Do the uber-rich pay their share?

By Dean Baker

According to their acolytes, the rich are great innovators and job creators. But they haven't lived up to that billing in this century, as both job growth and overall economic growth have been extraordinarily weak since 2000.

If their benefit to the economy is in doubt, no one can dispute that the wealthy are world-class tax avoiders. The New York Times recently reported that the country's 400 wealthiest families paid an average of just 17 percent of their income in taxes. This is a smaller share of their income than many middle-income families pay, especially if we add in Social Security and Medicare taxes.

The fact that the wealthy manage to pay so little in taxes is not by design, or at least not the explicit design, of the tax code. In principle, the tax code is supposed to be progressive. The tax rate for income above $465,000 is 39.6 percent, compared with a rate of 25 percent for income above $75,000 and under $150,000. The rate is just 15 percent for income between $18,000 and $75,000.

This should mean that the wealthy pay a larger share of their income in taxes than the rest of us. But according to data from the Internal Revenue Service, it doesn't turn out this way.

The rich are able to hire top-notch tax accountants and lawyers, as well as politicians, in order to secure loopholes that shield much of their income from taxation. As a result, they largely manage to circumvent the progressive structure of the tax code.

While there is not a single cure for tax avoidance by the rich, there are some polcies that would help to stop the bleeding.

The first and most obvious is to increase funding for IRS enforcement. This is a complete free lunch since the additional money we spend on enforcement would be more than offset by the additional revenue collected. Since spending on enforcement more than pays for itself, the opponents of IRS funding effectively want to tax the rest of us more to allow the rich to avoid their taxes.

We can debate whether items like spending on medical research, college education, or infrastructure are worth the tax revenue, but it's hard to make the case that supporting tax avoidance by the rich is a good use of our tax dollars.

The carried-interest tax deduction is one specific tax break that should be on everyone's radar screen since it is a completely unjustifiable giveaway to the extremely rich. This is the provision that allows much of the earnings of hedge fund and private equity fund managers (think Mitt Romney) to be taxed at the 20 percent capital-gains rate instead of the 39.6 percent rate they would ordinarily pay on their income.

The basis for this break is that these fund managers are paid partly on commission, just like realtors, car salespeople, and millions of other workers in the U.S. economy. While these more ordinary workers are taxed on their commissions at the same rate as they are on their wages, the fund managers get a special lower rate - because they are rich.

The corporate income tax brings a whole other set of games for the rich. The most visible has been the offshoring of corporate headquarters to escape U.S. taxes, but that is just the tip of the iceberg.

It's also important to recognize that many people have gotten very rich by developing these schemes. This is largely the story of the private equity industry, which has created many billionaires in the last three decades.

So let's make 2016 the year we end tax gaming by the rich. That would be something worth celebrating on New Year's Day 2017.

Dean Baker is a macroeconomist and cofounder of the Center for Economic Policy and Research (cepr.org).