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A Magic Trick from Biden’s Economists

Summary:
A magician tricks his audiences by distracting them. While people focus on something that is attractive but irrelevant (a shiny object, the magician's beautiful assistant in a skimpy outfit), the magician can more easily hide his deception.In a new CEA blog post, the Biden economics team does something similar. It asks what the average tax rate of the 400 wealthiest families would be if unrealized capital gains were included in the measure of their income.This is a mildly interesting question. But why is the Biden team taking the time from their busy schedules to ask it? Because they want to convince you that the rich aren't paying their fair share in taxes.The problem is that this question has little connection to the policies now being discussed. As I understand it, the essence

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A magician tricks his audiences by distracting them. While people focus on something that is attractive but irrelevant (a shiny object, the magician's beautiful assistant in a skimpy outfit), the magician can more easily hide his deception.

In a new CEA blog post, the Biden economics team does something similar. It asks what the average tax rate of the 400 wealthiest families would be if unrealized capital gains were included in the measure of their income.

This is a mildly interesting question. But why is the Biden team taking the time from their busy schedules to ask it? Because they want to convince you that the rich aren't paying their fair share in taxes.

The problem is that this question has little connection to the policies now being discussed. As I understand it, the essence of the plan under consideration is not a tax on the unrealized capital gains of the 400 richest families. Instead, the plan aims to raise the corporate tax rate, which in turn is paid by the many shareholders, workers, and customers of the companies. (Economists debate the relative incidence.) In addition, the plan aims to raise the tax rates applied to the already-taxed income earned by people making more than $400,000 a year. I would guess that this latter group includes about 1.5 million taxpayers. Needless to say, 1.5 million is a much larger number than 400. And the finances of the 400 are in no way representative of the finances of the 1.5 million.

Don't get distracted by this shiny object.

Greg Mankiw
I am the Robert M. Beren Professor of Economics at Harvard University, where I teach introductory economics (ec 10). I use this blog to keep in touch with my current and former students. Teachers and students at other schools, as well as others interested in economic issues, are welcome to use this resource.

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