Myth 1: Millionaires who favor of an income tax increase are fiscal heroes.
Fact 1: No, they’re not. Many of the rich get the majority of their income in the form of capital gains and dividends rather than ordinary income. They are essentially advocating a tax increase on those making much less money than they do.
On its face, raising the top income tax rate seems like an effective way to make our (already progressive) federal tax system more progressive. Yet the rationale underlying this policy recommendation ignores the complexities of the United States federal tax system. As you can see from the chart above:
• As income increases, the proportion of Americans’ earnings coming from wages and salary decreases (red). Meanwhile, wealthy Americans draw much of their income from dividends, interest payments, and capital gains (blue).
• Federal income tax rates are progressive, but they are not shared equally among high earners. Federal income taxes fall disproportionately on those wealthy enough to face the highest income tax rates, yet not wealthy enough to draw a large proportion of their income from non-wage sources -- those filers making $100,000 to $200,000.
So when Facebook’s Mark Zuckerberg—following in the footsteps of billionaires like Bill Gates, Warren Buffett, and Ted Turner—declared that he was “cool” with the idea of paying more income tax, it doesn’t really mean he’s personally going to be paying more money.
Indeed, if Zuckerberg really wants to pay more taxes he can simply send a check to the Treasury Department instead of asking for a tax increase on other people’s incomes.
Jakina Debnam of the Mercatus Center calculated the average tax rate on the non-wage and salary earnings of the wealthy using SOI data from the Internal Revenue Service. As she writes: “There is some rounding error incorporated from the SOI data. However, if you assume that all high income earners face the highest tax bracket on their income (that they make more than $373,651 in wage and salary income), then you get the tax rates illustrated below.
As you can see, these rates are all lower than the individual tax rate on income for single earners making more than $34,500 but less than $83,600, which is 25 percent.
Myth 2: Big government means more redistribution to the poor.