Questionable Assumptions Underlay Calls for a Wealth Tax

The leading proponents of a wealth tax have released a new study claiming that billionaires pay lower tax rates than the average American taxpayer. The study is co-authored by the UC Berkeley economics professors who made the case for the wealth tax supported by Senators Bernie Sanders and Elizabeth Warren. And just like their wealth tax study, this new study is coming under fire for using questionable assumptions and flawed data.

The authors of the study contend that billionaires on the Forbes 400 list pay a lower effective tax rate than average Americans, due in large part they say to the corporate rate reduction enacted in 2017. They argue that a significant portion of billionaires tax burden comes through the corporate tax.

The study is getting considerable pushback from nonpartisan tax experts. The Tax Foundation has called the study misleading, arguing that its methodology greatly overstates their income and significantly understates their actual effective tax rate. A detailed paper by a Joint Committee on Taxation economist raises similar concerns, and concludes that the study underestimates their effective tax rates by 13 percent percentage points, or more than 50%.

A Wall Street Journal article on the study said that it “requires significant assumptions” to reach its conclusions, and notes that the authors’ past estimates of income and tax rates “have been contested by other economists.”

A major flaw of the study is that it assumes the entire burden of the corporate tax falls on shareholders. However, as the Journal points out, the Treasury Department, the Joint Committee on Taxation, and most academic economists agree a portion of the corporate tax burden falls on workers in the form of lower wages.

Studies by Federal Reserve Board economists and the Tax Foundation estimate that workers bear as much as 70% of the burden. A University of Chicago study estimates that labor bears 60% of the corporate tax. A study by Kevin Hassett and others reviewed taxes and wages in 66 countries over 25 years and found that “higher corporate tax rates depress wages,” with every 1% increase leading to a 0.5% decrease in wages.

The intent of the UC Berkeley study is to make the  case that tax rates on billionaires are too low, and should be raised. But the Tax Foundation and the JCT papers both point out the U.S. federal taxes are highly progressive, and that the tax code’s progressivity has increased since the 1980s, including in the recent tax bills.

The top 1% of earners have a much higher effective tax rate than any other taxpayers and they pay more than 40% of all income taxes. The U.S. top capital gains tax rate is 10 percentage points higher than the average OECD rate. And even with the corporate rate cut in 2017, U.S. companies are still paying a higher corporate tax rate than the average European and Asian corporate rates. In fact, all but a few of our foreign competitors pay a lower corporate tax rate.

As the Tax Foundation report notes, “raising taxes on the most successful entrepreneurs and their businesses risks knocking out a key growth path for the stock market and the economy, reducing retirement savings (most Americans own stock), productivity, wages, and jobs.” More than enough reasons to ignore this latest UC  Berkeley study.