The "Working Rich" Are Not Like You And Me--Or The Oligarchs

Rising income inequality may be a reflection of the changing nature of work.

F. Scott Fitzgerald's story The Rich Boy included this famous line: "Let me tell you about the very rich. They are different from you and me." According to a recent paper published by the National Bureau of Economic Research (NBER), Capitalists in the Twenty-First Century (abstract only), the "working rich" are different from you and me, and from the Oligarchs above them who pay little in U.S. income taxes due to offshore tax havens and philanthro-capitalist tax avoidance scams.

Before we start complaining about the rich not paying their fair share, let's note that the top 3% of taxpayers--mostly "working rich"-- pay more than 50% of all income taxes. The latest available IRS data is from the 2016 tax year, as reported by Bloomberg: Top 3% of U.S. Taxpayers Paid Majority of Income Tax in 2016.

The top 1% paid 37% of all income tax collected, the top 5% paid almost 60% and the top 10% paid about 70%. What's striking is the progressive nature of taxes compared to the income of each bracket: the top 1% earned about 20% of total income but paid 37% of the income tax, the top 5% earned 35% and paid almost 60% of the income tax and the top 10% earned 46% of the income and paid 70% of the tax.

So what distinguishes the "working rich" from the Oligarch rich? The Oligarch rich collect passive, rentier income from the ownership of assets: stocks, bonds, real estate, etc. The "working rich" are owners of companies, and most of their income comes from human capital, meaning their knowledge, expertise, and experience. According to the NBER authors' research, when these "working rich" owners retire or die, business income tanks by 75%.

In contrast, the passive income from financial/physical assets continues on unchanged even if the owner retires or dies.

The "working rich" have a few tax advantages in terms of their effective tax rate, but the bottom line is they pay most of the income taxes collected by the U.S. Treasury. The "working rich" are not tax cheats like the super-wealthy revealed by the Panama Papers; they're the ones doing the heavy lifting of paying most of the $1.7 trillion in income taxes (which doesn't include the payroll taxes of Social Security and Medicare, with employees and employers each paying 7.65% of wages/salaries).

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Disclosures: None.

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