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If you win a million dollars in a lottery, you will pay approximately $370,000 in federal taxes. An X post complained about the tax on such a windfall and said that we should tax billionaires the same way.
Of course that is exactly what we do. Everyone is subject to the IRC and the same type of income is taxed the same way for all. I think billionaires get a bad rap.
A 2021 study by economists from the Council of Economic Advisers and the Office of Management and Budget, using data from Forbes and public records said the top 400 wealthiest taxpayers paid an average income tax rate of 8.2%. Many people jumped on that as proof these folks were grossly undertaxed. However, to arrive at that percentage, the growth in net worth from unrealized capital gains was used. Hardly apples to apples.That’s like including the growth in your home value and 401k to determine your effective tax rate.
Nevertheless, I have decided to become a billionaire myself. I have the same chance as anyone, but time may not be on my side.
I invest in the stock market, in a single company stock and in real estate. That’s what billionaires do. I don’t have a garage or dorm room to start a business, but there are other ways. Unfortunately, I don’t have the entrepreneurial skills or desirable personality either.
On the other hand upon realizing that one billion is one thousand million, and looking at my current net worth, I have the same chance as Don Quixote.
Are billionaires self-made? Most are, but even those who inherited big bucks, inherited it from someone who did earn it. The Waltons are a good example. Some of the wealthy inherit a nice nest egg and then grow it on their own.
I look at a list of some well known billionaires and think to myself about how they changed the world, made life better, more pleasurable for the rest of us. About the millions of jobs they created around the world and about the many other small businesses that thrive by leveraging what the entrepreneurs created.
Steve Jobs / Steve Wozniak Jeff Bezos, Mark Zuckerberg, Larry Page & Sergey Brin, Elon Musk, Michael Dell, Larry Ellison, Reed Hastings, Brian Chesky, Joe Gebbia, Daniel Ek, Evan Spiegel, Jack Ma, Sam Walton, James Sinegal, Philip Knight, Oprah Winfrey, George Lucas, Ralph Lauren
Many of the people on this list did the same thing, they took risk, created something, eventually issued an IPO while holding millions of shares and let the stock market take over. And then they diversified.
While many Americans envy such actions, the Philadelphia Fed found only 42.8% of U.S. adults personally own stocks. Pew Research Center, says only 21% of American families own individual shares directly. Roughly 60–65% of Americans have some exposure to the stock market through retirement accounts like 401k, but relatively few invest directly-many fear the risk. The thing is you don’t need big bucks to get started. Getting ahead requires constant change, growth, a bit of risk. You won’t improve your economic standing working in a minimum wage job relying on increases in the minimum wage.
To be honest, if they never paid a penny in income taxes, I think society at all income levels more than receives its moneys worth from these billionaires.
Billionaires underappreciated? I think there must be a million other concerns that an average human being might come up with, especially in the increasingly income-inequitable USA, that would warrant thought before arriving at the proposal that our long-suffering billionaires are not getting their fair share of societal strokes. Billionaires underappreciated…what a preposterous notion!
The income inequality is not a problem created by billionaires. Did they take from others or prevent us from getting ahead? Growth at the top does not prevent growth at the bottom, especially when most of the top growth is a function of the stock market.
Think of all the things we do and have that is the result of billionaires, including the ability to put comments here using a phone, tablet or laptop.
You seem to treat them like demigods passing out favors to all of us mere mortals. Income inequality surely is not helped by, for example, the constant tax and other breaks sent along to billionaires (some new ones cooked up even within the last several days, according to the NY Times). I’d rather celebrate some of the unsung heroes of our modern conveniences. Over the course of history, many who better the lives of others with their insights and inventions died without significant financial gain, with some being exploited by their so-called “superiors.” To the degree that innovators are enabled by billionaires, that’s great. And the billionaires are amply rewarded. But I agree with some other voices here that billionaires do not currently contribute their fair share in monetary terms to the welfare of society and the nation, even as they disproportionally influence the conventions and rules all the rest of us must follow. Only a few enlightened, such as Buffet and Gates (and no doubt several hundred more I can’t name), seem to realize that their success is dependent on the larger social matrix that is our country and is composed of all of us. Surely they can get by on a billion or so, and then give back in proportion to their means, not in comparison to the taxes paid by the likes of us.
