Sorry to burst your bubble but the answer to this question is a big fat no. It’s a common trope amongst the Occupy Wall Street crowd that the rich are able to get away without paying taxes but it’s a myth. The fact is that the so called 1% do indeed pay taxes and many (though not all) pay a very high percentage of their income in taxes. But there are people who do pay zero taxes, just not those you think.
The Difference between the Merely Rich and the Ultra-Rich
Let’s start by pointing out that there are a small number of people who pay relatively little federal income tax and who are rich. However, these people are not your average 1%. The so called 1% of Americans is a pretty big umbrella. If you earn a six figure income, even $250,000 a year, you are likely in the 1%. Now that amount probably sounds like a lot to most people. And it is. It also isn’t.
The thing is, earning a quarter of a million dollars a year means you likely have a job which pays well – plastic surgeon, investment banker, pharmaceutical salesman, etc. These are jobs that pay really well but which don’t necessarily mean that you’re Bobby Axelrod.
With that amount of money, your kids might go to private school and you may take trips to Europe a few times a year. You might even splurge on first class tickets and a nicer hotel. However, you’re not in the most exclusive of clubs and you are likely paying a hefty chunk of your income in federal income taxes.
The reason is simple – you make enough to be comfortable but you still make most of your money in salary and you don’t necessarily make enough to get some of the more exclusive write-offs that the ultra-rich can take advantage of.
So Who Doesn’t Pay Taxes?
I said at the beginning of this article that I was calling bullsh*t on the myth that the rich pay zero taxes. However, there are people who pay little or no federal income tax and they fall into two very widely disparate groups:
Surprise, surprise – if you are poor, even working poor, you may well not have to pay any federal income tax (mind you, that doesn’t mean that you don’t have to pay state or local taxes, which are a completely separate beast). In fact, depending on how little you earn, you may even get an earned income tax credit and get money back from Uncle Sam instead of paying in.
Here’s where the myth becomes a bit less of a myth. The average one percenter does indeed pay quite a hefty amount in taxes. However, as you go from merely well off to truly, fabulously wealthy, you may well end up paying relatively little federal income tax (and you may well maintain a residence in a state which has no state income tax either).
The reason is that the super wealthy rarely make their money primarily from salaries. Instead, the super wealthy make their money from investments, which are taxed at much lower rates than salary income.
On top of that, the super wealthy can also shift money from one investment to another in order to shield their money from taxes. Then there are the various tricks that the super-wealthy can use to minimize their tax burdens, things like being paid as a corporation (corporate taxes are lower than personal taxes) and using shell companies to shield their money from the tax man.
They also have the ability to get write offs that the average person would never dream of getting. For example, the super wealthy can take a tax deduction on the mortgage for a yacht. The average American will never even ride on a yacht, much less own one.
In addition to all this, if you make your money primarily from investing then you are excluded from paying Medicare and Social Security taxes since those are assessed only on income (and in the case of Social Security, only on income up to $118,500).
Look, if you follow our advice here and invest your money, you will find that you have to pay less in taxes on your investment income than on say your salaried income. However, the idea that the 1% pay zero tax is simply bullsh*t which the someone from Occupy Wall Street crowd might have come up with as a slogan (to be fair, I can’t find any actual reference to this idea, just to the idea of income inequality).
It’s a nice sound bite but except for very rare cases of the ultra-wealthy (a handful of the 0.001%, and even then, it’s lower, not zero taxes), it’s just not true.