The ProPublica report on billionaire taxes could rekindle the political debate

Taxes were a major political controversy earlier this year when President Biden proposed levying taxes on businesses and high-income Americans. But now that leaked personal tax records appear to show billionaires pay little to nothing in income taxes, the debate might take center stage.

ProPublica released details of the personal tax returns of 25 of the richest Americans, documents the news agency said it received from sources within the Internal Revenue Service. The nonprofit did not disclose who provided the documents. US Attorney General Merrick Garland has promised to investigate the matter as a top priority.

The revelation of tiny real tax rates among the richest Americans comes amid a yawning wealth gap and a growing debate about what to do about it. Even before the arrival of COVID-19, a greater portion of the nation’s wealth was being placed in fewer hands. The pandemic has only widened this discrepancy. Lower-income Americans fell behind due to job losses and other disruptions, but the rich thrived as real estate, business interests, and the stock market rose in value.

The timing of the leak does not seem to be accidental. ProPublica claims that the “public interest in knowing this information at this crucial moment” outweighs legitimate concerns about invasion of privacy. The organization, a nonprofit newsroom investigating abuse of power, has promised further updates on billionaires’ tax practices, including their use of loopholes and tactics to avoid audits.

What the report revealed

In some ways, the ProPublica report wasn’t all that earth-shattering.

It is widely believed that many of the richest Americans pay relatively little in taxes, sometimes below what middle-class households pay. This is mainly because the rich get most of their wealth from investments, rather than from salaries, wages or other income that is taxed each year. Tax rates on capital gains are lower than normal income tax rates and there is more flexibility to defer taxes on profits.

However, details of the actual tax returns were revealing. Many of the richest people haven’t paid any income tax in one or more years in the past decade and a half. That list includes Jeff Bezos, Elon Musk, Michael Bloomberg, Carl Icahn, and George Soros, according to the report. Others, like Warren Buffett, paid significantly less than 1% tax as a percentage of their net worth.

The 25 wealthy Americans whose earnings were leaked together paid $ 13.6 billion in income taxes over the five years from 2014 to 2018, ProPublica said. Still, their collective wealth rose by $ 401 billion over the period, meaning they paid the equivalent of 3.4% in taxes over the period, based on wealth gains.

You may have noticed that ProPublica mixed apples and oranges in comparison. The news agency calculated what it thought was the tax bill if changes in the billionaires’ net worth were continuously taxed, such as income. Under current law, capital gains are not taxable. Profits are also not taxable if the underlying assets are not sold.

How is that possible?

The ProPublica analysis examined several tax avoidance strategies – all legal – that the rich rely on more than most Americans.

Some billionaires only pay little or no income tax because they don’t make a lot. That’s because they don’t receive much in salaries or wages, but prefer to push their sizeable portfolios higher.

But they still need the cost of living, and for that many of the rich have borrowed against their growing fortunes, ProPublica said. Loan proceeds are not taxable and certain debt costs are deductible. Some wealthy individuals also make a living on dividends, which are usually taxed at the lower rates that apply to capital gains.

Another practice has been for billionaires to donate heavily to charities or other philanthropic causes, which has allowed them to lower their taxable income.

But the main strategy of the rich, as highlighted by ProPublica, revolves around capital gains. Because long-term investment gains or gains are taxed lower than normal income, the wealthy can reduce their obligations. This allows them to pay an overall effective tax rate that may be lower than that of middle-class Americans.

Why are profits so crucial?

All Americans have access to low capital gain rates, but not everyone owns stocks, real estate, or other assets to make such gains. Millions of Americans do not own such assets, which also helps explain the growing wealth gap.

Not only are tax rates lower on long-term profits – the top 20% versus 37% on regular income – but owners of stocks and other investments have more control over when those taxes are paid. Wages are taxed in the year of entry, collected through wage deductions or estimated payments, but capital gains taxes are only incurred when an investment is sold. That could be years, if not decades, later.

In fact, due to various estate planning rules, taxes may never be levied on some profits. One of them is the automatic exemption of nearly $ 11.7 million in net worth from taxes per person in the event of death (or $ 23.4 million for a married couple).

Another includes the ability to eliminate most or most of an accumulated taxable profit on the death of the owner through what is known as topping up the “base”. The basis is the amount of a non-taxable asset. An increase or increase in the value of the asset around the time of death, as the tax code allows, can make the tax table for heirs clean.

“The result is that great fortunes can be passed on largely intact from one generation to the next,” ProPublica said.

Where is the debate going here?

Biden’s proposed reforms would change the country’s policies in several ways that could generate more tax revenue from the richest Americans (or at least top earners). These include raising the top income rate for individuals from 37% (for those with annual incomes over $ 400,000) to 39.6% and eliminating the lower rates on capital gains for those individuals, which means that profits are taxed the same as income.

Then there is a proposed 10 percentage point millionaire surcharge that would apply to both income and capital gains / dividends. The Democrat-backed measure would affect 0.2% of taxpayers – those with incomes over $ 1 million (or $ 2 million for couples).

As a more fundamental change, the government could tax unrealized capital gains.

According to a proposal by Senator Ron Wyden (D, Oregon), accrued profits would be taxed each year and those assets would be treated as if they had been sold. This provision would not apply to more than 99% of taxpayers and would exclude retirement accounts, single family homes and farms. Nor would it apply if assets depreciate in value. The tax revenue received after Wyden’s proposal would support social security.

Taxing unsold real estate would be easy enough for assets like stocks, mutual funds, and the like, the prices of which are updated regularly. It would be more difficult with real estate that is difficult to evaluate, such as works of art or shares in private companies. For these assets, Wyden has proposed a “look back” rule where tax is collected when the asset is eventually sold.

However, the complexity of taxing unrealized gains presents hurdles. But if the wealth gap continues to widen, these and other proposals could be redesigned.

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