According to the Tax Foundation (2022 data), the bottom 50% of taxpayers have an average (effective) federal income tax rate of about 3.74%. That hardly seems an unfair burden.
This argument, if that’s what it is, is basically a non sequitur. Enough highly reputable individuals and organizations recognize that this country has an income inequality problem. If it keeps developing along the current trajectory, it could eventually lead to cataclysmic ill-effects for society at large. A family that pays “only” a 3.74% rate may still be below what is considered “poverty.” If I’m paying 4% of 12k or 20% of, say, 100m, who is likely to have fewer concerns about “having enough.” It should be obvious that I say this facetiously. One cannot intelligently compare folks from the bottom 50% with billionaires in simply nominal terms.
My main point in the comments I’ve made here today is that billionaires do not need apologists (the genre of your original piece). They are doing fine for themselves, and sometimes that can benefit the rest of us, but it can also work against the interests of the rest of us, financially and otherwise; and the playing field is not level.
No need to focus on the top 1%. The problem is how do we raise up the bottom 20-30%. You don’t do that by trying to lower the top tier. You can close the gap much better by focusing on education and training. Economists generally agree the dollars involved in inequality are not a real problem. The problem is the ability to influence that goes with money and that takes two parties. The influencer and those who respond to it.
I still feel that the top 400 or so have contributed far more to society than they have taken from it and I do not begrudge them their wealth.
Estimates using employee count show just the top ten billionaires have created ~3.4 million US jobs and ~5.8 million global.
Of course the billionaires themselves do not “create” all of these jobs, they do it in conjunction with all of the talent that they are able to employ. And they are amply rewarded for that. There are some billionaires who get their start with family money, and grow it, or lose it, replying only on hired help (not to name any names). I’m all for education and training, but that doesn’t seem to be where our country is heading at the moment. I don’t think asking billionaires for more substantial financial contributions, and limiting their special access to the nation’s decision makers, would at all threaten their location in the top financial tier. Bill Gates has given away billions, but he’s still in the top echelon. Wish more would emulate him. We can’t expect the family paying taxes at a 3.74% rate to bring our country’s financial situation under control.
My favorite tax scam is where Private Equity billionaires have lobbied for having a major source of their income taxed at capital gains rates…their carried interest. It is their cut of the 20% fee the PE firm receives during a liquidity event. There is no capital invested as they are not investors. Having worked in many PE owned businesses, my compensation was taxed at regular tax rates. If I had a capital gain, I had to have a basis in the investment. Somehow, PE billionaires get a pass. For more of this story read the link and write your Congressman.
https://carta.com/learn/private-funds/management/carried-interest/
Anything allowed by law is not a scam. And that does not apply just to billionaires, but I agree it needs to be looked at. I actually think Roth accounts are unfair while earnings on a 401k are taxed as ordinary income. Where is the logic treating the earnings on pre or post tax investments differently?
“Anything allowed by law is not a scam.”
I know it will shock you to discover that billionaires employ lobbyists who have entrée to our “representatives” to craft “laws” to serve their wealthy clients’ interests. Some of that can spill down to the rest of us in the upper 5-10%; not so much for those further down the ladder. It has ever been so.
That’s what all PACs do.
The billionaires don’t necessarily need a PAC for their goals, although they certainly can control such organizations. Billionaires have reached a level of financial power that enables them to achieve access without a PAC. That’s a problem. It can be held in check by ethical lawmakers, but …
Thank you for stating this, Chris. The old aphorism about the golden rule: Those who have the gold make the rules.
