Non-profit investigative journalism site ProPublica has obtained mountains of tax information, including data on the wealthiest 25 individuals in the United States. The claim promoted by ProPublica and media outlets reporting on the ProPublica series is that the wealthy don’t pay taxes or pay a minimal amount compared to their wealth.
There’s no question we have a wealth inequality problem globally. That’s a wealth inequality problem, not an income inequality problem because wealth and income are not synonymous. I’ve written repeatedly on income taxes, from the 90% Tax Rate Myth to the likely constitutional problems with a national wealth tax (which might not apply at the state level). There are also issues with how wealth, income, and taxes are modeled by economists.
The first ProPublica article on the IRS data opens:
How the Wealthiest Avoid Income Tax
In 2007, Jeff Bezos, then a multibillionaire and now the world’s richest man, did not pay a penny in federal income taxes. He achieved the feat again in 2011. In 2018, Tesla founder Elon Musk, the second-richest person in the world, also paid no federal income taxes.
Michael Bloomberg managed to do the same in recent years. Billionaire investor Carl Icahn did it twice. George Soros paid no federal income tax three years in a row.
Notice the names represent the spectrum of political views. Nobody would claim Soros is a conservative. Generally, the wealthy are moderates politically who often support higher income tax rates. Of course, income taxes pose no threat at all to amassed wealth.
Income is not wealth and it is possible, even likely, that the wealthy might have no income in a given year. I know several wealthy couples who took entire years off as sabbaticals, traveling to learn and research before launching a new business or product. Those years had no income, just like you might have little to no income while studying full-time at a university. The income earned to build wealth and to enable such sabbatical years was taxed when it was earned.
Wealth taxes have a lot of problems, including the valuation of holdings and how to deal with losses. Taxing income is, by comparison, much easier than taxing wealth. When the Constitution was amended to allow the income tax, via the 16th Amendment, that established our current system. A new amendment, allowing a national sales tax, national wealth tax, or other forms of taxation, is unlikely to pass any time soon.
So, if you are concerned about inequality — or merely envious of wealth — you need to have a solution to the real challenges of our Constitution and our divided federal government. Personally, since I would rather states handle most tasks, these are non-issues. States can and do tax wealth, via property taxes. States can also adjust their own income tax systems. Some states, particularly New York and California, are notoriously aggressive tax collectors.
The wrong way to address wealth inequality is to encourage or dismiss a major violation of federal privacy laws. It bothers me that confidential IRS information was provided to any media source. This was not a selective leak benefiting all mankind. This was a data dump, potentially revealing medical expenses, charitable donations, and more. There are defensible reasons to leak information, but this wasn’t a traditional leak. There should be serious consequences for failing to secure tax returns, too. The IRS has data security issues if so much data were shared with media outlets.
But, I realize that’s not an argument I’d win with most people who don’t feel the wealthy should have privacy rights. Remember, the protections we take from one group can be taken from everyone.
Nothing, not one bit of information in the ProPublica report is surprising or new if you have read this blog. The wealthy use the tax code to pay less in taxes. That’s not surprising. That’s also why I advocate for a three- or four-tier tax system with no deductions of any kind. The moment you allow any deductions, people will try to lobby for additional deductions. We have a complicated tax code that encourages using (exploiting) deductions added by Congress for supposedly great reasons.
Here’s what ProPublica obtained and their supposedly shocking discovery:
ProPublica has obtained a vast trove of Internal Revenue Service data on the tax returns of thousands of the nation’s wealthiest people, covering more than 15 years. The data provides an unprecedented look inside the financial lives of America’s titans, including Warren Buffett, Bill Gates, Rupert Murdoch and Mark Zuckerberg. It shows not just their income and taxes, but also their investments, stock trades, gambling winnings and even the results of audits.
Taken together, it demolishes the cornerstone myth of the American tax system: that everyone pays their fair share and the richest Americans pay the most. The IRS records show that the wealthiest can — perfectly legally — pay income taxes that are only a tiny fraction of the hundreds of millions, if not billions, their fortunes grow each year.
Again, I have written that it is easy to avoid both income taxes and capital gain taxes. The wealthy can invest in tax-free bonds. If progressives don’t like tax-free bonds and tax-exempt or reduced-tax savings plans, then vote accordingly. If I had several million dollars, of course, I’d be buying bonds. The rate of return is low, but it compounds. I’d also give to charities, invest in my businesses, and buy property that falls under various tax waivers. You can easily avoid or reduce income while maintaining wealth.
