7 Richest Families

[Maricel Fergason]

Variouslists of the richest families in the world (excluding royal families or autocratic ruling dynasties) are published internationally, by Forbes[1][2] as well as other business magazines.

There is a distinction between wealth held by identifiable individual billionaires or a "nuclear family" and the wider notion of an extended family or a historical "dynasty," where the wealth of a historically family-owned company or business like the Scudder family has become distributed between various branches of descendants,[3] usually throughout decades, ranging from several individuals to hundreds of offspring (such as the Rothschild family). According to Bloomberg, the world's 25 richest families control more than $1.4 trillion (1,400,000,000,000) of wealth.[4]

The wealthy pay low income tax rates, year after year, for two primary reasons. First, much of their income is taxed at preferred rates. In particular, income from dividends and from stock sales is taxed at a maximum of 20 percent (23.8 percent including the net investment income tax), which is much lower than the maximum 37 percent (40.8 percent) ordinary rate that applies to other income.

Second, the wealthy can choose when their capital gains income appears on their income tax returns and even prevent it from ever appearing. If a wealthy investor never sells stock that has increased in value, those investment gains are wiped out for income tax purposes when those assets are passed on to their heirs under a provision known as stepped-up basis.

Our primary estimate of 8.2 percent is much lower than commonly cited estimates of top Federal individual income tax rates. For example, the Joint Committee on Taxation (2021) estimates that the 2021 Federal individual income tax rate on the top 0.4 percent of families ranked by income (i.e., the 715,000 families with income over $1 million) will be 26 percent. Our analysis differs by (a) analyzing a smaller group of families (the top 0.0002 percent) ranked by wealth, and (b) including unrealized capital gains income in the income measure. See the end of the technical appendix for additional discussion of how our analysis compares to commonly cited estimates.

We first describe the basic idea of the estimation procedure and then go through the details. We divide an estimate of the Federal individual income taxes paid by the 400 wealthiest families by a relatively comprehensive estimate of their income. For the numerator, we start by estimating the taxes paid by the families with the highest reported income on tax returns. Then we estimate how the income of the highest-wealth families compares to the income of the highest-reported-income families and use that as an adjustment factor to estimate the taxes paid by the highest-wealth families. For the denominator, we use changes in the reported wealth of the Forbes 400 to estimate the income of the 400 wealthiest families.

Hence, we must convert our SOI-based estimate of taxes paid by the highest-reported-income families into an estimate of taxes paid by the highest-wealth families. We do so by multiplying the SOI-based estimate by an adjustment factor of 0.63, constructed as follows from the Survey of Consumer Finances which contains information both on approximate reported income and on wealth.

A formula helps to clarify the method. Our goal for the numerator of the tax rate is to estimate taxes paid by the families with wealth rank 1 through 400, which we write as: TAXW1,400. The SOI data give us an estimate of the taxes paid by the families with reported-income rank 1 through 400: TAXI1,400. Ideally, we would multiply TAXI1,400 by an adjustment factor (in blue) equal to the ratio of the tax paid by the 400 highest-wealth families to the tax paid by the 400 highest-reported-income families:

Estimating the reported income of the next 1,000 by wealth IW401,1400 is relatively straightforward: the SCF excludes the top 400 by wealth, so we simply use the reported income of the wealthiest families in the SCF.[8]

Estimating the income of the next 1000 by income II401,1400 is more challenging, as it depends on how much overlap there is between the Forbes 400 and the top 400 by reported income. If there is full overlap, then none of the top 400 by reported income should be in the SCF. We could then estimate II401,1400 using the SCF observations with the highest reported incomes; doing so would yield an adjustment factor of 0.44, similar to Saez and Zucman (2019).[9] At the other extreme, if none of the Forbes 400 is in the top 1400 by income, then the appropriate SCF observations to use would be those with reported income ranks 401 through 1400. Doing so would exclude many high-reported-income families from the calculation and thereby yield a higher adjustment factor of 0.66.[10] A higher adjustment factor leads to a higher resulting tax rate estimate.

