During Saturday night’s Democratic presidential debate, each of the three candidates on stage called for higher taxes on wealthy Americans. At one point in the debate, Hillary Clinton called for a new minimum taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. on high-income individuals:
Look, I have said I want to be the president for the struggling, the striving, and the successful. I want to make sure the wealthy pay their fair share, which they have not been doing. I want the Buffett Rule to be in effect, where millionaires have to pay 30 percent tax rates instead of 10 percent to nothing in some cases.
Is this claim true? Are there really millionaires who pay “10 percent to nothing” in taxes?
Unfortunately, the federal government does not provide enough data to answer this question precisely, because none of the relevant IRS statistics include a separate category for taxpayers making over $1 million. However, we can extrapolate from the available data to estimate how many millionaires are paying income tax rates below 10 percent.
First, the IRS provides a useful table that shows the effective income tax rates that different taxpayers face. Here, “effective tax rate” just means the income tax that a taxpayer owes to the federal government, divided by the taxpayer’s adjusted gross incomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.” . (This is not a perfect measure of a taxpayer’s effective rate, but it’s good enough for these purposes).
When looking at the U.S. at large, the majority of taxpayers face effective tax rates below 10 percent. In 2013, out of the 94.5 million tax returns that owed any income tax at all, 61.8 million faced an effective tax rate under 10 percent.
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Effective Income Tax Rates of All Taxpayers, 2013 |
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Effective tax rate |
Number of returns |
Share of all returns |
|
Under 5 percent |
25,454,353 |
26.93% |
|
Between 5 and 7 percent |
12,996,530 |
13.75% |
|
Between 7 and 10 percent |
23,306,529 |
24.65% |
|
Under 10 percent |
61,757,412 |
65.33% |
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Source: Internal Revenue Service, Statistics of Income, Table 3.2 |
When it comes to the high-income taxpayers, however, the vast majority face effective tax rates of over 10 percent. While the IRS data doesn’t include a specific category for taxpayers with over $1 million in income, we can look at the closest category – returns with over $200,000 in income. In 2013, almost all taxpayers making over $200,000 paid over 10 percent in income taxes; only 2.88 percent faced an effective rate of under 10 percent.
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Effective Income Tax Rates of Taxpayers Making Over $200,000, 2013 |
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Effective tax rate |
Number of returns |
Share of all returns with income over $200,000 |
|
Under 5 percent |
62,948 |
1.14% |
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Between 5 and 7 percent |
26,864 |
0.48% |
|
Between 7 and 10 percent |
70,026 |
1.26% |
|
Under 10 percent |
159,838 |
2.88% |
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Source: Internal Revenue Service, Statistics of Income, Table 3.2 |
Of course, taxpayers who make over $1 million are only a small subset of those with incomes over $200,000. And it is well-known that taxpayers making over $1 million are more likely to earn income from capital gains and dividends, which are subject to lower rates. Therefore, while only 2.88 percent of Americans making over $200,000 face rates below 10 percent, perhaps Americans making over $1 million are more likely to pay less than 10 percent in income taxes.
To test this theory, we can hone in on the highest income taxpayers, using another dataset provided by the IRS: an annual summary of the 400 highest-income tax returns. Out of these tax returns – each of which reported over $140 million in income – only a very small number faced effective tax rates of less than 10 percent. Specifically, out of the 400 highest-income taxpayers in 2012, only 32 taxpayers paid less than 10 percent in income taxes. In other words, even among the very wealthiest taxpayers, only 8 percent paid “10 percent to nothing.”
It is also worth noting that the number of wealthy taxpayers paying less than 10 percent has almost certainly shrunk significantly since 2012. This is because of the net investment income tax, which took effect in 2013 and imposes a flat 3.8 percent rate on investment income. It is highly probable that, once the 2013 statistics for the 400 highest-income taxpayers are released, they will show that virtually none of the highest-income Americans faced rates under 10 percent any longer.
The verdict: There are very few millionaires in the U.S. that pay “10 percent to nothing” in taxes. Specifically, somewhere between 3 percent and 8 percent of millionaires pay below 10 percent of their adjusted gross income in taxes.
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