The Only Certainties in Life are Death and Taxes and Rich People Not Paying Their Fair Share of Taxes
Billionaires are a different kind of duck
Thanks to the non-profit journalism site ProPublica, we learned last week many of the United States’ wealthiest individuals pay very little income tax and in some recent years paid no income tax at all. ProPublica reported this after an anonymous source provided the news site with the confidential tax returns of billionaires like Jeff Bezos, Bill Gates, Warren Buffett, Elon Musk, Michael Bloomberg, and George Soros, which, like the tax returns of any American, are ordinarily kept under lock and key by the IRS.
The public reaction was mostly a shrug, maybe because what the report revealed wasn’t all that surprising or because a lot of Americans kind of root for tax evaders. President Biden was about to have tea with the Queen, so the media spent more time gearing the country up for that non-event than scrutinizing the tax returns of the ultrawealthy. Meanwhile, the Justice Department announced they were more concerned with finding the source of the leak than prosecuting matters of tax avoidance, which makes sense since the DOJ investigates crime and there is no evidence in these filings that anyone actually did anything illegal.
Let’s not get too caught up, though, in the drama of unmasking the whistleblower or in feeling sorry that Warren Buffett had his financial privacy invaded. Wealth is power, and economic power rivals political power in the way it shapes daily life. (That’s hard for Americans to appreciate, as we assume government is oppressive while free market capitalism is liberating, but as Amazon workers who need a paycheck to put food on the table but who also need to use the restroom on occasion will tell you, the actual choices a wage laborer gets to make often fall within a fairly circumscribed range of freedom.) Given the concentration of wealth in this country—the wealthiest 1% of Americans possess 30% of the country’s wealth, with the overwhelming amount of that wealth concentrated among the top .1%, while the bottom 50% of Americans possess approximately 2% of the nation’s wealth—it’s good to have a window into the financial lives of billionaires, who are practically financial institutions in-and-of themselves. It’s also good to know if our system of taxation reflects the values it is based upon, which is that everyone chips in, with those able to pay more paying more and those less able to pay paying less.
The ProPublica report proves that’s not exactly how things work. From the report:
To capture the financial reality of the richest Americans, ProPublica undertook an analysis that has never been done before. We compared how much in taxes the 25 richest Americans paid each year to how much Forbes estimated their wealth grew in that same time period.
We’re going to call this their true tax rate.
The results are stark. According to Forbes, those 25 people saw their worth rise a collective $401 billion from 2014 to 2018. They paid a total of $13.6 billion in federal income taxes in those five years, the IRS data shows. That’s a staggering sum, but it amounts to a true tax rate of only 3.4%.
For context, remember the median American household makes about $70,000 per year and pays a rate of around 14% on their income taxes. The highest rate, which is levied against people earning over $628,300, is 37%.
Now there is a little bit of a catch that ProPublica irons out over the course of their reporting that needs to be explained here, which is that a tax on income is not a tax on what counts here as “wealth,” which matters when we’re talking about the “wealthiest” of Americans. Most American workers are wage earners. Their incomes are taxed. Their wealth, however—their homes, their savings, their stocks if they aren’t selling—is not. Most Americans do not have a tremendous amount of wealth, and what wealth they do have is usually tied up in a house.
The wealthy billionaires ProPublica profiled, however, are wealthy not because they’re earning a lot of income. Many in fact do not earn a wage. (Remember when Steve Jobs worked as the boss of Apple for an annual salary of $1?) Instead, the wealthy get wealthier through massive investments in stocks and property and other investments, and so long as investment earnings remain in the investment market, an investor can watch their wealth increase without having to pay taxes on it (let alone work for it). This is how a wealthy individual technically gets wealthier without needing to deal with a paycheck or income tax.
The challenge rich people face in this system is cashing in on their investments, since the government only considers investment earnings “income” once those earnings are sold at profit. Fortunately for them, the capital gains tax—the tax levied on the sale of an investment asset—is lower than the top income tax rate (20% vs. 37%) which saves them money on taxes. The more potent workaround, however, is that the wealthy can fund their lifestyles not by selling stocks but by borrowing huge sums of money from banks as spending cash and using their investments as collateral. Needless to say, this is not a tactic the average American—who often borrows money to pay for something they can’t pay for with cash on hand—can use without risking ruin. Of course, the rich still have to pay interest on their loans, but that’s around 1% and much better than the tax rate, so borrowing is a no-brainer for them. And while it’s not exactly clear to me how the wealthy pay back these massive loans without dipping into their fortunes and triggering a tax, my understanding is there are all sorts of financial mechanisms they can rely on to skirt the system.
