The Phantom Tax Threat

The Tax Foundation, a Washington, D.C. think tank founded in 1937 by business executives to “monitor the tax and spending policies of government agencies,” is once again ringing the alarm bell about tax proposals that impact only the wealthiest among us.

President Biden’s tax proposals, the Tax Foundation charges, add up to a 61.1-percent tax on “high-earning” taxpayers.

In reality, no actual taxpayers are going to face anything close to a 61-percent tax if the Biden proposals become law. The Tax Foundation, to reach that 61-percent figure, has had to add together two separate taxes on two different and totally mythical taxpayers.

The Tax Foundation’s “analysis” combines the income tax for a mythical unmarried taxpayer who dies holding $100 million of wealth, a fortune that consists entirely of one asset for which the taxpayer paid zero, and the estate tax owed by that mythical taxpayer’s estate.

The Tax Foundation analysts, interestingly, didn’t also include in their tax-rate computations the sales tax the mythical taxpayer’s heirs would pay on the purchases they made with their inherited fortune. Or the property tax they might pay if the taxpayer’s mythical zero purchase price asset was real estate.

But let’s put the Tax Foundation’s logic here aside and focus on its mythical taxpayer. All of us who study tax policy use hypothetical taxpayers as examples to illustrate the reality faced by actual people. Nothing wrong with that. The problem for the Tax Foundation analysts: No real people are going to pay the 61-percent tax rate the Tax Foundation finds so alarming. So the Tax Foundation had to invent some.

Let’s start with the Tax Foundation’s core example of an unmarried individual with a $100 million net worth. Only about two out of every 10,000 American households have wealth at the $100 million level. And married couples head the overwhelming majority of these households.

To be fair, the Tax Foundation’s analysts could have concocted an even higher Biden tax rate by choosing as an example a mythical billionaire who paid zero for her assets. That would have driven the Tax Foundation’s total claimed tax rate even higher, to 65 percent. Of course, her heirs would have been left with $350 million. Kind of hard to find that alarming, as compared to the heirs of the lowly centi-millionaire forced to make do with a mere $39 million inheritance.

But even those rare individuals who accumulate $100 million or $1 billion of wealth have paid something for the assets they hold. That reality inconveniently reduces the gains that the Tax Foundation’s mythical taxpayer could have avoided tax on during that taxpayer’s lifetime and the resulting income tax that this mythical individual would be required to pay under President Biden’s tax proposal. The Tax Foundation explains its zero-cost assumption as a simplification. That “simplification” has absolutely no basis in reality. Yet the Tax Foundation lets this assumption drive the calculations that lead to its 61.1-percent tax rate.

To grasp just how concocted the Tax Foundation’s 61-percent tax stat happens to be, consider what this “tax” would be for an ultra-wealthy household that does exist, albeit quite rarely: a married couple with wealth of $50 million. That couple would be wealthier than 999 out of every 1,000 American households. Now suppose that fully half the wealth of that couple – $25 million — comes in the form of previously untaxed gains, a reasonable assumption. The total income and estate tax bill under the Biden plan for this ultra-wealthy couple? About $16.3 million, or 32.6 percent of the couple’s wealth. Their heirs would inherit, after tax, over $33 million.

The total income and estate tax paid by this ultra-wealthy couple and its estate, by the way, would be no more under the Biden plan than the tax paid by a similarly situated couple who sold their appreciated assets prior to death.

So should we consider a 32.6-percent total income and estate tax rate on a couple comfortably in America’s top 0.1 percent, a couple that has avoided income tax for decades on $25 million of gains, be something to be alarmed about?

Hardly.

Bob Lord is a veteran tax lawyer who practices and blogs in Phoenix, Arizona. He’s an associate fellow of the Institute for Policy Studies. 

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