Structural injustice gives certain people advantages over those of us further down the ladder. Making the rules is a big one.
To adapt another old aphorism (power corrupts…): Money corrupts, and unlimited money corrupts absolutely.
The logic for a Roth’s earnings not being taxed is based on the math. The math shows that the “after tax value” of investing in a Traditional IRA or Roth IRA is the same if the tax rate is the same at withdrawal as it was when the investment was made. But if the tax rate is lower when invested as compared to when it’s withdrawn, the Roth IRA returns more. And if the tax rate is higher when invested as compared to when it’s withdrawn, then the traditional IRA returns more. This assumes the same rate of return, the same length of time invested, and the same gross dollar amount (which in the case of the Roth results in a smaller dollar amount initially invested since taxes are immediately paid). This isn’t intuitive, but it is correct.
Correct, Rick Connor did the math a year or so ago. Where has he been lately?
From an individual and tax basis I see no logic. By that reasoning my brokerage account investment earnings should be tax free too. Why have 401k plans, make them all after tax contributions with earnings tax free when retirees need it the most? Eliminate regular IRAs entirely.
Too unnecessarily complicated.
Why have 401k plans, make them all after tax contributions with earnings tax free when retirees need it the most?
Interesting question. One reason might be the ‘bird in hand’ argument for an instant tax deduction.
On the other hand (pun intended), I bet there are many seniors who could have avoided IRMAA premiums if all their IRAs were Roth
Dan and others who do tax preparation, roughly what percentage of your senior clients filing MFJ got dinged by IRMAA? If they were paying IRMAA premiums, what suggestions did you offer to them to avoid it in the future?
About 7% of all Medicare retirees pay IRMAA premiums.
Thanks RDQ! I realized now I could have asked AI.
Olin, of over 300 retired couples I prepared taxes for, none of them had to pay IRMAA.
Several of those clients could have reduced their federal/state taxes by filing separately, but that filing status would have caused IRMAA, which was much greater than their tax savings.
Thanks Dan! Thought maybe 5-10 percent of your clients might have had to pay IRMAA.
Good question. I’ll be interested to hear how others handled this issue. For myself I developed a “income plan” spreadsheet so I could plan (discretionary) income decisions (which for me was mainly brokerage actions, Roth conversions and IRA distributions) to stay within the desired IRMAA bracket. A little bit of work, but it lets me coordinate my Roth/HSA withdrawals into my taxable events to keep from going over the threshold I’m planning to.
The brokerage account analogy fails since it’s not a retirement account. Retirement accounts enjoy special consideration in the U.S. tax code. That said, no doubt it is complicated (such as the different rules with 401K’s versus IRA’s) and I’d vote for a simpler system, but I think you’re missing that the optionality of choosing pre-tax or post-tax retirement savings (in a retirement account) allows a worker to decide which option will work out best for them. For the “typical” worker who would be in a higher tax bracket while working and a lower tax bracket in retirement, the traditional IRA is still the best option. But for a worker who has additional income beyond social security and has been saving for a long time (and will thus face large RMD’s at some point later), the Roth option wins out. But as with so many other things, it’s left to the individual to choose wisely.
But from a pure tax point of view, does the type of account matter?
Good question. My opinion is that it matters since the government is trying to assist it’s citizens with a particular goal, in this case saving for retirement. Similar to the special treatment from taxes, funds in retirement accounts generally have various enhanced legal protections (eg. ERISA, state law, etc) from court judgements that aren’t afforded to brokerage accounts. So from various points of view under the law, retirement accounts are treated quite differently than brokerage accounts.
I think your idea that depreciation reduces the asset value is a canard. In normal accounting where you depreciate over the useful life of the asset that might be true but if you buy a plane and fully depreciate it in year 1 that plane still has a lot of value in year 2 and in the ensuing years. Also, in order of magnitude, your example of using depreciation to offset rental income is thousand, perhaps million fold less than the benefit that billionaires achieve. I don’t necessarily begrudge the billionaire use of this I would propose however if you use an asset as collateral perhaps you should pay some tax on the value borrowed. At least tot he extent it has appreciated over time.
