Addressing President Biden's Claim that the Rich Only Pay 3% in Taxes

A famous talking point among elected officials with liberal political ideologies is that the rich are not paying their fair share in taxes. Recently, President Joe Biden claimed exactly that on Twitter when he said the following:

Look, I think you should be able to be a billionaire if you can earn it, but just pay your fair share. I think you ought to pay a minimum tax of 25%...You know the average tax billionaires pay? Three percent. No billionaire should be paying a lower tax than somebody working as a schoolteacher or a firefighter (Biden 2023).

Most Americans would agree with President Biden that billionaires should be paying much more in taxes than schoolteachers or firefighters. However, claiming that billionaires are only paying taxes at a three percent rate is bound to cause confusion. President Biden was likely incorrectly citing a figure that the White House officially announced in a brief on February 6th of this year stating that billionaires, “pay an average tax rate of just 8%” (White House 2023). Due to the discrepancies in these claims, it is imperative to understand what methods were used to obtain these figures and what they mean for American citizens.

The White House outlined their method for finding this data in a press brief from September of 2021. In the brief, the White House explains that they used IRS Statistics of Income data paired with data about the Forbes 400 wealthiest families in America to find an accurate income tax rate of around 8% (White House 2021). All of the data they used is published on their website and a detailed analysis of their methods can be found in the technical appendix to the brief. The data used is ordinal and is a sample of the population of billionaires in the US. The dataset is highly extensive with data about the income, total wealth, and taxes paid by the 400 wealthiest families in America as provided by Forbes and the IRS. They do an adequate job of reducing sampling error by using Forbes data that accurately shows the wealthiest Americans. The validity of the measure is accurate as well as they use revenue from earned revenue and capital gains per family as a statistical measure of wealth compared to total taxes paid to find a percentage tax rate.

The purpose of this claim was to influence voters to support candidates who will work to raise tax rates on the rich. Because President Biden wants to raise taxes on the rich, he would benefit from a citizenry who feels that the rich are not paying their fair share. The average American would see this claim and feel enraged because they would assume that these 3% to 8% rates are what is coming out of the billionaires’ bi-weekly paychecks. The problem with this line of thinking is that billionaires don’t amass wealth the way the average American does. The wealthiest people in America amass their wealth through ownership of companies, real estate, or intellectual property. The increases in wealth recorded due to ownership are known as capital gains and are not actual income but are rather unrealized revenue. Having capital gains is like having a house that increases in value over time. The house is more valuable, and your net worth has increased, but no money has entered your bank account. So, what the White House is measuring as taxable is more closely related to net worth, and not net income. This means that from a purely income related standpoint, the average tax rate on the top 1% of Americans would not be 3% or 8% as calculated on their total net worth, but rather 26% as calculated on their net income (York 2023). This distinction completely changes the perception of how much in taxes billionaires appear to be paying and is much less of a talking point when reported as a percentage of income and not of net worth. Thus, President Biden’s claim would be a misuse of quantitative data if examining tax rates based on net income due to its lack of context into how these percentages are being generated and what they really mean in the context of net worth compared to net income.

References

House, The White. 2023. “FACT SHEET: The Biden Economic Plan Is Working.” The White House. February 6, 2023. https://www.whitehouse.gov/briefing-room/statements-releases/2023/02/06/fact-sheet-the-biden-economic-plan-is-working/.

President Biden [@POTUS]. 2023. “Look, I Think You Should Be Able to Be a Billionaire If You Can Earn It, but Just Pay Your Fair Share. I Think You Ought to Pay a Minimum Tax of 25%. It’s about Basic Fairness. Https://T.Co/OHgreYCdUz.” Tweet. Twitter. https://twitter.com/POTUS/status/1637136790208356354.

“What Is the Average Federal Individual Income Tax Rate on the Wealthiest Americans? | CEA.” 2021. The White House. September 23, 2021. https://www.whitehouse.gov/cea/written-materials/2021/09/23/what-is-the-average-federal-individual-income-tax-rate-on-the-wealthiest-americans/.

York, Erica. n.d. “Summary of the Latest Federal Income Tax Data.” Tax Foundation (blog). Accessed March 21, 2023. https://taxfoundation.org/publications/latest-federal-income-tax-data/.