“Musk’s income puts him in the top federal income-tax bracket, where income is currently taxed at 37 percent.
According to ProPublica, Musk’s average effective federal income tax rate between 2013 and 2018 was 27 percent.
And the tax on exercising his Tesla stock options was much higher. “Since the options are taxed as an employee benefit or compensation, they will be taxed at top ordinary-income levels, or 37% plus the 3.8% net investment tax,” notes CNBC. “He will also have to pay the 13.3% top tax rate in California since the options were granted and mostly earned while he was a California tax resident. Combined, the state and federal tax rate will be 54.1%.”
Jayapal seems to have reached her “alternative facts” (to use a vintage Trump-administration term) by calculating Musk’s tax rate based on a system she wishes we used rather than the calculation system we actually use.
As it stands, Americans do not pay taxes on unrealized gains—that is, appreciations in investments that exist only on paper. If you own a stock worth $5 per share and its worth increases to $6 per share over the course of a tax year, you have an unrealized gain of $1 per share. You aren’t expected to pay taxes on that gain until you sell your shares—which makes sense, since 1) you don’t actually have that money yet and 2) the stock’s worth could drop again before you sell. Maybe next year the stock decreases to $4 per share.
Jayapal appears to have come up with the alleged 3.27 percent tax rate for Musk by including unrealized gains in the amount she thinks he owes taxes on (while using the standard method for calculating the average income tax rate). However, unrealized gains are, by definition, gains that Musk doesn’t yet have. When he actually realizes the gains, he will be required to pay taxes on them. That’s how it works.”