Thread by @ChuckCBPP

Here’s a tax policy must-read from two top economists, @gregleiserson of CEA and @dannyyagan of OMB: they find, conservatively, that the wealthiest 400 families paid an average income tax rate of just 8.2% over 2010-2018
bit.ly/39vMoXv

It’s featured this morning in this New York Times Story by @jimtankersley:
nyti.ms/39uC16f

This is timely given the stage of the current debate. The House bill includes important provisions that would boost this rate some, but leaves out the most important provision (on step-up which I’ll discuss later in this thread)

But first, recall that the individual income tax is our main federal tax. It raises roughly half of all federal revenue and it is based on an ability to pay principle (i.e. rich people are supposed to pay at a higher rate).

Often, however, the wealthiest people pay little or no income taxes for 2 reasons: 1. Much of their income (unrealized capital gains) is not counted as taxable; 2. When their income is taxable it’s often in a form that enjoys special breaks or lower rates
bit.ly/3lOUgZX

The ProPublica bombshell revealed just how little some of the wealthiest people pay in income tax and, here, Leiserson and Yagan are adding an important rigorous analytical supplement to this investigative reporting
bit.ly/3hYk84m

The Leiserson-Yagan paper importantly includes unrealized capital gains in its measure of income in the denominator. Most other analyses leave this income out (by considering only income that shows up on a tax return) & overstate the tax rate of the wealthiest people

Contrary to the “unconventional” in the NYT subheading, this is Econ 101. As top tax economists Joel Slemrod & Jon Bakija explained in Taxing Ourselves, “whether you sell the asset does not matter because an increase in the value of assets you own increases your purchasing power”

Exactly this: @M_SullivanTax, chief economist at Tax Analysts: “it’s hard to see how a good assessment of taxation of the very rich can ignore unrealized gains. It would be like evaluating the Los Angeles Lakers offense without talking about LeBron James.”

Note that the paper’s approach is conservative, understating the true income of the wealthy. Many of the wealthiest people, as ProPublica highlighted, pay an even lower effective tax rate, including zero some years.

Leiserson and Yagan explain on page 5 that “taxes paid by the 400 highest-reported-income families surely exceeds the 2010–2018 taxes paid by the 400 highest-wealth families”

They provide an example of Warren Buffet, who while clearly in the top 400 in wealth, would not have even been in the top 14,000 in reported/taxable income from the 2015 tax return he made public.

Returning to how this important paper fits into the current debate. First, it underscores the importance of the House Ds’ effort to reduce the tax rate discounts/raise tax rates on their income that does show up on tax returns: realized cap gain, dividends, surtax.

But it also helps highlight the most glaring omission of the House bill. Many of the wealthiest people will still go through life and death paying little or no income tax because of how unrealized capital gains are treated – the tax liability is simply erased at death.

This is why, at a minimum, the Senate should adopt the President’s proposal to tax capital gains of the wealthy at death. Plus, the Brown-Wyden proposal on stock buybacks would be another incremental way to tax unrealized gains. Here is our related paper:
bit.ly/3zxTQvR