A 40 percent upper marginal income tax rate, with no deductions, wouldn’t change much. Not without some serious reforms to our system. But, just try suggesting a modest cap on some deductions and you’ll incur the wrath of special interests. As it stands, our top rate isn’t far from what research suggests might be the top marginal rate with high compliance. (Nations with high marginal rates also have a serious problem with tax avoidance. About 40 percent seems to be the upper limit before criminal avoidance skyrockets.)
Our top tax rate isn’t the problem. It’s the deductions and caps within the tax system.
Many Americans live paycheck to paycheck, amassing little wealth and paying the federal government a percentage of their income that rises if they earn more. In recent years, the median American household earned about $70,000 annually and paid 14% in federal taxes. The highest income tax rate, 37%, kicked in this year, for couples, on earnings above $628,300.
The confidential tax records obtained by ProPublica show that the ultrarich effectively sidestep this system.
If I own land, stocks, cars, artwork, or anything else that’s not liquid, I have potential wealth. Stock only has “value” if someone else wants to buy it. If the wealthy were to sell millions of shares of any one stock, the price per share would sink and the value held would also crater. Paper billions in stock are valuable if you sell the stocks or borrow against them.
Many titans of the 21st century sit on mountains of what are known as unrealized gains, the total size of which fluctuates each day as stock prices rise and fall. Of the $4.25 trillion in wealth held by U.S. billionaires, some $2.7 trillion is unrealized, according to Emmanuel Saez and Gabriel Zucman….
The key word from the ProPublica piece: unrealized gains. It’s a misleading phrase became the gains are only “realized” when you sell a stock or other asset. There’s no gain at all until you sell the shares, technically. As I mentioned above, significant selling can also lower the value of the shares.
Echoing my argument is James Surowiecki:
Why taxing Jeff Bezos more won’t narrow the wealth gap
June 11, 2021, 7:43 AM CDT
By James Surowiecki, MSNBC Opinion ColumnistJeff Bezos, for instance, has earned a salary of $81,840 a year from Amazon for two decades and has never gotten an award of stock or stock options from the company. He’s the world’s richest man because he’s held onto a significant stake in the company he started and because since it’s gone public, Amazon stock is up more than 12,000%. You can tell similar stories about Mark Zuckerberg at Facebook or Larry Page and Sergey Brin at Google or Warren Buffett at Berkshire Hathaway. (Elon Musk is an exception, in that Tesla gave him billions in options, but even then, he owns roughly 20 percent of the company.)
In fact, seven of the nine richest people in the U.S., according to Forbes, are company founders. They’re absurdly wealthy for a very simple reason: They’ve all held on to sizable stakes in the companies they started, and the stock prices of those companies have soared over the last 20 years. The increase in their wealth, in other words, is largely in the form of what are called “unrealized capital gains.”
If we want to reduce inequality, we’d have to have large stock holdings and other assets unattractive at certain levels. That risks dissuading innovation. Nearly 60 percent of the world’s billionaires have degrees in science, technology, and engineering. Their wealth came from taking risks creating products. The shares in the companies these people founded are only valuable because their innovations had practical appeal.
I’m not a fan of the investor class wealth. I do not believe in treating investment earnings apart from income when stocks or bonds are sold. But, I am a fan of rewarding people for creating new businesses and entire industries.
How do we reduce wealth inequality while encouraging innovation? That’s the discussion we need.
I don’t have a great solution, but I don’t consider innovators the same as investors. Loaning money to an inventor shouldn’t make you wealthier than the creator of a product or service. Trading currency? The futures markets? I understand these are ways to get wealthy, but the original intent of markets wasn’t paper wealth. Futures were meant to help counter risks in commodities. Currency markets were meant to enable global transactions. For example, I support taxes or fees on high-speed trades and day-trading. Investment in a company implies ownership and responsibility, not 30 seconds or less of ephemeral electronic data.
Founders of companies are not like Warren Buffett, Carl Icahn, or George Soros. Those creators who became investors are… investors. They claim to be “financial innovators” but that’s playing word games. Sure, balloon mortgages were an “innovation” but let’s not confuse financial services with other products and services. Only the wealthy are able to create these new financial products, often at the expense of lower- and middle-class workers who rely on debt to buy homes, cars, and educations.
Tax financial gains as regular income. End some of the carry loss rules. By eliminating the ability to take years of tax deductions beyond a single year of losses, we’d be dissuading some high-risk leveraged buyouts. No, you lose money in a year, the loss only applies to that year.
I realize tax reform isn’t a sexy legislative goal. But, we need to change this system that rewards passive investment more than it encourages innovation.
ProPublica hasn’t revealed anything new. What their reporting does is remind us that our tax code needs to be reimagined at the local, state, and federal levels.
Again, I doubt a streamlined, flatter tax system will ever be implemented. But, I can dream.