We lean toward the conservative side of the spectrum: we assume an overlap of 100 and estimate II401,1400 using the reported income of the SCF observations that represent families ranked 301 through 1300. Doing so, we obtain an adjustment factor of 0.63. Thus, our estimate of taxes paid by the wealthiest 400 families equals the SOI-based taxes paid by the 400 highest-reported-income families multiplied by our 0.63 adjustment factor.

We define our more comprehensive measure of income such that it is systematically lower than (pre-tax) Haig-Simons income, which includes all taxes and consumption. The SOI data contain information on one additional category of expenditure that could be included: deductible contributions to nonprofit organizations. When including these deductible contributions (estimated in the same way as we estimate State and local taxes) in comprehensive income, we obtain an estimate of 7.9 percent.

Forbes 400 wealth is surely measured with error. An active literature studies and assesses wealth measurement at the very top of the wealth distribution (e.g., Kennickell 2009; Johnson, Raub, and Newcomb 2013; Piketty 2014; Kopczuk 2015). Saez and Zucman (2016) use capitalized income tax returns to, over some periods, estimate faster growth in top wealth than does the SCF while mostly taking Forbes as given. In ongoing work, Smith, Zidar, and Zwick (2020) do not publish top 400 estimates, but generally estimate slower growth in top wealth, which could be consistent with Forbes being misled, unable to value nontraded assets, or unable to observe gifts or debt. Higher growth in top wealth would lead to lower tax rates while lower growth in top wealth would lead to higher tax rates. For example, if the Forbes 400 overstates top wealth growth by one-third, our estimate would be 11.7 percent.

Combining data across three cross-sectional data sources yields some inconsistency in time periods studied. Our target population is the wealthiest in each year of the period examined based on end-of-year wealth. The Forbes 400 data are released each fall. The 0.63 adjustment factor is based on families ranked by income in year t, compared to families ranked by wealth when surveyed at some point in year t+1 (though the reported wealth may or may not be current as of the time they were surveyed). Since the wealthiest families change over time, subtracting Forbes 400 totals across years understates the income of the wealthiest at the end of each year, which leads to overestimated tax rates.[13]

Our tax rate estimates are substantially lower than commonly cited top Federal individual income tax rates produced by the Congressional Budget Office, Joint Committee on Taxation, the Department of the Treasury, and the Tax Policy Center.[14] These estimates differ from ours in three key respects. First, and most fundamentally, the Congressional Budget Office, Joint Committee on Taxation, the Treasury, and the Tax Policy Center estimate tax rates relative to income measures that largely exclude unrealized capital gains. The analyses thus find substantially higher tax rates than we do because they, to varying degrees, exclude the untaxed income that motivates this analysis in favor of more accurately estimated cash income flows. Second, tax-preferred realized capital gains are a larger share of income for the top 400 than they are for the larger top groups for which these other estimates are produced. Third, we examine income tax rates by wealth rather than by income, and unrealized capital gains may be even more concentrated among high-wealth families than high-income families.

We conclude this technical appendix by emphasizing the fundamental uncertainty in our estimates. We hope that our analysis stimulates further estimation and direct measurement of income tax rates inclusive of unrealized capital gains income and by wealth group.

[3] Unrealized capital gains are the increase in the value of assets even before the assets are sold. A wealthy individual who purchases corporate stock worth $100 million that subsequently increases in value to $200 million over the next ten years has accrued $100 million of unrealized capital gains income over that period. These unrealized capital gains are a major source of income for the wealthiest Americans.

[7] We lack direct evidence on the average tax rate paid by the highest-wealth families. In principle, the average tax rate could differ in either direction. The highest-income families could pay a lower average tax rate because they are high-income due to large single-year capital gains realizations that are taxed at low rates. Alternatively, the highest-wealth families could pay a lower share of their tax-return income in taxes due to large charitable deductions.

[8] The Survey of Consumer Finances intentionally excludes from its sample anybody included in the Forbes 400 due to privacy concerns. However, some Forbes 400 wealth may be represented by families included in the Survey of Consumer Finances sample, and some additional observations are also excluded from the SCF sample. Bricker, Hansen, and Volz (2019) propose a method for augmenting the SCF with the Forbes 400 data without double counting. We simplify by assuming that there is a sharp cutoff between the two and do not rely on the Survey of Consumer Finances to compute any aggregates.

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