But then again, it’s not really skirting the system if that’s how the system is designed. There’s something of a disconnect between the principle underlying our tax code (everyone pays, with those able to pay more paying more and those less able to pay paying less) and the way the system actually operates. The ProPublica report reveals in concrete detail the necessity of reform.
The challenge is finding a reform that is practical and enforceable. Some, like Bernie Sanders and Elizabeth Warren, have suggested a wealth tax, but wealth is sometimes hard to assess and surprisingly easy to hide. Others have recommended raising the capital gains tax or taxing yearly stock profits, but a lot of the laws the super-wealthy exploit also work to the benefit of working Americans with much smaller investments tied to, say, retirement plans. (For example, if the government taxed stock earnings on a yearly basis without requiring the sale of the stock, someone who owned a few stocks in Disney who saw the price of those stocks suddenly rise one year may have to sell some of those stocks to pay the tax on them, which could hurt their future earning potential and long-term investment goals.) And no matter how the laws are written, the rich are very good at finding loopholes and bending the system to their ends.
I was surprised as I read reactions to the ProPublica article to find that commentators are generally stumped when it comes to figuring how to get the wealthy to pay their fair share of taxes. I for one am not creative enough when it comes to tax law to imagine a solution, but it seems to me we’ll only find a way forward once we acknowledge that the finances of the mega-wealthy need to be treated differently than the finances of more ordinary Americans and then regulate accordingly. We need to quit thinking that a multibillionaire like Jeff Bezos is fundamentally no different than the entrepreneur who runs the hair salon or construction company down the street. It is the scale of his wealth that sets him apart.
It's hard to appreciate just how wealthy someone like Bezos is. Consider this: The poverty threshold for a family of four in the United States is about $25,000. The median household income is about $70,000. An income of about $538,000 will land someone in the top 1% of all income earners in the United States. That number’s just shy of the annual minimum salary of a Major League Baseball player, which is about $570,000. The average Major Leaguer makes about $4.17 million a year. The highest paid MLB player in 2019 was pitcher Gerrit Cole of the New York Yankees, who earned $36,000,000 that year. He has a contract with the Yankees (uh-oh) that will pay him $324,000,000 over nine years. And now we’re in the ballpark—$321,000,000—of what Jeff Bezos makes per day.
That sort of wealth—how it is made, how it is stored, how it is leveraged—liberates Bezos from the strictures and expectations other participants in the more conventional American economy operate under. The very idea of an income tax—let alone a capital gains tax—gets warped beyond all recognition when someone has billions upon billions of dollars in stock options at their disposal. The mega-wealthy need their own set of rules written for them, and we’ll only really appreciate the need for that once we realize that people who borrow a billion dollars from a bank not as a way to underwrite a business endeavor but just so they can have some tax-free pocket change aren’t exactly constrained by the economic gravity that keeps the rest of us grounded.
Some will object, arguing it is unfair to treat billionaires any differently than any other investor or taxpayer. The problem is they already are behaving differently, and it’s their reservoir of wealth that allows them to do so. If anything, it doesn’t seem fair to more ordinary Americans to allow the richest Americans to use their wealth to avoid paying billions of dollars in taxes. As for those who note the mega-rich often do pay taxes and that when they do, they pay billions of dollars to Uncle Sam, I would respond, yes, they do pay billions, but according to the principles of our tax system they should be paying billions more, and when someone is paying billions in taxes, they’ll have billions left over and will come out more than OK every April 15.
There is also a public interest concern in making sure billionaires are chipping into the system like everyone else. The government has a lot it needs to pay for—education, health care, Social Security, clean air, clean water, matters of security and safety, infrastructure, etc.—and the government will struggle to adequately fund these undertakings if it’s missing billions upon billions in revenues. While the mega-wealthy alone cannot fund the government—it still needs those middle-class taxes—they remain sitting atop a massive pool of legitimately taxable wealth that, by virtue of its size, almost has to be regarded as a critical public resource. That’s a pretty controversial assertion—few Americans think of their savings and checking accounts as a “public resource” the government ought to monitor and manage—but then few Americans are billionaires who command wealth of this magnitude, so they need not worry about the government taking steps to make sure the owners of these unique fortunes are contributing to the nation’s treasury as they should. It may seem counterintuitive, but it may be the only way to make sure the rich pay their fair share the way the rest of us do is to treat them differently.
