San Antonio Express-News (Sunday)
TAXING WEALTH?
The Smart Money S.A.: Investigation shows the U.S. does tax wealth — but not for the wealthiest.
My fellow billionaires, I learned a really cool tax-avoidance trick earlier this month from a bombshell ProPublica story based on wealthy folks’ tax returns.
You should never come to this column for tax advice, but take my advice on this:
Step 1: Take zero salary at your job. (I know, I know. Just bear with me for a second.)
Step 2: Own highly valuable stakes in businesses, either through public shares or private ownership. Never sell these ownership stakes.
Step 3: Borrow the money you need to live on from the bank. Step 4: When that loan comes due, just refinance it with another loan and keep going, tax-free.
If you can do this, you will hardly owe any federal taxes. This is a beautiful strategy because it exploits the tax code as written.
Here’s why it works: The IRS is good at taxing salaries. (Hence, step 1.) The IRS is also good at taxing capital gains, provided somebody sells something that increased in value, such as property or shares in a company. (Hence, step 2.) But if you don’t have a salary and you don’t sell assets, it’s really hard for the IRS to collect federal income taxes from you.
This legal tax avoidance strategy works for anyone, but is so much easier for us billionaires. That’s partly because we own highly valuable shares in companies, and partly because we don’t have to earn much or sell much of our wealth to support our lifestyle, so taxable activities like collecting salaries and selling assets can be minimized. And it’s partly because banks will always refinance our big loans.
As ProPublica explained, this is how Jeff Bezos, Warren Buffett, Elon Musk and Mike Bloomberg get away with paying taxes on trivial amounts of their increasing annual net worth year after year.
The report showed the 25 richest Americans paid 3.4 percent of the amount by which their wealth grew from 2014 to 2018. Meanwhile, the median American household paid 14 percent of its income in federal taxes. This illustrates that the U.S. does not have an efficient way to tax very wealthy people — especially compared to its efficiency taxing middle-income earners.
A positive interpretation is that this is capitalism distilled to its essence. Bezos, Musk and Bloomberg are founders of world-conquering companies. They push the envelope of technology and customer satisfaction, and they reap the rewards. This purposefully capitalist tax code keeps these folks right here in the U.S. of A. If you are looking for evidence of this worldview, you would cite the fact Google, Facebook, Microsoft, Amazon and Apple — the most obviously world-transforming tech companies of the past 30 years — all originated in the United States.
Weirdly, those five companies originated from just two metropolitan areas, so a different geographic-origin story would focus less on the United States as a whole and more about what, exactly, is in the water of Seattle and San Jose.
In any case, some may shrug
and say words like, “Meh.” “Capitalism.” “Job creators.”
That would be a mistake. I could not disagree more that this is a “meh” story. ProPublica’s investigation is an essential contribution to the dialogue about fairness and inequality in America in 2021. Wherever you fall on the issue, you should read the story. It is free online.
The main issue posed to readers of the ProPublica article is not how to avoid paying taxes. The main issue — the one all tax discussions should be centered on — is about fairness.
If billionaires increase their net worth through legal means in a way that exacerbates our already gigantic inequality, is there a point at which we need to fix the tax code to move back toward fairness?
Before reading the report, I would have argued the U.S. does not have a tradition of taxing wealth, particularly without a sale of assets. But this belief, upon further examination, isn’t exactly true.
As a homeowner in the high property-tax state of Texas, I’m taxed every year on my household’s single largest asset. I pay 2.7 percent of the value of my house in property taxes — not because I sold it, but just because I own it. For most middleclass Texans, for whom their home also is their largest asset, this wealth tax is quite severe. For a billionaire, however, home property taxes are practically irrelevant as a percentage of their wealth.
Is this fair? I don’t know. I’m just raising questions about whether we need to tax wealth. And if we do, how do we design that system for fairness and efficiency? What is undeniably true is that we already tax middle-class wealth through property taxes, especially in Texas.
From the ProPublica investigation, we learn the average American household saw a wealth gain of $65,000 from 2014 to 2018. But over that fiveyear period, that same household paid nearly $62,000 in property and income taxes.
If it feels like it’s hard to get ahead and that taxes are a real barrier to building wealth, well, maybe it’s because the average household paid out 95 percent of its five-year wealth gains in taxes. Again, compare that with the 3.4 percent paid by the country’s wealthiest 25 people.
These are important facts to think about. Is it fair?
Some have objected to ProPublica’s investigation because it was based on leaked tax returns. I disagree with the objection. I’m in favor of radical transparency and believe everybody’s tax returns and salaries should be made public, always. In this specific case, the public interest is served because we need to have a conversation about taxation and fairness.
The good news is that ProPublica published only a fraction of the information it has about wealthy folks’ tax returns. We will learn even more over time from their data set. I’m looking forward to it as this discussion about fairness continues.