A new report from ProPublica reveals the outrageous rates of the 25 wealthiest people in the United States. The irony is irresistible: The very same people that demand the wealthy pay more in taxes and promote progressive policies are, in fact, paying barely any taxes. Two questions: Why should we listen to them and what can we do about it?
Jeff Bezos. George Soros. Elon Musk. Michael Bloomberg. Carl Icahn. Apart from being almost ridiculously wealthy with a combined net worth of over $420 billion, all of them paid no Federal income taxes at some point in their career. The non-profit news organization, ProPublica, reported this stunning fact after receiving leaked IRS data on thousands of the world’s wealthiest people over the past 15 years. According to ProPublica, “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.”
ProPublica found that Jeff Bezos paid no income taxes in 2007 and 2011. Carl Icahn also pulled it off twice as well. George Soros three years in a row. Musk once. Even when these titans of industry pay taxes, it’s pennies on the dollar compared to the average American.
The report compared the taxes paid by the 25 richest people in the US compared to Forbes’ estimate of the increase in their wealth. “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%.” By contrast, the average middle-aged American, in the prime of their earning years, increased their wealth by about $65,000 after taxes while paying about $62,000 in taxes over the same period, meaning comparing apples to apples, the average American’s tax rate would be over 95%.
Of course, I understand that wealth is not income, we’ll circle back to that in a moment, but in the meantime consider the underlying numbers. Warren Buffet for example increased his wealth by $24.3 billion while reporting only $125 million in income, paying a paltry .1%, making him the record holder for the ignominious distinction of paying the least taxes on the most wealth. Jeff Bezos increased by $99 billion, reported $4.22 billion, and paid $973 million for a .98% rate. Michael Bloomberg clocked in at 1.3%, paying $292 million on income of $10 billion and an increase in wealth of $22.5 billion. Amazingly, Elon Musk paid the most of this group at 3.27%, claiming $1.52 billion in income, paying $455 million in taxes, and growing his wealth by $13.9 billion.
ProPublica also provides some insight as to how the mega-rich legally keep their taxes so ridiculously low. In 2007, for example, Jeff Bezos paid no income taxes while the value of his Amazon stocks doubled, increasing his fortune by some $3.8 billion. He filed jointly with then-wife, MacKenzie Scott, and the couple reported $46 million in income, most from interest and dividend payments on their investments. He was able to offset his entire income tax burden with losses from other investments, deductions, and “other expenses.” Similarly, in 2011 Mr. Bezos actually claimed the couple lost money, even going so far as receiving a $4,000 child tax credit. Over the entire 2006 to 2018 period, Mr. Bezos’ net worth skyrocketed by $127 billion, but he reported “only” $6.5 billion in income, allowing him to pay a paltry 1.1% on taxes on the net increase in his wealth.
The ProPublica report concludes with some even more stunning numbers. “Our analysis of tax data for the 25 richest Americans quantifies just how unfair the system has become. By the end of 2018, the 25 were worth $1.1 trillion. For comparison, it would take 14.3 million ordinary American wage earners put together to equal that same amount of wealth. The personal federal tax bill for the top 25 in 2018: $1.9 billion. The bill for the wage earners: $143 billion.”
Of course, as I mentioned earlier, wealth is not income. Conservative, free-market types, like myself in most cases, will be sure to point out that distinction. We tax gains on investments differently than regular income for two key reasons. First, it is generally assumed that a person already paid income tax on the money used to purchase the investment. The average American buys a home or stocks with after-tax income, therefore taxing investment gains as income represents another bite at the same apple. Second, it is beneficial to encourage investment and provide a high level of freedom to move money toward desirable investments. A high tax on gains diminishes the potential for return, resulting in less money invested and slower economic growth, plus distortions in the market, especially for smaller, individual investors hesitant to sell stock because they have to pay taxes out of pocket. This is especially true when an individual is simply moving money from one investment to another: The capital gains tax must be paid even if you never actually touch the money.
In my opinion, these are both very strong reasons to tax investments differently than income, but, at the same time, neither are really applicable to the super rich in the ProPublica report and neither makes the report seem any more fair to the average American. First, Bezos, Musk, Bloomberg, and others are generally receiving their stock as income. They are not purchasing it as you or I would with money that has already been taxed. Instead, their income to a large extent is the stock itself, meaning this wealth is money they have been paid by their employer, they just get paid differently than the average person. Second, the megarich use investment income as their primary source of cash. These are not investments set aside for a comfortable retirement, the gains to be realized years later; they are an endless stream of money to draw upon whenever they need, even borrow against tax free. They are, in short, income in any reasonable sense of the word.