Photo credit: The Kingdom Insider
Further reading: “The Tax System is Working as Intended. So If We Want to Tax the Rich, Here are Some Alternative Options” by Charlotte Rampell, Washington Post
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Dept. of “Huh, Who’d a Thunk It?”
States with higher vaccination rates now have markedly fewer coronavirus cases, as infections are dropping in places where most residents have been immunized and are rising in many places people have not, a Washington Post analysis has found….
Vaccination is not always even within each state, and The Post found the connection between vaccine shots and coronavirus cases at the local level comparing more than 100 counties with low vaccination rates (fewer than 20 percent of residents vaccinated) and more than 700 with high vaccination rates (at least 40 percent vaccinated).
Counties with high vaccination had low coronavirus rates that are going down. In counties where few people are vaccinated, not only are there higher case rates, but the number of cases there also is growing.—“Coronavirus Infections Dropping Where People are Vaccinated, Rising Where They Are Not, Post Analysis Finds”, Keating, et al., Washington Post, June 14, 2021
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Vincent’s Picks
(Vincent’s Picks theme song here.)
There are no good musicals except for Hairspray, but then I saw Lin-Manuel Miranda’s Hamilton on Disney+ and that was pretty good and now I’ve seen In the Heights, the film adaptation of Miranda’s Tony Award-winning 2008 Broadway musical directed by John M. Chu, and now I like three musicals. In the Heights is set in the Latino community of Washington Heights, NYC, and follows a multi-generational cast of characters over the course of a long hot summer. Like Hamilton, this movie is about honoring the hustle: The characters here are all either immigrants or the direct descendants of immigrants and revel in the opportunity to make it in this land of opportunity. We see them at various steps on the economic ladder. Anthony Ramos’ Usnavi (the origin of his name is hilarious) gets steady business running the bodega; Kevin Rosario’s (Jimmy Smits) taxi service looks to be drying up; Daniela (Daphne Rubin-Vega) is moving her hair salon to the Bronx due to gentrification; Vanessa (Melissa Barrera) dreams of being a fashion designer; Kevin’s daughter Nina (Leslie Grace) feels like a fish out of water at Stanford and is ready to move home to save her father the tuition; the Piraguero (Miranda) looks to triumph in his rivalry with the Mr. Softee ice cream truck. The movie does a good job showing how each generation rationalizes the experience of racism differently and updates its politics from the stage production by examining the DREAMer issue. We also see that while Washington Heights wasn’t always a Latino neighborhood, it has long history as an immigrant neighborhood, a place constantly being remade by people trying to make it in America. The musical numbers are great—the opening song “In the Heights” and the swimming pool epic “$96,000” are the stand-outs—but the more subdued “When the Sun Goes Down” is a sublime scene (alluded to in the poster above) and destined to become an iconic cinematic moment. It’s streaming now for a limited time on HBO Max and playing in theaters.
And as long as you’re on HBO Max, you might want to check out Mare of Easttown staring Kate Winslet as a police detective in a working class town near Philadelphia. The show’s creator Brad Ingelsby seems determined to bring the sociological sensibilities of recent British crime dramas like Broadchurch and Happy Valley to deindustrialized America. Winslet’s Mare Sheehan was a star basketball star back in the day; now she’s an exhausted detective with a family tragedy in her past and a missing person case she can’t solve. When a different girl shows up dead, the suspects seem to be everyone in her orbit. (It’s a close knit town and you kind of have to ignore how implausible it would be for her to be allowed to investigate someone like her ex.) The show takes some patience as there’s a lot of build-up and a lot of time spent getting to know the town’s many denizens (and sliding them into the background so we can’t anticipate how exactly they’re relevant to the story) but it’s certainly a worthy mystery that keeps the twists coming. Also starring Julianne Nicholson, Jean Smart, and Angourie Rice as Mare’s daughter Siobhan, costumed so that it is not unreasonable to suspect she is a displaced character from a John Hughes film.
Thanks for reading.
Exit Music: “Money Changes Everything” by Cyndi Lauper (1983, She’s So Unusual)