Do the wealthy pay enough tax? We look at how perception differs from reality in the US.

We examine the contentious issue of ‘do the wealthy pay enough tax?’. Populist politics in the US would suggest the answer is a resounding no. We look at reality vs perception. We also look at how – instead of talking to a brick wall – many wealthy americans are now preparing themselves for the inevitable.

Do the wealthy pay enough tax - the stats

Do the top 1% pay their ‘Fair Share’?

Recently the WSJ and other financial media have been publishing IRS data about the actual amount of tax paid by the Wealthiest Americans. Based on the latest available information the top 1 percent of US taxpayers paid 42.3 percent of the total federal personal income tax in 2020. At the same time, this same top 1% received only 22.2 percent of total adjusted gross income.

Does the American voter think the wealthy pay their ‘Fair Share’?

By any measure, the top 1% of US taxpayers (aka “The Rich”) pay an enormous amount of US personal tax. However that is not the PERCEPTION espoused by American politicians and “Tax the Rich” advocates.

A prime example of this is the 2023 State of the Union address. President Biden made the statement that

“Because no billionaire should pay a lower tax rate than a school teacher or a firefighter.”

President Biden uses a clever mathematical slight of hand here. It is the same magic trick that is often used in the “Warren Buffet doesn’t pay as much tax as his secretary” trope.

To understand the disingenuousness of President Biden’s statement and the Buffet tax fallacy one needs to understand the “Tax Equation

(Taxable Income) times (Tax Rate) = (Tax Paid)

It’s important to understand that if you have a higher taxable income or capital gain, you will likely pay more tax. This is true even if you pay at lower capital gains vs. higher ordinary tax rates.

The Reality…

There has been much speculation about Buffett’s secretary’s salary. Figures range from $100K to $500K annually. For the sake of argument, let’s use the highest number of $500K. Let’s assume that both Mr. Buffett and Ms. Bosanek live in Omaha, Nebraska. Income wise we’ll assume that Mr. Buffett generates all of his income from capital gains whilst Ms. Bosanek generates all of her income from employment. Therefore, we can use the taxable income of $39.8 million that Mr. Buffett reported in 2011 when this trope first surfaced. Using these assumptions, Ms. Bosanek would pay approximately $200K in taxes. Mr. Buffett would pay about $6.9M in taxes.

So, tax-wise, one Warren Buffet is worth 34.5 secretaries like Ms. Bosanek.

Let’s fast forward this ten years. In 2021 Elon Musk paid an estimated $11 billion in tax. That’s the equivalent of:

The fact is that whether or not one thinks it ‘fair’ the US is extraordinarily dependent on a small number of taxpayers. After all they account for close to half of all total personal tax collections. Add onto this the fact that the US is exceptionally dependent on personal tax for an overwhelming percentage of all types of tax revenue collected. For instance, It does not have a a Value Added Tax like many other major industrialised countries.

Despite this reality of the US tax system 60% of Americans of voting age feel that wealthy people are not paying their “fair share” (according to a recent Pew Research Center survey). Whilst one would hope in an ideal world facts would overcome falsehoods, in the minds of the voting public the world is far from ideal.

The bottom line is that, whilst noble to point out the facts on tax contributions of the rich, these efforts will not be successful in changing the majority of voters’ PERCEPTION that the rich do not pay their “fair share”. This means that voters will always listen to the siren song of politicians who beat the “Tax the Rich” drum.

When someone tells you who they are… believe them!

On March 28, 2023, President Biden released his latest ‘Green Book’ of revenue proposals. The clear headline attention grabber was the Billionaire Minimum Tax. This is a tax based on wealth but it is not technically a wealth tax. This is because the tax is computed as a percentage of a taxpayer’s total wealth. The Billionaire Minimum Tax would only apply to individuals meeting a threshold level of wealth. It would impose a minimum income tax rate on income, gains and most significantly on unrealised gains.

Other notable proposals included:

  1. An income tax rate increase to 39.6% for “higher income” individuals;
  2. Treating transfers of appreciated property by gift or at death as realisation events. In short, this would eliminate the so called “Step Up”;
  3. Curtail the effectiveness of GRATs.;
  4. Ending the Perpetually GST Exempt “Dynasty” Trust; and
  5. Reduce the Gift/Estate tax credit (Note this will automatically occur in January 2026)

It is worth understanding that these proposals will not be adopted with the current Republican controlled House of Representatives. However, they are a clear signal of what will be proposed and adopted should the Democrats win the trifecta (POTUS, and both houses of Congress) in 18 months!

God, grant me the serenity to accept the things I cannot change

Rather than wasting time and effort in trying to persuade the unpersuadable about current tax policy, many wealthy Americans are instead preparing themselves for the predictable consequences of a Democratic grand slam. In practical terms this means acquiring the optionality to legally and permanently leave the US should this election outcome occur.

This optionality involves acquiring the “Fire Insurance” of a second citizenship. You’ll also need a possible residence and to develop a tax efficient “Fire Escape Plan”. I recently authored a four part detailed series entitled, “How to Successfully Expatriate from the US”. I outline all the issues that must be considered in acquiring ‘Fire Insurance’ in synch with a fire escape plan.

It is worth noting that acquiring ‘fire insurance’ and an ‘escape plan’ does NOT mean that one must trigger the plan. Rather it gives your family invaluable peace of mind. You know that should the political winds blow the ‘Tax the Rich Wildfire‘ to your doorstep, you can leave before it damages your fiscal house.

It’s worthwhile looking at Elon Musk’s situation. He already has the fire insurance of Canadian and South African citizenships. He also certainly has tax advisors who have developed a fire escape plan. While he may personally decide not to trigger his plan, the real question will be how many other Wealthy Americans will leave if THEY feel that US taxation has become unfair?

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