Taxing the rich, a tax issue

ProPublica, which identifies itself as “a non-profit newsroom investigating abuse of power,” recently published an article titled “How the Richest Avoid Income Tax.”

Using leaked information on tax returns, the article claimed that Amazon billionaire Jeff Bezos completely avoided income taxes in 2007 and 2011, while Tesla’s Elon Musk achieved the same feat in 2018. .

Adding Warren Buffett and Michael Bloomberg to the list, ProPublica calculated an “effective tax rate” between 0.1% and 3.27% from 2014 to 2018. ProPublica compared this to the federal tax rate of 14 % paid by median household with income of around $ 70,000 per year.

What is a “real tax rate”?

For ProPublica, the real rate is based on wealth growth, not taxable income. The growth of wealth includes the increasing value of the shares of society held by these men. For Bezos, the growing value of Amazon shares has risen to more than $ 90 billion, which has not been taxed.

Meanwhile, Bezos paid $ 973 million, or 23% of his mind-boggling $ 4.22 billion in taxes.

The other billionaires – Buffett, Bloomberg and Musk – suffered federal tax rates of 19%, 29% and 30%, respectively.

So the first of two separate questions is: How do billionaires reduce their tax rate from the federal maximum of 37%?

For Bezos, the answer in 2007 and 2011 was that investment losses completely made up for his other income. Maybe unusual but not unfair.

Michael Bloomberg cut his taxes by making nearly $ 1 billion in charitable contributions. In a statement, Bloomberg said 75% of its income goes to taxes and charity. Unusual? Yes. Unfair? Not necessarily.

Realized capital gains are another reason tax payments are low. When these people sell stocks, the maximum federal rate is 24%.

What can be done? President Biden has proposed an increase in the maximum income tax rate from 37% to 39% and an increase in the maximum capital gains tax rate from 24% to 43%. These would definitely increase the numbers unless Bezos, Musk and. stop selling stocks because the rate is too high.

Another equalization measure is Oregon Senator Ron Wyden’s proposal to tax unrealized capital gains. Each year, a tax would be payable on increases in the value of the asset, whether or not the asset was sold. In a way, this could be a double game – a capital gains tax and a tax on any capital gains that might be made on the sales needed to raise the funds needed to pay the tax.

Finally, there is the wealth tax which would capture not only a part of the unrealized future capital gains but a part of the past capital gains. The best-known proposals are those of Senators Elizabeth Warren and Bernie Sanders who cap at 8% of wealth annually.

What should be done? This is a more difficult question. Wealth taxes and taxes on unrealized gains are notoriously difficult to administer as they require annual valuation of private businesses, copyrights, works of art, jewelry, etc.

Income taxes? The choices are higher maximum rates or the imposition of a significant alternative minimum tax rate or a combination of both.

Jeffrey Scharf is the founder of Act Two Investors LLC, a registered investment advisor. Contact him at [email protected]

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