Further, none of these benefits are available to the average person. When I get a raise, I pay taxes on that raise, hence the figures ProPublica reported for the middle class, where we are being taxed almost 10 times higher. I should also point out that if my income goes down, I don’t get to claim it as a loss and offset my taxes when my income was higher. Either way, when I buy a stock, I’ve already paid taxes on the money and when I pay my mortgage, it’s after tax as well. Whatever I or just about any other American does, the wealth they accumulate is already taxed and at significantly higher rates than ProPublica found for the ultra rich; yet we have to pay the same capital gains taxes if we happen to make a profit on our after-tax investment.
The difference in treatment and the accompanying ridiculously low rate should prompt a certain outrage whether you are a conservative or a liberal, Republican or Democrat. If you’re paying full freight on your income, so should they. In this regard, Bernie Sanders, Elizabeth Warren, and other progressives have a valid point. Senator Sanders, for example, said “the rich have money, the rich have power, the rich have lobbyists, and the rich do not pay their fair share of taxes.” The White House voiced similar concerns. “We know that there is more to be done to ensure that corporations, individuals who are at the highest income are paying more of their fair share,” White House Press Secretary Jen Psaki said at a briefing after ProPublica issued the report.
Alas, the remedies being offered by at least Bernie Sanders and Elizabeth Warren, namely a wealth tax, are likely to cause far more harm than good. The problem is that a wealth tax, aside from possibly being unconstitutional, is inherently destructive. Mr. Bezos doesn’t have his approximately $190 billion in net worth available as cash in a vault somewhere, or as gold coins he can lounge on like Smaug from The Hobbit. When his wealth skyrocketed by $127 billion, it did not do so in disposable funds from which he could write a check to the Federal Government for $47 billion. Instead, his wealth is based on the value of Amazon stock and, if he were to have to pay $47 billion in taxes, he’d have to sell a lot of stock, causing two problems.
First, who could purchase such a vast sum in the first place? There aren’t many people in the world with billions in cash lying around to buy thousands of shares of Amazon because Mr. Bezos needs to pay his taxes. Second, and far more importantly, Mr. Bezos isn’t the only owner of Amazon stock. Millions of ordinary people are also shareholders either individually or through retirement accounts. If Amazon’s CEO started dumping millions of shares on the market every year, the value of the stock would certainly decline, meaning we wouldn’t just be taxing his wealth, we’d be taxing anyone who owned a single share.
At the same time, even if a wealth tax isn’t the answer, this doesn’t imply that nothing should or can be done. The facts are indisputable: The uber-wealthy are gaming the system to reap huge rewards and pay almost nothing in taxes, and they’re doing it legally. In a sense, I’m reminded of the situation with corporate compensation in the 1970s, when executives would regularly receive a corporate car, expense accounts, and more in lieu of income. At the time, the highest personal income tax rate was 70%; high earners avoided that rate by receiving compensation outside of income. Now, we see the ultra-wealthy avoiding income taxes by receiving stock as income or by only using income from investments.
Perhaps needless to say, the rules governing these stock payments are complicated, but essentially the recipient pays no taxes up front because the stock is normally provided as options that can be exercised at a later date. For example, an executive receives the right to purchase a stock at some point in the future at the price point of today. If the stock in the future is worth more than the option price, the gains are taxed and, in some cases only, the original value of the stock given is taxed. Either way, the stock as income is given significantly more preferential treatment than regular income and the result is the super-rich avoiding the taxes the average person pays.
I don’t pretend to be an expert on the optimal tax code, but it seems to me there are several opportunities to change this dynamic short of a wealth tax. We can consider applying income tax to the value of the stocks at the point they are given, that is treating the value of the stock as income and then the future sale of the stock as capital gains. We can consider treating gains for stocks that were purchased differently than those provided as compensation, essentially taxing those gains as regular income to differentiate them from investments purchased after taxes. We can even consider a “tax” on the shares themselves, meaning if Mr. Bezos receives 100 shares, 40 of them are held in escrow by the federal government just like income would be. The federal government can then sell the stock at its time of choosing. Lastly, we can look at a new alternative minimum tax for the super rich; one which would apply regardless of how the income was generated.
Whatever the optimal method, we cannot have a tax code that allows Jeff Bezos to take advantage of the child tax credit, about as insane an idea as I’ve heard in some time and there is no shortage of insanity out there these days. Another thing we cannot and should not do: Listen to a word these hypocrites have to say on the tax rates you and I should pay. George Soros, Warren Buffet, Jeff Bezos, and others have all advocated forcefully for higher income tax rates while they pay next to nothing. In response to the ProPublica report, a spokesman for Mr. Soros claimed, “Between 2016 and 2018 George Soros lost money on his investments, therefore he did not owe federal income taxes in those years. Mr. Soros has long supported higher taxes for wealthy Americans.”
Yes, he’s long supported them while doing everything in his power to game the system, something he will no doubt continue to do whatever the rate. In short, their position is essentially that we pay more and more, while they don’t. I’ve got something to say to that and it’s not safe for work.