The Wall St. Journal ran an interesting piece this morning showing how the effective tax rate—taxes as a share of income—spiked up significantly in 2013 for the wealthiest taxpayers due to an increase in the tax rate on capital gains. This is important information and the piece appropriately highlights how the higher rate sharply increased the tax liability of the richest 400 taxpayers, whose effective rate went from 16.7% in 2012 to 22.9% in 2013.
That’s the highest effective rate paid by this top group since 2002, though it’s still a 7 percentage point decline from the 29.9% rate that prevailed in 1995. Had these wealthy taxpayers faced that rate, their liability would have been $7.5 billion higher.
For readers who also read the recent New York Times piece on the “income defense industry” of the wealthy–the extensive anti-tax infrastructure they’ve built up over the years to reduce their tax liabilities–this WSJ piece may have sown some confusion. For example, the Journal quotes a conservative commentator complaining about “the mistaken narrative…that…high income Americans have used a combination of aggressive tax planning, loopholes and political influence to lower their tax burdens to unconscionably low levels.”
So who’s right? Does there really exist an industry of deeply funded anti-tax lobbyists whose sole purpose is to protect the holdings of their clients? Absolutely—far from “mistaken,” that narrative is exactly right. Do they win every fight? Nope, and they lost the one that led the capital gains rate to go up in 2013. But to suggest that this one change alters the fundamental landscape of our tax avoidance problem would be an egregious overstatement.
First off, as both the NYT and WSJ pieces stress, pushing for lower rates is but one part of the tax avoidance agenda. It’s far more effective to get your income out of the tax base. As Gabriel Zucman, whose recent work on tax havens provides essential data for this debate, puts it in the WSJ piece, “For billionaires, a lot of income never shows up on tax returns.”
–Zucman finds that the share of U.S. foreign profits booked in tax havens has grown from about 20 percent in the 1980s to 50 percent now.
–As I point out here, a group of tax analysts show in a forthcoming paper that the share of corporate stock held in taxable household accounts has fallen from around 80 percent in the mid-1960s to about 25 percent now, meaning most such stock is now untaxed or held in tax-favored vehicles, like individual retirement accounts.
–Business income “passed through” to the individual level is the single largest source of the “tax gap” (the difference between what people owe and what they pay; it amounts to over $300 billion/year). Sole proprietors, e.g., have been found to report less than half of their income to the IRS.
One reason people pass through business income to the personal side of the code is to take advantage of the differential in top income tax rates, about 40%, and capital gains, which are now about 24%. That’s still a very important form of tax avoidance, but the WSJ is certainly right to point out that the currrent cap gains rate is a lot higher than the 15% rate that previously prevailed.
Finally, it should be lost on no one that if the tax suppression lobby can’t get everything they want in lower rates or wider loopholes, they’ve got a new strategy that’s proving to be alarmingly effective: defunding the IRS. Since 2010, the agency’s budget is down 18 percent in real dollars; enforcement staffing is down by 20 percent. These cuts support the tax gap: Treasury estimates that each additional $1 spent on IRS enforcement yields $6 of additional revenue.
Like I said, the Journal makes an important and relevant contribution, revealing that the tax avoiders don’t win every fight. But that doesn’t make them any less real and, unfortunately, they win a lot more of these fights than they lose. I’m sure it makes them very happy to hear someone argue that they’re a figment of liberals’ imagination.