What ProPublica Gets Wrong About the Wealthy and Taxes

Tax laws have been designed to encourage business investment, economic growth, and charitable giving.

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ProPublica obtained the tax returns of the richest Americans and discovered what every informed person already knew: They don’t pay as much in income taxes as some people would like them to. This is being called a great scandal by many Democrats and liberal journalists.

Meanwhile, that these returns were almost surely leaked by someone at the IRS seems not to bother a lot of the same people. There’s no way ProPublica got this information from dozens of high-priced accountants and attorneys. Barring the possibility that this was a computer hack—which itself would be a monumental scandal—this is outrageous. Weaponizing the IRS for political purposes is not just a crime, it is a long-term political disaster. 

But I want to focus on the fake scandal.

Billionaires often pay little in income taxes because billionaires don’t typically make their money from a salary. Billionaires exist for the most part because they own assets—stocks, businesses, commodities, property, etc.—and the paper value of those assets amounts to the bulk of their wealth. And in America, we do not tax wealth. 

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  1. Ryan King

    This sums up my thoughts on the issue almost precisely! Good article @jonah!!

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    Ben Connelly

    For some reason for the left, anything immoral or illegal if done to a normal person is okay if it’s the rich. Violate the law to get someone’s confidential tax information? Take money from someone against their will in order to pay for something you want? This whole thing is ridiculous.

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    Mark

    Fine, but where is the conservative alternative to wealth taxes? The current system of taxing and spending is a monstrous abdication of responsibility to our future. Simplify the tax system and connect it to spending. Take all the subsidies and gimmicks out of the tax code so that the same income earned by different people yields the same amount of tax. Set one tax on realized income and match it to spending in the long run. Then voters will be interested in spending and begin to demand cuts and results from the remaining spending.

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      Luke Thompson (not that one)

      The conservative response is that we're already taxing way too much and insisting that we tax more before we focus on the actual issue is like insisting that we expand the barns we're using to store the grain before we deal with the fact that those same barns are on fire.

      Most of what this ProPublica article is treating as gimmicks is just common sense. "Wealth," as they're defining it, is mostly an imaginary number. None of these people could actually come up with anything close to that as cash within ten years. That's part of why you can use a wealth tax as a litmus test. Anyone who proposes one doesn't know what they're talking about, is lying to you, or wants to destroy the economy. There isn't a fourth option. Every state that's tried it has seen horrendous consequences and either gotten rid of it or seen their economy collapse.

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  4. DJ

    I oppose a wealth tax but support *much* higher funding for the IRS to go after tax cheats.

    Unlike voodoo economics, this truly would pay for itself.

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      snoball

      I'm not so sure that it would. Remember, most of the policies being discussed regarding increased IRS enforcement are those that would drastically impact the poor. Increased audits and bank reporting requirements wouldn't affect someone wealthy, it would definitely affect, say, a waitress or small business owner who deals in a lot of cash every day or someone who works under the table. And this is where I think Biden and his people are really looking to go.

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      1. DJ

        Where has that been discussed? Everything I’ve seen is about how the IRS has all but given up on enforcement against the wealthy.

        https://www.marketwatch.com/story/irs-misses-substantial-tax-evasion-by-the-wealthiest-americans-this-study-calculates-just-how-much-11616502277

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          snoball

          A part of Biden's proposed infrastructure bill contains a provision that forces banks to report all deposits to the IRS, so that they can later be matched against the individual's tax return. That doesn't really affect wealthy people. That affects people who deal in a lot of cash, who tend to be more downscale.

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  5. Jon L

    A much simpler tax code:
    Personal Income tax only (no business, payroll or inheritance tax) with a single deduction (median income reported for household size in last tax year) and a single tax rate (federal expenditures of previous tax year / all income reported above single deduction of previous tax year) with sale of investments/personal house not taxable if turned over into other investments/home in 0.5/2 years; inherited wealth not taxable unless sold and not reinvested in above time frame; taxable income from the sale of investments or home discounted by the cumulative CPI from year of purchase.

    This produces a simple tax code with: no hidden taxes; all income being taxed is taxed once and equally; approximately 50% of taxpayers exempt from federal taxes; and an average tax rate that progressively increases on all income above the single deduction. If total income is 2x/10x/100x the standard deduction, average tax rate on total income is of the single tax rate X 0.5/0.90/0.99.

