires of America — paid an average effective tax rate of 23%, which factors in all federal state and local taxes. The bottom 50% of U.S. households, however, paid a higher rate of 24.2% toward income tax.

In a November 2019 phone interview with Capital & Main, economist Gabriel Zucman described how he perceives the U.S. tax system — as a giant flat tax where each segment of the population – except for the wealthiest Americans — commits around 25 to 30% of its income in taxes. The wealthiest Americans pay a lesser rate of 23%, which means that the tax system becomes regressive at the top.

Get Tax Debt Help

Not surprisingly, the culprit that upset the tax system — according to Saez and Zucman — is Trump’s Tax Cuts and Jobs Act that was signed into law in December 2017. Although the president repeatedly stated that the TCJA would benefit the middle-class — and it has to a point — many experts point out that the wealthiest Americans are the ones who have benefited the most from the tax cuts.

According to Saez and Zucman, it’s not only the bottom 50% of households who pay more — which include many in the middle-class — it’s also those in the upper middle class and in the top 1% who pay more in taxes than the 0.1% do.

Saez and Zucman did not include refundable tax credits and benefit programs that aid in offsetting the cost of excise, payroll and sales taxes. The omission of these particular credits and benefits is significant. For example, the refundable portions of the Child Tax Credit and Earned Income Tax Credit can keep many low-income workers – mainly those who have children — from owing federal payroll tax on their earnings. The result of failing to include these credits and benefits in the calculations, can make it appear that the lowest income-earners are paying more in taxes than they actually are.

Get Tax Debt Help

Estimated average tax rates are determined by dividing the taxes paid by the income. But the assumption is that not all income is reported to the IRS. For the purposes of their study, Saez and Zucman assumed that all households under-reported income in proportion to their reported income, even when IRS taxpayer audit data shows that’s not true. Unfortunately, misallocating under-reported income inflates the income of the highest earners, which, in turn, drives down the estimated tax rate. The result: It can look like the highest earners are paying less in taxes than they really are.

One thing is for sure — the issues surrounding whether the wealthiest in the U.S. are paying less taxes than the middle-class won’t rest. From economists to presidential hopefuls to tax policy organizations, everyone has a point — or three — to make. Here’s a preview of what you can look forward to in the future regarding these issues.

Get Tax Debt Help