Jonathan P. Baird

There is deep cynicism about the ultra wealthy evading taxes. People expect it. Still, it was disconcerting to read ProPublica’s story about how the ultra wealthy are still gaming the system to avoid paying their fair share of taxes.

I am reminded of an old quote from Eugene V. Debs:

“There is something wrong in this country; the judicial nets are so adjusted as to catch the minnows and let the whales slip through.”

The whales, in earlier days known as robber barons, play by their own rules. ProPublica shows that many of our richest citizens have figured ways to pay no or minimal taxes. To name a few, Jeff Bezos paid no federal income taxes in 2007 and 2011; Elon Musk paid no taxes in 2018; and Carl Icahn paid no taxes in 2016 and 2017.

ProPublica obtained tax data on tax returns of thousands of the wealthiest Americans for over fifteen years. The pattern shows that the wealthiest pay income taxes that are only a tiny fraction of the many millions their fortunes grew.

To the extent there is a debate over taxes it is mostly about incremental changes at the top of the tax rate. For individuals the debate is whether the high end rate should jump from 37% to 39.6%. For corporations, the rate may jump from 21% to 28%. The corporate rate was 35% before 2018.

While the income generated by these possible tax increases on the very wealthy would be much needed tax revenue, these discussions miss a bigger picture.

The IRS taxes income rather than assets like stock holdings or property. The value of stocks and property are not defined as taxable income until they are sold. As a result, much wealth escapes any IRS scrutiny. Determining the value of stocks and property would no doubt be extremely contentious but it is doable by some kind of fair and objective criteria.

The phenomena of extreme income inequality is a defining feature of our era. Over the last 16 months since the start of the pandemic in 2020, the combined wealth of 713 U.S. billionaires increased by $1.8 trillion, a gain of almost 60 percent. This increase happened at the same time the net worth of working Americans lagged.

The tax system in America is failing to come to grips with the reality of the economic inequality and the ways the ultra wealthy have maneuvered assets. Because wealth is accumulated outside the narrow realm of income, the IRS ignores it. It is like the IRS misses the boat because it is set up to address a time that no longer exists. It is not allowed to look in the right places.

ProPublica compared how much in taxes the 25 richest Americans paid between 2014-2018 compared to how much Forbes estimated their wealth grew in the same time period. The IRS records show the ultra wealthy paid only a tiny fraction of their wealth increase.

With their fleet of lawyers, the ultra wealthy have devised an array of techniques to get around the tax system. Minimizing salaries and income, holding onto stock in their companies, not paying dividends, deductions, wealth stored in off shore accounts and using loans are all legal ways the ultra wealthy have devised to minimize their tax burden.

Senator Elizabeth Warren and Senator Sheldon Whitehouse have demanded an investigation by the Senate Finance Committee into the ultra wealthy tax avoidance. In a letter to the Senate Finance Committee Chair Ron Wyden, they write:

“…tax avoidance by the nation’s wealthiest individuals is profoundly unfair. It leaves the nation unable to pay for critical investments in infrastructure, education and health care. It favors investment income over wages, distorting our nation’s economy and adding to inequality. And it leaves low-income and middle class families paying an unfair tax burden.”

Warren and Whitehouse are also sponsoring an “ultra millionaire tax” to tax the wealthiest 100,000 households. The tax would include a 2% tax on households and trusts between $50 million and $1 billion. It would also feature an additional 1% annual surtax on the net worth of households and trusts over $1 billion.

A wealth tax at least considers a truer picture of the ultra wealthy and their schemes. It creates a mechanism for addressing wealth that has been stowed away in off-limits locations.

Since the ProPublica story broke, much media has focused on the fact that the unauthorized disclosure of confidential government information is illegal. ProPublica has not disclosed how it obtained the tax info. Republicans especially have expressed outrage about illegal violation of billionaires’ privacy. But Democrats barely had a better response. Neither party was outraged that billionaires have cheated the public by paying no or absurdly low taxes.

I am at a loss what harm occurs from the release of tax returns of the ultra wealthy. ProPublica noted that the Scandinavian countries like Norway, Sweden and Finland all regularly make public the tax returns of all citizens.

The IRS Commissioner Charles Rettig testified earlier this year that the government may be failing to collect more than $1 trillion of the taxes it is owed annually. The IRS has been starved of funding for years, crippling their ability to enforce tax law. Audits of the rich have plummeted. Poor people are now more likely to be audited than the ultra wealthy which is a travesty. The weakness of the IRS is not an accident – it has been de-clawed by the lobbyist tools of the super-rich.

When Jeff Bezos and other billionaires shoot themselves into space, maybe it is partly about obscuring the fact they do not pay fair taxes on the earth. For those old enough to remember, it is reminiscent of Gil Scott-Heron singing “Whitey on the moon”.

Normalizing tax evasion by the ultra wealthy is pathological. Maybe we are worn down by outrage fatigue but it is only fundamental fairness that those who can afford to pay the most at least pay their fair share.