The news that the wealthiest Americans, including tech billionaires, are paying remarkably low tax rates compared to the general population should be a wake-up call for policymakers. A new study from the National Bureau of Economic Research found that the top 0.0002% of U.S. households (the "top 400" billionaires) paid an average total effective tax rate of just 24% from 2018-2020. This is substantially lower than the 30% rate paid by the full population and the 45% rate paid by top labor income earners.
Billionaires Exploit Tax Loopholes
What this really means is that the ultra-wealthy are using a variety of legal strategies to minimize their tax burden, even as their net worth continues to soar. The researchers found that billionaires are able to keep their individual income taxes low by retaining most of their business earnings in their companies rather than taking dividends. They also reported negative taxable income on average for their passthrough businesses, further reducing their personal tax bills.
Implications for the Broader Economy
The bigger picture here is that this trend of billionaires paying relatively little in taxes has serious consequences for the rest of the economy. As The Wall Street Journal reports, an increasing share of the country's economic output is flowing to company profits and shareholders rather than worker wages. This concentration of wealth at the top exacerbates inequality and reduces the resources available for public investment in areas like infrastructure, education, and social services.
In the long run, this dynamic could undermine economic dynamism and social cohesion. As AP News notes, the proposed "billionaire's tax" in California is a sign that policymakers are starting to grapple with this issue. But meaningful reform will require concerted action at the federal level to close loopholes and ensure the ultra-wealthy pay their fair share.