Yes, the super-rich are different from the rest of us. Many of them pay very little income tax.
Some of the richest executives in the world, including Warren Buffett, Jeff Bezos, Michael Bloomberg and Elon Musk, pay little to no taxes on their net worth, a ProPublica report revealed Tuesday.
“The tax law is not intended for hired workers,” said Eric Pierre, an Austin, Texas-based auditor and owner of Pierre Accounting.
Most Americans earn income from their jobs, such as wages, salaries, or other employer-provided benefits.
However, the top 1% often receives income from interest, dividends, capital gains, or rent from their investments, known as capital income.
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Typically, the more someone earns, the higher the percentage of capital income and the lower wages they receive each year, the Tax Policy Center found.
While most people pay tax through their paycheck, the top 1% may not see any income on their tax returns. Here’s why: There are several ways to delay or avoid taxes on investments.
For example, if someone has $ 1 million in inventory that grows to $ 2 million, they owe no tax on profits until they sell.
In addition, they can reduce the tax burden by scheduling the sale or offsetting profits against other losses.
Another strategy can be to use valued real estate as collateral for buying new investments.
The wealthy can hold assets until their death to avoid capital gains taxes and to provide heirs with inherited wealth valued at the time of their death.
American billionaires grew their wealth by 55%, or $ 1.6 trillion, during the pandemic, according to analysis by left-wing Americans for Tax Reform and the Institute for Policy Studies.
President Joe Biden wants to curb tax avoidance from the 1% by levying taxes on inherited assets with profits greater than $ 1 million.
He has also called for the highest capital gains rate to be raised from 20% to 39.6%, which is in line with his proposed income tax rate for top earners.
Tax strategies of the rich
Although the report didn’t reveal detailed strategies, there are lessons for Americans looking to cut taxes and build wealth, Pierre said.
Some of these tactics could include taking out home loans to buy more real estate or starting a side business and considering legitimate tax deductions.
“It’s a rethink,” he said.
Of course, not everyone has the resources or the appetite for these strategies, he said. But Americans might start thinking about how to diversify their income beyond their paychecks.
“Maybe you don’t get the billions or pay 3.3% [tax] “But you can cut your taxes from, say, 25% to 20% and from 12% to 14% if you adjust the way you use your money.”
But everyone’s situation is different, so it’s important to speak to a CPA or financial advisor, he added.
Better ways to tax the rich
It is clear that the rich have found ways to avoid taxes, but opinions are conflicting about how to solve the problem.
Some policymakers have called for the wealth growth of the wealthy to be taxed each year in what is known as the “mark-to-market” system, along with a wealth tax.
“There are better options for policymakers looking to increase the tax burden on the rich,” said Erica York, an economist with the Tax Foundation’s Center for Federal Tax Policy.
The annual taxation of wealth growth can be “extremely complex”, especially from an administrative point of view. There could be “tricky valuation questions” for assets and companies, York said.
“You would also tax savings and investment decisions,” she added.
Instead, lawmakers could consider a so-called progressive consumption tax used by countries affiliated with the Organization for Economic Co-operation and Development, she suggested.
Another option could be value added tax, a levy that is levied on the sale of goods and services.
The legislature can also consider a national sales tax. Both could avoid the challenges of levying wealth growth taxes every year, York said.