The writer, the chair of the Patriotic Millionaires, is a former managing director at BlackRock and co-author of ‘Tax the Rich!’
The US has long had two tax systems: one for people who work for a living, and another for the wealthy. Many of America’s richest billionaires paid virtually no taxes on hundreds of billions of dollars in added wealth over the past decade, an eye-popping new report from ProPublica has revealed.
The details of this story, based on leaked Internal Revenue Service data, may be shocking. But it’s really just further confirmation of something that we’ve known for a long time. And it isn’t about loopholes, it’s about the fundamentally different treatment for wealthy people that is baked into the core of the US’s tax code.
People who work for a living — the vast majority of Americans — pay taxes at rates that vary from about 10 per cent to about 40 per cent. Some money is withheld from their pay cheques every week, and once a year they file a tax return and either have to pay the IRS a little bit more or get a small refund of the excess amount that was withheld.
The wealthy, on the other hand, don’t need pay cheques. They can just use financial derivatives or loans to get money to live on, and so they do not need to have any “taxable income”. They can hire accountants to organise their finances in order to decide for themselves if and when to pay taxes. Because the US only taxes capital gains upon the sale of an asset, wealthy individuals are able to accumulate vast fortunes completely untaxed until they decide to cash out.
That is how the 25 wealthiest Americans were able to accumulate $401bn from 2014 to 2018 and only pay 3.4 per cent of that amount in taxes. They all became fantastically more wealthy, but because they didn’t sell the assets they owned that increased in value, they barely owed any taxes on that increase in wealth.
The distinction our tax code makes between making money from an “increase in wealth” and from “income” creates a massive advantage for only the wealthiest Americans.
It says that the way rich people make money, through investments increasing in value, shouldn’t be taxed, while the way everyone else makes money, income, should be. It’s an entirely arbitrary distinction. Yes, there is a difference between an asset increasing in value and actual income. But for the richest Americans it doesn’t matter. Wealth is wealth, no matter what form it’s held in.
There is nothing built into the economy that says you can’t tax unrealised capital gains. It’s not an immutable law of economics, it’s a deliberate policy choice, a choice that, based on the explosion of inequality in the US in recent decades, appears to be a pretty bad one. Wealthy investors like me, a former Wall Street executive, simply should not be allowed to pick and choose when we want to pay taxes on our investments.
There are two solutions here. The first is to simply tax unrealised capital gains every year. Senator Ron Wyden has already introduced a proposal he calls mark-to-market that would do exactly that, and he now appears to want to reintroduce it in the wake of the ProPublica investigation.
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The second is to levy an annual wealth tax on the ultra-wealthy, as Senators Elizabeth Warren and Bernie Sanders have proposed.
Both approaches have their merits and their challenges, but either would be a dramatic improvement over the current status quo.
While continuing negotiations in Congress over tax increases on the wealthy don’t appear to include either proposal at the moment, public pressure for aggressive action on this issue is only going to continue to grow, and for good reason. There is no defending a tax code that allows the country’s wealthiest individuals to pay almost no tax.