Thanks to a leak of Internal Revenue Service records to ProPublica, we know just how little some of the richest people in America have been paying in federal income tax. “In 2007, Jeff Bezos, then a multibillionaire and now the world’s richest man, did not pay a penny,” a report published by the investigative news organization, on Tuesday, begins. “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.”
Representatives for those mentioned would doubtless argue that some cherry-picking went into that news lede. The article later points out that, between 2014 and 2018, Bezos, the founder and C.E.O. of Amazon, paid nine hundred and seventy-three million dollars to the feds in taxes, while Musk, the C.E.O. of Tesla, paid four hundred and fifty-five million during the same period. Bloomberg, the media magnate and former New York City mayor, contributed $968.3 million to charitable causes in 2018, which helped to bring his over-all income tax rate down to 3.7 per cent. Still, the main thrust of the article cannot be denied. In recent decades, as the stock market has soared, the vast fortunes amassed by some members of the plutocracy have largely escaped taxation. In the words of Jesse Eisinger, Jeff Ernsthausen, and Paul Kiel, the ProPublica journalists who wrote the report, “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.”
This shouldn’t be news to anybody. Unlike real estate, which is subject to local property taxes, most other forms of wealth in the United States aren’t taxed on an annual basis. The federal government supposedly takes a share whenever an asset is sold or transferred, but there are loopholes in the tax system that allow the owners of vast fortunes to minimize the capital-gains and inheritance taxes which they pay. Since the age of the economist Henry George, in the late nineteenth century, the failure of the U.S. tax system to reach large agglomerations of wealth has attracted the attention of reformers. In 1995, Edward Wolff, an economist at New York University, warned that a rising concentration of wealth represented a threat to American democracy and proposed an annual tax on the net worth of wealthy families. More recently, during the 2020 Presidential campaign, Senator Elizabeth Warren called for a wealth tax that explicitly targeted the country’s richest households. Warren revived her proposal early this year, suggesting that the I.R.S. would levy an annual tax of two per cent on fortunes of more than fifty million dollars and three per cent on fortunes of more than a billion dollars.
Given the almost unimaginable wealth that some billionaires have, the Warren plan could theoretically raise a lot of revenue. Based on Bezos’s estimated worth—roughly two hundred billion dollars—he would be liable for an annual levy of more than five billion dollars under Warren’s proposal. Musk would stump up roughly four and a half billion; Mark Zuckerberg, the founder of Facebook, three billion. Compared with potential liabilities like these, even during years when the überbillionaires do pay some taxes, the sums involved are small. “The 25 richest Americans collectively paid 0.17% of their wealth in taxes in 2018,” Gabriel Zucman, a Berkeley economist who worked on Warren’s wealth-tax proposal, commented on Twitter. “Which, no matter how you look at it, implies tiny effective tax rates relative to income—much lower than for the middle class.”
One of the merits of the ProPublica piece is that it reminds us of the enormous variety of tax-minimization options available to the extremely wealthy. Some are familiar: holding onto stocks and other assets for as long as possible; using investment losses to offset income; investing in real estate, which the tax code treats very favorably; setting up charitable foundations. But the article also emphasizes other, less obvious, tactics.
Some principals of public companies avoid paying corporate dividends, which are taxable, to themselves and other stockholders. Warren Buffett is an example of this. Many billionaires use their wealth as collateral for bank loans, the interest on which may be tax-deductible. “Last year Tesla reported that Musk had pledged some 92 million shares, which were worth about $57.7 billion as of May 29, 2021, as collateral for personal loans,” the ProPublica piece states. It goes on to report that, in 2016 and 2017, the Wall Street billionaire Carl Icahn reported five hundred and forty-four million dollars in adjusted gross income. But, because he had taken out so many loans, he was able to take hundreds of millions of dollars in interest deductions, which meant he avoided paying any federal income taxes. “I didn’t make money because, unfortunately for me, my interest was higher than my whole adjusted income,” he told ProPublica.
As reports by the New York Times about Donald Trump’s federal tax returns also demonstrated, it is not an exaggeration to say that there are two separate tax systems. One is for ordinary people, who make most of their money in wages and salaries. The other is for members of the gilded class, who make most of their money through the ownership of publicly traded assets, private businesses, and other forms of capital. With one of the major political parties dead set against any changes that would make the system more progressive, and an army of lobbyists for the rich waiting to pounce on any proposal, reforming the tax code to make it fairer will be a big challenge. But, with enough political will, it can be done.
The Biden Administration rejected Warren’s annual-wealth-tax idea, but it did propose three important changes to the existing system. First, it suggested raising the corporate-income-tax rate from twenty-one per cent to twenty-eight per cent. The burden of corporate taxes falls partly on shareholders, so this move would effectively raise the tax rate of people like Bezos and Zuckerberg. Second, the Administration wants to raise the top income-tax rate to 39.6 per cent and tax the capital gains of millionaires at that rate. Because the current tax rate for long-term capital gains is only twenty per cent, and because it’s the same for all income groups, this would make a big difference. And, finally, the White House wants to eliminate the notorious “step-up in basis” loophole, which allows rich people to pass down property, including financial assets, to their heirs without either party paying any taxes on the appreciation in value. Under the Biden proposal, unrealized capital gains would be taxed at death.
None of these proposals has the headline value of imposing an annual wealth tax on the mega-rich, but they could have a significant impact. According to the Tax Foundation, a Washington nonprofit that generally supports lower taxes, the changes to the capital-gains tax and the estate tax, if combined with the existing estate tax, could lead to a tax rate of sixty-one per cent on the largest estates. Even if that estimate is too high, the reforms that the White House is proposing would surely make the tax system more progressive at the very top. A skeptic might object that the ultra-rich, with their armies of accountants, will find a way to get around any tax system. That is a counsel of despair. With clear tax rules in place and a well-financed I.R.S. there to enforce them, it is perfectly possible to shift the tax burden toward the ultra-wealthy even if there is still some avoidance. The revelations from ProPublica have provided another demonstration of why this change is so badly needed.