8 June 2021   Leave a comment

ProPublica is a highly regarded lefty think tank that does serious investigative reporting. It has published a report entitled “The Secret IRS Files: Trove of Never-Before-Seen Records Reveal How the Wealthiest Avoid Income Tax“. It is a remarkable analysis in that ProPublica has had access to “a vast trove of Internal Revenue Service data on the tax returns of thousands of the nation’s wealthiest people, covering more than 15 years. The data provides an unprecedented look inside the financial lives of America’s titans, including Warren Buffett, Bill Gates, Rupert Murdoch and Mark Zuckerberg. It shows not just their income and taxes, but also their investments, stock trades, gambling winnings and even the results of audits.”

The report does a good job of establishing a base line for average Americans: “In recent years, the median American household earned about $70,000 annually and paid 14% in federal taxes. The highest income tax rate, 37%, kicked in this year, for couples, on earnings above $628,300.” But the analysis of the tax returns of 25 rich people indicates that the rich pay significantly less than that average case. The report attempts to establish a “true” tax rate for those people and the results are devastating:

“The results are stark. According to Forbes, those 25 people saw their worth rise a collective $401 billion from 2014 to 2018. They paid a total of $13.6 billion in federal income taxes in those five years, the IRS data shows. That’s a staggering sum, but it amounts to a true tax rate of only 3.4%.

“It’s a completely different picture for middle-class Americans, for example, wage earners in their early 40s who have amassed a typical amount of wealth for people their age. From 2014 to 2018, such households saw their net worth expand by about $65,000 after taxes on average, mostly due to the rise in value of their homes. But because the vast bulk of their earnings were salaries, their tax bills were almost as much, nearly $62,000, over that five-year period.”

The difference in tax rates is explained by the difference between “income” and “wealth”. The US Federal tax code only taxes income. The distinction between wealth and income is important and in 1920 the US Supreme Court “….ruled that income derived only from proceeds. A person needed to sell an asset — stock, bond or building — and reap some money before it could be taxed.

“Since then, the concept that income comes only from proceeds — when gains are ‘realized’ — has been the bedrock of the U.S. tax system. Wages are taxed. Cash dividends are taxed. Gains from selling assets are taxed. But if a taxpayer hasn’t sold anything, there is no income and therefore no tax.”

The US tax system favors the accumulation of capital and the logic behind that bias is that capital is the source of investment and therefore should be favored for economic activity. The low taxes paid by these 25 rich individuals is therefore legal and not necessarily a defect of the Federal income tax, although the report also identifies various loopholes in the income tax system which favor the rich.

There are serious difficulties in taxing wealth, and Senator Warren (D-MA) has proposed a wealth tax. According to CNBC:

“About 100,000 Americans — or, fewer than 1 in 1,000 families — would be subject to a wealth tax in 2023, according to Emmanuel Saez and Gabriel Zucman, economists at the University of California, Berkeley.

“The policy would raise at least $3 trillion over a decade, they found.”

Such a tax is unlikely to pass the US Congress, but we need to think more seriously about genuine alternatives to taxing just income. The deliberate decision to avoid taxing wealth makes the US tax system highly unfair and deprives civil society of the necessary revenues to maintain a robust infrastructure. It is unfortunate that this discussion is so arcane because the consequences of ignoring wealth is cruel and brutal.

“Our analysis of tax data for the 25 richest Americans quantifies just how unfair the system has become.

“By the end of 2018, the 25 were worth $1.1 trillion.

“For comparison, it would take 14.3 million ordinary American wage earners put together to equal that same amount of wealth.

“The personal federal tax bill for the top 25 in 2018: $1.9 billion.

“The bill for the wage earners: $143 billion.”

Posted June 8, 2021 by vferraro1971 in World Politics

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