The day after the richest man in the world announced that he was fulfilling his lifelong dream of flying into space on a flight from his own private company, a bombastic investigative journalism reported that the billionaire “didn’t pay a cent in federal income taxes” in 2007 and 2011.
Amazon boss Jeff Bezos, founder of the private space company Blue Origin and, according to Bloomberg data, the richest man in the world, was one of the billionaires whose tax returns were collected and analyzed by the non-profit news organization ProPublica.
A mobile billboard demanding higher taxes for the ultra-rich shows a picture of billionaire businessman Jeff Bezos near the U.S. Capitol on the 17th, DC and New York City on Tax Day.
The ProPublica article reported that despite their dramatically growing net worth, the ultra-rich were able to avoid paying income taxes through legal accounting maneuvers. While the middle American household paid 14% of their income in federal taxes, the richest 25 Americans had a “true tax rate,” according to ProPublica, averaging 3.4% of the amount their wealth grew each year between 2014 and 2018.
Bezos was not accused in the ProPublica coverage of violating tax laws based on a plethora of IRS documents the news organization obtained from an unnamed source. ABC News did not independently obtain the individuals’ private tax information. A Bezos spokesman did not respond to ABC News’ request for comment.
The results have left many questioning how US tax law could allow the country’s top earners to legally evade income tax despite their growing wealth, at a time when the gap between the haves and the dispossessed is widening. One of the main questions is what the tax law treats as income.
SpaceX founder Elon Musk in Washington, DC on March 09, 2020, Blue Origin founder Jeff Bezos in Washington, DC on October 22, 2019.
“This is a feature of our income tax system that has been around for a century,” Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, told ABC News. “We don’t have a wealth tax, we have an income tax.”
“Income tax tends to favor the rich and capital owners over the workers, and the rich are different from you and me, they hold a lot of capital and we tax that capital lightly,” added Rosenthal. “We wait until they actually sell their assets before we pay a tax.”
However, one of the problems with reforms like taxing unrealized gains is that many average taxpayers benefit from the same provisions that allow the ultra-rich to cut their tax burden significantly.
Unrealized capital gains
The wealth of the ultra-rich tends to be more tied to stocks than that of working-class Americans, who may keep their money in a bank or elsewhere.
The richest 1% of households in the US own more than half of all publicly traded stocks in the market, according to the Federal Reserve, and the bottom 50% own less than 1%. As the value of the stocks held by these titans increases, their net worth increases dramatically – but they don’t have to pay taxes on those asset gains unless they sell the stocks.
In contrast, even small income on a classic savings account with interest rates of a fraction of a percentage can be taxed if they exceed a certain level.
Facebook’s CEO Mark Zuckerberg will take part in the “Tech for Good” summit in the Elysee Palace in Paris on May 23, 2018.
“That is one of the reasons why the rich can amass so much wealth without having to share large parts of it with the government,” said Rosenthal.
While some think law is being circumvented, “it’s perfectly legal,” Rosenthal said.
“The IRS only enforces the laws that are on the books,” he added. “Congress must change the law if we don’t like the results.”
President Biden has proposed drastically increasing capital gains taxes for those earning over $ 1 million to bring the rate in line with regular income.
‘Previous losses’ and charitable donations
According to Garrett Watson, a senior policy analyst at the nonprofit, bipartisan tax foundation, the billionaires have also reportedly used other legal methods to lower their income tax rates, such as deducting “past losses” and philanthropic donations.
“There are a variety of provisions in tax law that allow all taxpayers, including the people at the top, to lower their taxes owed,” Watson told ABC News. “If someone has had a big loss in a given year, which can especially happen with corporate income, they can offset some of their taxes that they would otherwise owe because they have that loss.”
“That’s one thing that can explain a lot, the second is other provisions of the code we created to encourage behavior,” he added. “A big thing is the charity deduction, which allows people to donate to causes they believe in, but then also reduce the taxes they pay on their income.”
Finally, the ProPublica article outlines how the ultra-rich can avoid paying taxes by buying assets that are increasing in value and then borrowing money against those assets for tax-free consumption.
While income and stock sales are taxed, borrowing provides tax-free access to cash – and, for the ultra-rich, likely single-digit interest rates. This “buy, borrow, die” approach also enables the wealthy to pass on their wealth, which has accumulated unrealized gains, to heirs without paying taxes on those capital gains.
A double-edged sword
Watson warned that a rush to tax unrealized gains to make the ultra-rich pay a seemingly fairer share of taxes could potentially place an inappropriateness on others – such as homeowners who have risen in the value of their homes due to the market.
Introducing a progressive consumption tax – a taxation based on consumption, not income – might be a better policy approach to increasing the taxes the rich pay, argues Watson, and poses fewer administrative and economic challenges than levying one Property tax.
Watson and colleagues argued in a blog post that wealthy households could not use the “buy, borrow, die” strategy under a consumption tax that includes financial activities because the household would be subject to consumption tax even with the funds borrowed.
Rosenthal added that there are “constitutional restrictions on moving more towards a wealth tax”.
“Not to say that we shouldn’t change our constitution, but in the current context it is difficult to levy taxes on wealth,” he said, referring to a debate that has raged over the past few years.
Rosenthal said President Joe Biden’s proposal to tax unrealized gains on death, however, appears “perfectly reasonable”. However, some Republicans are blowing this up as a death tax, Rosenthal said.
Warren Buffett in his office in Omaha, Nebraska on August 4, 2015.
If someone owns stocks in a small tech company that grows into a tech giant like the social media and e-commerce companies that turned some Americans into billionaires, that stock could go from zero to, say, $ 500 million said Rosenthal.
Under the current system, “that $ 500 million in profit would be entirely tax-free if he kept it until he died and then passed it on to a child,” said Rosenthal.
He argued that a tax on unrealized gains on death “will ensure that all profits are taxed – and reduce the incentive for billionaires to keep holding those stocks in hopes of avoiding taxation entirely”.
Jeff Bezos, head of Amazon, is seen at a corporate event on September 25, 2019.
Ultimately, Rosenthal says, “We need better tax laws, not better enforcement, to collect money from the rich.”
“We live in a fantastic democracy that promotes economic and political freedom and in our country only lives from it,” he said. “But taxes are the price of democracy.”