    Wealth taxes are impossible to clearly define and expensive to implement. New appraisals every year? Would the sale of assets to pay the tax would be taxable events? Would there be refunds for loss of value of the wealth previously taxed?

    As for Mr. Bezos's tax bill: Amazon has ~400,000 US employees. Assuming full and part timers average $15/hr at full time or ~30,000 a year these individuals and Amazon pay over $1.5B in SS taxes alone. Does Mr. Beozo's get any credit for these contributions to the federal fiscal nut?

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    Pat Riot

    Now imagine you need to sell part of your baseball collection to pay medical bills, which will incur a taxable event. But because you have the best accountants money can buy and relationships the country's biggest banks, you can simply borrow money against that baseball card collection (which the banks are sure will be safe in that shoebox you keep them in the garage) and not pay any taxes at all on the sale. Easy peasy.

    Oh wait, you are a mere collector of baseball cards and not a billionaire, so this is all fantasy. In reality you're going to get tagged by the IRS for its pound of flesh just like the rest of the working stiffs when you need to sell your cards. All while people thousands of times richer than you pay nothing to help keep our country going.

    I agree about not taxing static wealth, but that doesn't mean loopholes shouldn't be closed. It's absolutely naive to say, "tax laws have been written to encourage investment". Oh come on. Sure, maybe this is true *sometimes* but we all know high-end political donors also get the laws to bend to their will as well.



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      Luke Thompson (not that one)

      Now imagine you know how loans work and know that borrowing money means you have to pay interest, which gets recorded as income on someone else's ledger, and actually means you come out behind. Even at 0% interest, you still end up paying the loan back, so you've not actually made a profit.

      The notion that that's a loophole requires an extraordinary ignorance of the subject. That your greed has led you to hate everyone with more money than you doesn't actually mean that they're evil.

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        Pat Riot

        Um, incredibly tiny interest. This scheme is *exactly* what was revealed in those leaked tax returns, and this is a pretty standard practice for people who have a lot of equity in their companies.

        When you incur a taxable event on your sold stock, you'll pay at least 20% on the sold value (e.g. if you are a company founder etc. like Jeff Bezos). That's easily 10 times what you'll end up paying in interest, and most of that capital is reinvested anyhow into things that beat the heck out of the near-zero interest rates.

        Anyhow, I don't know what you mean (nor do I want to know) about the "hate" and "ignorance" stuff. I'm not an expert in IRS loopholes but I've used enough of them to know that the laws are rigged to help people like me who have great accountants skip out on taxes.

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        1. CliffTX

          Presumably, when the borrower pays back the loan they're using income from some source. Presumably again, they've paid taxes on that income.

          I suppose the work-around is that they can pay the loan back in a subsequent year when they have losses so they can offset the income and not pay taxes on it.

          If that's the way it works, it's seems pretty effective and not some sort of shady dealing that's only available to the super-rich.

          Is there some other aspect to using loans that yields a better, more unsavory benefit?

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      mel ladi

      I was not all that political until I read Winner Take All Politics (Hacker/Pierson) and read the studies it cited and much more recent ones. Wealth buys political influence which ends up affecting the day-to-day life of us all. The most stunning finding to me was that the richer you are, the more likely the governmental initiatives you desire will come to fruition. If you’re poor there is a negative correlation.

      Soros, Koch, Mercer, Gates, Adelson, Bezos — name your favorite boogeyman — truth is they have direct access to politicians and a network of wealthy friends who also have that access. It creates a political inequity. Some of us are more equal than others.

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    Ed P

    “Why is conflating “taxation” with “income taxes” wrong for some Americans but speaking truth to power for others?”

    Because our income taxes are designed to be progressive ever since their inception 150 years ago. So when billionaires skate on this part they are supposed to be paying most on, it rightly strikes most of us as unfair.

    Its not supposed to be progressive in favor of the richest.

    C’mon Jonah. We have been living through a gilted age perhaps more stark and severe than the original wherein the income tax was invented to tame some of the glaring income inequality

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      Narwhal

      Taxes on long term capital gains are also progressive. Short term capital gains are taxed under income tax.