It is also true that the basis of depreciated property is adjusted up to market value when it is inherited.
That’s what I am counting on in the future. If I were to sell our vacation home now with intent of giving proceeds to our children, the taxes would take a big chunk … and I’m not even a billionaire 🤑
Dick, are you using a Revocable Living Trust in order to keep the Cape Cod house out of probate?
Yes, all our children are named beneficiaries in equal portions.
Would you apply that to a HELOC or reverse mortgage as well?
Roughly 60–65% of Americans have some exposure to the stock market through retirement accounts like 401k, but relatively few invest directly-many fear the risk.
is it possible that those that do not have exposure to the stock market, 35-40% of Americans, just can not afford it since they live paycheck to paycheck with nothing left over? I bet if they earned more then maybe they would overcome “the fear of risk”.
Don’t buy it. First, because paycheck to paycheck can mean a lot of different things and occurs at any income level.
Second, there are many ways to invest with very minimal amounts. Perhaps the lowest income 20% would struggle, but not higher levels if investing becomes their priority.
How many billionaires do you think are living paycheck to paycheck?
From a tax perspective I’m not sure that billionaires pay their share of taxes. They typically use their assets as collateral to borrow and therefore don’t trigger tax payments on liquidated assets. Then everything is sheltered under their business interests and are deductible expenses. A review of the OBBB will show that people who can purchase yachts, planes, laundromats, (for some reason) can fully depreciate them in year 1 to offset taxes. There are different rules if you can buy them.
I don’t have a problem with bonus depreciation for a piece of factory equipment that will supercharge productivity and strengthen a business, but for an airplane or a laundromat… c’mon.
Seriously, a laundromat? That’s a follow-the-money moment if there ever was one.
Nevertheless, those rules apply to everyone. And doesn’t everyone attempt to leverage the tax code to lower taxes like avoiding IRMAA, use of Roth, QCDs, etc.?
In think depreciation lowers the cost basis doesn’t it?
I have a friend who owns a vacation home, rents it for several weeks and then depreciates it on their taxes and deducts all expenses so pays no taxes on rental income. I used to do the same thing 25 years ago.
Dick, if your friend is writing of all of the homes expenses and only renting it out for a couple weeks, they better pray to never get audited.
Also, as a business owner, I had a whole different set of rules than the poor schmuck who worked as an employee.
This is a wonderfully thought-provoking post!
Yet one aspect of it is bugging me. I just don’t buy the ‘self-made’ argument. While I never deny the importance of hard work and good decision-making, it seems we underestimate the role of moral luck in financial success—or in any of our successes.
I suspect Warren Buffett’s recent message to his shareholders is shaping my reaction this morning. He put it this way:
…Lady Luck is fickle and – no other term fits – wildly unfair. In many cases, our leaders and the rich have received far more than their share of luck – which, too often, the recipients prefer not to acknowledge. Dynastic inheritors have achieved lifetime financial independence the moment
they emerged from the womb, while others have arrived, facing a hell-hole during their early life or, worse, disabling physical or mental infirmities that rob them of what I have taken for granted. In many heavily-populated parts of the world, I would likely have had a miserable life and my sisters would have had one even worse.
I was born in 1930 healthy, reasonably intelligent, white, male and in America. Wow! Thank you, Lady Luck. My sisters had equal intelligence and better personalities than I but faced a much different outlook. Lady Luck continued to drop by during much of my life, but she has better things to do than work with those in their 90s. Luck has its limits.
I am always amazed to think that we were born by no choice of our own. We did not choose our parents, their wealth, their social status, our race, our gender, our genetics, or the nation (including its political or economic system) we were born into. We were born with certain opportunities that were presented to us, but we were not free to choose the presence of those opportunities. We were born able-bodied in a way that allowed us to work. We were born within reach of schools that could give us a basic education.
