Federal Taxes on the Wealthy
U.S. Senator Elizabeth Warren (D–MA) claims that the “wealthiest 400 families in the U.S. pay just 8% of their income in taxes,” while the “average taxpayer pays 13% of their income in taxes.”
IN FACT, the wealthy pay about 33% of their income in federal taxes, even after write-offs. Warren’s 8% figure misleadingly counts paper gains as income and excludes massive amounts of taxes paid by wealthy people. Here are the specifics:
- The U.S. Treasury estimates that the richest 0.1% of families paid an average effective federal tax rate of 33.5% in 2024.
- The Treasury’s estimates of effective federal tax rates roughly accord with data published by the Congressional Budget Office, which typically lag the Treasury data by several years.
- Unlike the incomplete and misleading tax rates reported by the media and politicians of both parties, the Treasury’s and CBO’s computations of effective federal tax rates reflect actual taxes paid (not marginal rates) and account for nearly all forms of income and nearly all federal taxes, such as capital gains, pensions, health benefits, payroll taxes, excise taxes, corporate taxes, hidden taxes and write-offs (aka preferences).
- Warren cites no source for her figure of 8%, but it accords with a 2021 Biden White House analysis that estimated an “average federal individual income tax rate” of 8.2% for “America’s 400 wealthiest families” during 2010–2018.
- Contrary to Warren, that analysis is not a full measure of “taxes” because it only includes “federal individual income taxes” and excludes all other types of federal taxes, such as social insurance taxes, corporate income taxes, excise taxes, estate taxes, and gift taxes.
- Contrary to the law and reality, the Biden White House analysis understates the actual income tax rate by counting “unrealized capital gains” as “income.”
- Per the Supreme Court’s 1920 ruling in Eisner v. Macomber, “increase in value of capital investment is not income in any proper meaning of the term,” and “mere growth or increment of value in a capital investment is not income.”
- As explained by PhD economist David R. Henderson, “Unrealized capital gains are not income. Say you own a house that grows in value from $1 million to $1.3 million in a year. By Biden’s standards, the appreciation in your house’s value gave you $300,000 in additional income even though you didn’t sell the house.”
- As explained by PhD economist Isabel V. Sawhill, “You can’t use accrued gains to pay for basic living costs. They are not income; they are paper gains.”
- Per academic papers published in 1991, 2021, and 2022, “virtually every country that taxes income imposes a capital gains tax only upon the realization of gains rather than on accrual,” “no country applies accrual taxation on a broad scale,” and the “realization rule” is “used nearly universally in income taxes around the world.”
- Contrary to the allegation that the rich avoid taxes and live lavish lifestyles by borrowing against their unrealized gains, a 2025 paper in the Journal of Public Economics found that total borrowing by the “top 1% of wealth-holders” is only 4% of their unrealized gains, while the equivalent figure for “Americans in the 50–90th percentiles of wealth” is 42%, showing that this is “not a dominant tax avoidance strategy for the rich.”
- In accord with misinformation spread by prominent Democrats and media outlets, roughly 79% of voters have been misled to believe that middle-income households pay a higher average federal tax rate than the upper 1%. In reality, the top 1% pay 2.5 times the average middle-income federal tax rate and 67 times the average middle-income tax amount.