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        Ed P

        And its really easy to dump your stock into a trust and sock it away from Uncle Sam etc.

        I’m not for a wealth tax. But I am very much in favor for revitalizing and reforming estate/trust taxation. As a wealthy person, I know firsthand its quite easy to never pay tax on investment income. Our tax code is just rife with loopholes and opportunities to exploit if you have the money to hire good accountants. It is unfair when this is the dynamic for many of us while others have their taxes sent to Uncle Sam directly by their employer before they ever see the money - and this is the tax meant to level the playing field

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          Narwhal

          I’m not familiar with how trusts work. Can you explain how very wealthy people use them to avoid paying taxes?

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            Ed P

            There’s not just one scheme. There are countless. And most are quite involved and tedious.

            But for example, my family used a GRAT to pass down stock in a family business. It is a very clever accounting trick - google it. Totally legal and litigated, and was highly effective for us. It strikes me as odd the IRS has guidance on how to operate such devices rather than regulation meant to close these loopholes.

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    Narwhal

    From the article, “ The underlying premise of the people complaining the loudest about all of this is inherently unreasonable. For instance, politicians like Sens. Bernie Sanders and Elizabeth Warren often claim that if billionaires and millionaires simply ponied up a fraction of their wealth, we could have socialized medicine and a Green New Deal.

    No, we couldn’t. You could confiscate all of the wealth of the top 1 percent—seize their bank accounts and stock portfolios, kick them out of their homes, sell all their stuff at auction—and it wouldn’t come close to paying for it all.”

    From Forbes in 2020, “According to the latest Fed data, the top 1% of Americans have a combined net worth of $34.2 trillion (or 30.4% of all household wealth in the U.S.), while the bottom 50% of the population holds just $2.1 trillion combined (or 1.9% of all wealth).”

    https://www.forbes.com/sites/tommybeer/2020/10/08/top-1-of-us-households-hold-15-times-more-wealth-than-bottom-50-combined/?sh=3dd0f6265179

    Sen. Sanders claims his MFA proposal would actually save money and cost less than we currently spend on health care costs as a country, whether it would or not is at least debatable. For the sake of argument lets say it would be cost neutral. His says his Green New Deal would cost $16.3 trillion over ten years. https://berniesanders.com/issues/how-does-bernie-pay-his-major-plans/

    So, the Green New Deal could be paid for by collecting around half of the wealth of the top 1%. But, that doesn’t mean the GND is a good proposal in every way or that collecting/confiscating around half of the accumulated wealth of the top 1% to pay for the GND is a good idea or even feasible.

    Theoretically the US government could also collect/confiscate over half of the accumulated wealth of the top 1% to completely pay off our entire national debt. I’m not claiming that would be a good idea or feasible. Or the US government could collect/confiscate around 1/5th of the accumulated wealth of the top 1% to pay off the portion of our national debt held by foreign governments and individuals. https://www.statista.com/statistics/246420/major-foreign-holders-of-us-treasury-debt/

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    1. Jon L

      And once we confiscate much of this wealth, we had better reform our wayward tendencies as we certainly won't get to do it twice. That goose, once feathered, is cooked.

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        Narwhal

        Or maybe, and hear me out, maybe we don’t collect/confiscate around half of the accumulated wealth of the wealthiest 1% for any reason, GND or paying off the national debt.

        I’m guessing the subsequent stock market crash would be biblical.

        Or I guess we could bring back the Roman practice of proscriptions. What could go wrong?

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    Narwhal

    “Meanwhile, that these returns were almost surely leaked by someone at the IRS seems not to bother a lot of the same people.”

    Thankfully AG Garland seems to be very bothered by what happened.

    “There’s no way ProPublica got this information from dozens of high-priced accountants and attorneys. Barring the possibility that this was a computer hack—which itself would be a monumental scandal—this is outrageous.”

    Yup.

    “Weaponizing the IRS for political purposes is not just a crime, it is a long-term political disaster.”

    100% agree.

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  10. Joe Curtis

    Something's very wrong when a razor thin majority can so easily juke the system to spend astronomical amounts of money simply by betting-on-the-come that someone will find the cash when it's needed. So really, "[w]hat difference, at this point, does it make?"

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