The Rich Demystified - A Reply to Bach, Corneo, and Steiner (2008)

Abstract

The contribution Bach, Corneo, and Steiner (2008) has argued that rich do not pay taxes adequately in relation to their income, finding, for instance, an effective tax of only 38.1% for the 0.001% fractile of German income taxpayers in 2001. This result contrasts sharply with the legislated top marginal income tax of 48.5%. We subject the results contained in Bach, Corneo, and Steiner (2008) to a rigorous analysis: We find major flaws and inconsistencies with regard to methodology, i.e. the omission of corporate taxes and intertemporal aspects of taxation. Restating basic rules for the measurement of effective tax rates, we provide values for what we term the comprehensive nominal tax rate (CNTR) and show that the headline result in Bach, Corneo, and Steiner (2008) of 38.1% is underestimated by over 12 percentage points. As an important distributional result, the CNTR increases with increasing taxable income.