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Rich Pickings

Greg Spears, 12:50 am ET

THE NEWSPAPERS ARE full of reports that a new tax on billionaires may be uncorked. The Washington Post even ran an article estimating what the 10 richest Americans would pay over the next five years should it pass.

I take no stand on the politics of the proposal. But I have seen enough trial balloons to be skeptical that Elon Musk will soon write a 10-digit check to the U.S. Treasury. As Chuck Collins has written in The Wealth Hoarders, billionaires pay their advisers millions to hide trillions. Collins is the great-grandson of hot dog king Oscar Mayer, so he’s seen how wealth works from the inside.

The fledgling tax proposal does meet one important objective, as espoused by the late Senator Russell Long, the longtime chair of the tax-writing Senate Finance Committee. As Long once noted, many people have the same plea: “Don’t tax you, don’t tax me, tax that fellow behind the tree.”

A proposal to tax just the ultra-wealthy does indeed aim the tax gun at somebody else. But can we count on billionaires to stand still? Collins says there are two main ways that the wealthiest deflect taxes. The first is to assign lobbyists to Washington to ward off a blow before it’s imposed. That, no doubt, is happening right now.

The second way is to deploy talented professionals with highly specialized knowledge to adeptly navigate a complex tax landscape. Several recent dumps of secret legal papers have shown that—should it get that far—assets can be moved offshore or to tax-friendly states like South Dakota.

Of course, if options A and B don’t work, there’s always the nuclear option—giving the money away. That’s the idea behind the giving pledge endorsed by Bill Gates and Warren Buffett, two of the tax proposal’s principal targets.

Signers of the pledge promise to give away the majority of their wealth to philanthropy. This is a generous impulse, but it’s also far-sighted. Since estates that contain assets of more than $23.4 million per couple are taxed at a 40% federal rate, why not give away what Uncle Sam was only going to take?

The creators of great wealth—like Rockefeller, Getty, Gates and Ford—can extend their influence beyond a single lifetime by endowing a foundation. It’s either that or blast off for Mars. There’s no tax code there—so far.

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John Wood
John Wood
1 month ago

The super rich show us where the tax code needs to be fixed when they legally exploit it. Congress is tasked with fixing the weaknesses they created, but instead of fixing them, they huff and puff and feign indignance about the atrocity of the rich’s actions – and, worse than doing nothing, continue to aid and abet.

The highest income tax rates were 91% in 1963, 70% in 1980, 50% in 1985 and 37% in 2021. This massive tax break for the rich occurred through Congress’s actions. Hedge fund billionaires still pay only the capital gains rate on the majority of their income, courtesy of the “Carry Interest” rule that Congress created and dutifully maintains through every tax reform charade.

Now comes the distraction of the “wealth tax” discussion which, I suspect, will quietly disappear in time.

I do not see how the billionaires are to blame when they play within the rules that Congress created, and Congress does nothing material to change those rules.

Roboticus Aquarius
Roboticus Aquarius
1 month ago

I don’t mind Elon Musk being rich. Good for him. Created jobs, built some really interesting companies. He’s not a great human being, but there’s no law against that. However, I think there is a legitimate discussion here.

Consider that Elon’s taxes average about 3.3% of his Net Worth growth annually (over a period of 5 years. This could be a one-off, but it’s not. The 25 richest Americans had an effective tax rate of 3.4% over the course of 5 years.) Keep in mind this is not how most of us think about our taxes. Pro-Publica calls this an ‘effective tax rate’, but really they distort the general meaning – usually we look at income as a base, not net worth. Even so, these numbers seem really low, so let’s take a look.

The Federal Income Taxes these Americans paid on actual Income appears to be in the 35-40% range per the WSJ, which seems pretty reasonable given typical marginal rates aren’t that high, let alone effective rates for most Americans. However, this cheats a bit too. Wealthy people tend to structure their income as Capital Gains vs Ordinary Income, which allows them to pay that rate on what is on average 40% of their compensation. This is within the rules, but it does yield benefits, since Cap Gain tax rates are lower than for ordinary income. Keep in mind that Congress changes tax law all the time to reduce legal tax avoidance, such as with the upcoming changes to backdoor Roths, so it’s perfectly valid to change this (with caveats, but keeping this short…)

However, if you compare taxes to NW, it’s a different story. Young people may carry a negative NW, which yields an incalculable rate of taxation. As people are building NW, they pay very high rates relative to NW. Average 40 year olds are estimated to pay about 95%. Someone growing their wealth from $500K to $2M over ten years might have a rate of roughly 15% over that period. The very rich have a rate as low as 3.5% as we have seen.