The question I ask of myself: How can we bring about a society in which the most privileged and lucky among us can use that power to create more, not less, fairness—to mitigate the terrible traps of Lady Luck?
But by that definition there is no such thing as achieving individual anything.
I agree the absence of misfortune of any type is a significant plus for achieving success, but it is not essential.
I credit my success in large part from the blessing of being fortunate with the absence adversity, but if we’re not for us avoiding poor decisions and irresponsible actions that alone would not have brought success.
There are many, many people born with the same degree of Lady Luck, opportunity, lack of hardships … call it what you will, who have not achieved significant success perhaps going backwards.
No, individual effort is the key if starting at the top or bottom. Look at the Vanderbilt’s who managed to spend wealth into oblivion and then the Fords whose legacy is still helping others.
Talk about being humble. WB is an amazing person.
Thanks, Carl, for a thought-provoking reply.
He is, he is. While I could never emulate his wealth, I do my best to emulate his character.
Two-thirds of billionaires are self-made, and they should be celebrated. They create entirely new industries, contribute to the well-being of their fellow citizens, and serve as role models for aspiring young people.
However, we should not tolerate those who use their wealth to seize control of democratic institutions and mass communication tools, believing they are superior to others. Such individuals pose a threat to society.
While I agree that many billionaires have helped advance our standard of living, it is clear that technological advances have almost always been the primary reason for the enormous economic development over the past 200 years. For example, does anyone doubt that an app comparable to Facebook would have been developed if Zuckerberg hadn’t been born?
Like you, I’m grateful to the entrepreneurs and the innovators for all of the things that make my life better and longer today. I do not envy their wealth. I can’t recall a time in my life when I spent more than a few seconds fantasizing about what I would do if I were suddenly that wealthy.
We do not tax unrealized capital gains. We should not tax unrealized capital gains. Billionaires, like the rest of us, do indeed pay income tax on the income they report. Billionaires may have a salary that is taxed exactly the same as my Required Minimum Distribution, or they may have no salary at all to pay taxes on. Instead, they may rely on the sale of stock to fund their lifestyle.
Your lucky million dollar lottery winner will pay close to $370,000 in Federal Income Tax, while the billionaire relying on Long Term Capital gains from the sale of stock, will only pay around $200,000.
The United States has a pretty significant national debt. Sooner or later we are going to have to deal with it. Less spending, higher taxes, some combination of both; I’m not a smart man, but I know the national debt isn’t going to reduce itself.
According to Federal Reserve data, the top 10% control more wealth than the bottom 90%. Somebody has to do the math.
When my Iraq dinars re-value, I’m gonna pay my fair share.
(Just kidding about owning dinars)
“According to Federal Reserve data, the top 10% control more wealth than the bottom 90%.”
No matter your philosophy or political leanings, how can anyone think that the numbers above reflect a fair society. That fact is not just a reflection of hard work but a society that is tilted towards the rich.
One other point: I can not fathom what the point is of having 10, 20 billion or more in assets? No matter who you are no one can spend all that money. I think it’s just for bragging rights.
I remember Sam Walton reflecting on the 1987 market crash. At that time, he was the richest man on earth and said “It was paper when I made [millions] and paper when I lost it.” The perspective of a billion dollars is more than I can think about. I can see the number, do the math, whatever. But I can’t see that amount of money doing anything positive in my life. The stress to simply give it away is equally overwhelming. That high tax rate may be a blessing of that perspective.
You just need to reframe your perspective. Go to your local bank and buy 40,000 dollars of Vietnamese dong and bobs your uncle… your a billionaire!
Or you can go on ebay right now and buy a 100 Trillion Dollar bill from Zimbabwe for a whopping $12.50 and be richer than Elon!
Can I get cash from the Prince?