There are many ways for the wealthy to structure their income to sidestep taxes. There are many unintended tax loopholes that are very difficult to fight in court. Even if successful, cases have been brought to a halt by organizational pressure within the IRS (wealthy political donors call their congressperson who then asks the IRS to explain, and etc). This is a tool not available to most Americans, and problematic at the least when you are talking about a system that keeps bending fractions of an inch towards offering advantages to the rich. Over time, the effects are significant.

The point being that, putting the issue of fairness aside, the richer you are, the more the tax code enables wealth growth. I think this is a worthy issue to debate. I think on some level this imbalance is kind of inevitable because of the math of the situation, but the skew does seem extreme to me. There must be ways to frame this a little better, but this is what I got. Appreciate comments: agreement, disagreement, different framing.

Last edited 1 month ago by Roboticus Aquarius
Langston Holland
Langston Holland
1 month ago

Winning politics includes two skillsets:

1. That of the magician.
2. Appealing to the basest parts of human nature.

The consistently short lifespans of empires indicates that history’s warnings are little defense against those that prey on human nature.

The magician directs the attention of his audience away from what he is actually doing to cover his real objective. He uses specially designed furnishings, lovely ladies, scary situations, etc. to distract.

The politician incites fear, hatred, envy, etc. toward a smaller target to distract from the larger target he has his sights on – “the middle class”.

The combined net worth of America’s billionaires is about $4.5 trillion. That’s about 13.5 months of the current US tax revenue. Take everything away from them and it’s nothing compared to “that fellow behind the tree”.

Willie Sutton would be proud.

Roboticus Aquarius
Roboticus Aquarius
1 month ago

Nobody (except the usual fringes, and there are plenty of kooks of all flavors out there) is proposing to take everything away from them. The initial conception on this particular unrealized capital gains tax might take about a half percent of their net worth ($20B annually of the $4.5T)

Jan Butter
Jan Butter
1 month ago

The invention of income tax immediately became popular with citizens. Probably due to class envy. The motivation is dark meaning not good for the personal development side of things if you know what I mean. Why is it so important to scrutinize our earnings and investments? This is high-stress nonproductive work surrounded with lawyer-like intimidation. Coercive government incentive that is opposite of what the creation of government was supposed to be created for. To further the citizen’s enjoyment of life.
My question shouldn’t our representatives be held to the standard of inventing better ways to finance governments. Shouldn’t they be on the hunt to find less costly ways to run this funding system? Surely, someone could find a painless system that doesn’t entail so much waste of effort and time.

R Quinn
R Quinn
1 month ago

Some politicians have devoted themselves to creating class and income envy and it works. If billionaires do anything illegal to avoid taxes, they need to be held accountable, but despite the rhetoric that doesn’t seem to be the case. Your scenarios are far more likely.

The reality is every taxpayer does and should seek to minimize their tax bill within the law. Avoiding IRMAA, using Roth accounts, 125 cafeteria plans, HSAs, any number of deductions, child tax credits when you earn $300,000 a year are but few examples.

How many retirees claim residence in Florida to avoid income taxes? In my condo building in NJ there are three individuals out of 12 units who drive cars with Florida plates.

The amount of money involved is irrelevant.

The idea of taxing wealth or unrealized gains is reprehensible IMO, not to mention impractical to implement. I suggest the total value created for the world society by most of these billionaires far exceeds any taxes they might pay.

If we truly seek fairness, the full – honest – cost of all the programs people want and believe they are entitled to must be spread across the population – as they do in most European countries.

Roboticus Aquarius
Roboticus Aquarius
1 month ago
Reply to  R Quinn

Like you, I am also leery of taxing unrealized cap gains, and I think there are enough loopholes in the proposal to keep tax lawyers busy for centuries…

I grant your point on when it comes to federal income taxes. However,

  • the US nationwide average effective state and local tax rate is 11.4 percent for the lowest-income 20 percent of individuals and families, 9.9 percent for the middle 20 percent, and 7.4 percent for the top 1 percent. https://itep.org/whopays/
  • US Total Federal Tax rate by Quintile in 2020 was 3%, 8%, 13% 17% 24% according to https://www.pgpf.org/budget-basics/who-pays-taxes
  • Combined that looks like about 14%, 18%, 23%, 25%, 31% by quintile, give or take, depending on these sources.

I have no idea how that compares to Europe, but I suspect their total tax burden is probably higher but similarly progressive?

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