WASHINGTON – A jaw-dropping report from ProPublica detailing how America’s richest men have avoided paying taxes has heightened congressional interest, even among some Republicans, in changing the tax code to ensure that people like Jeff Bezos and Warren Buffett are paying their fair share.
For Republicans, the idea that the tax code should give preferential treatment to investment has been sacrosanct, ostensibly to promote economic growth and innovation that could benefit everyone. But this week’s news has shown how the treatment of stocks, bonds, real estate and the huge loans taken out of those assets has driven the tax bills of wealthier Americans down.
“My intention as the author of the 2017 tax reform was not that multibillionaires do not pay taxes,” said Senator Patrick J. Toomey, Republican of Pennsylvania, who helped draft the law that cut taxes by more than $ 1,000 billion. “I think dividends and capital gains should be taxed at a lower rate, but certainly not at zero.”
Democrats, especially in the Senate, have been working hard on a tax package to fund President Biden’s costly national program, including a major infrastructure plan, climate change measures and expansion of benefits education and health care. Much of this work – fiercely opposed by Republicans – has focused on clawing back the tax cuts granted to businesses by the 2017 Tax Act, President Donald J. Trump’s iconic legislative achievement, and preventing tax cuts. multinational corporations to transfer their taxable profits abroad.
The ProPublica report, analyzing a wealth of documents detailing the tax bills of household names such as Mr. Bezos, Mr. Buffett, Elon Musk and Michael Bloomberg, showed that the country’s richest rulers pay only a fraction of their wealth in taxes – $ 13.6 billion in federal income taxes during a period when their collective net worth increased by $ 401 billion, according to a Forbes tabulation.
The United States taxes people based on their income and investment earnings, not on their net worth. But ProPublica calculated that after all the fancy bookkeeping work, the 25 richest Americans paid what he called a “real tax rate” – the proportion of their total wealth paid in taxes – of just 3 , 4%. That’s a tiny fraction of the amount wealthy Americans are supposed to pay in income taxes – 37% – or the top 20% of the proceeds from asset sales.
Some years they paid no taxes.
In 2007, Mr. Bezos, the CEO of Amazon and the richest man in the world, paid no federal income tax even as his company’s stock price doubled. Four years later, with his fortune reaching $ 18 billion, Mr Bezos declared losses and even claimed – and received – a $ 4,000 tax credit for the care of his children, according to ProPublica, whose the report was based on data leaks from the IRS.
“Americans knew billionaires played these kinds of games,” Oregon Sen. Ron Wyden, chairman of the tax drafting finance committee, said Wednesday. “What was important yesterday was that everything was detailed about the richest people in America.”
He said he was working on a series of proposals to solve the problem, possibly including a return to some sort of minimum tax, and would unveil specific proposals soon.
“Billionaires are going to have to pay their fair share every year,” he said.
The revelations from ProPublica have resulted in a widely understood problem: that the super-rich derive virtually all of their wealth from the ever-increasing value of their assets, especially in the stock market, and that sales of those assets are taxed at a lower rate. to that of ordinary income from a paycheck, a point Mr. Buffett often makes.
But the analysis also revealed a less recognized strategy employed by the super-rich: take out huge loans, use their assets as collateral. This allows them to avoid selling their assets and being taxed, and even amortizing certain borrowing costs. In this way, Mr. Bezos and Mr. Buffett were able to post annual income losses even as their wealth increased by billions of dollars.
This sort of trick, perfectly legal under the tax code, would not be affected by some of Mr Biden’s proposals, such as increasing the marginal income tax rate from 37% to 39.6%. and the taxation of capital gains at the income tax rate for people who earn more than $ 1 million per year. Such proposals always rely on paychecks that the super-rich largely avoid and the asset sales they generally avoid.
The details of the report could strengthen the case for a wealth tax, pushed by Senator Elizabeth Warren, Democrat of Massachusetts, who proposed a 2% tax on an individual’s net worth over $ 50 million – including the value of stocks, houses, boats and anything else that a person owns, after subtracting all debts.
“Americans know the game has been rigged for those at the top,” Ms. Warren said, “but they rarely get their face pushed about how these tax returns highlight the number of billionaires who pay nothing then. that American families are struggling. “
Mr Wyden said he was also reviewing the approach. The canceled alternative minimum tax was once meant to ensure that the rich pay a significant amount and was put in place as a parallel system after taxpayers claimed a number of deductions.
But Mr Wyden said it was designed to target high incomes, not high wealth, and ended up letting the richer of the rich skate. He said he would act to close the so-called deferred interest loophole, which allows many hedge fund and private equity managers to report income commissions as their clients’ capital gains and pay them a much lower rate.
“We need to be more aggressive,” said Senator Sherrod Brown, Democrat from Ohio and member of the finance committee. “The whole Republican message was, ‘Pay less taxes, have more economic growth. He added: “They’ve come along for too long, and we haven’t had enough Democrats who wanted to oppose it. . “
Most Republicans do not change their position. Senator Charles E. Grassley of Iowa, a senior Republican finance committee official who once fought against tax evasion, said he was not the most outraged by the contents of the ProPublica report , but by the fact that so much private tax data had been leaked.
He was concerned that any effort to impose the value of assets before they are sold would hit farms and private businesses. Taxing the capital gains of the super-rich as income, he said, “would delay investment, which creates jobs.”
Mr Toomey, another committee member, was more open, although he said he wanted to make sure the ProPublica report was accurate and that he understood the mechanics of tax avoidance before hanging on. to a blunt instrument like a new alternative minimum tax.
“I’d rather try to figure out if it’s true, what is the dynamic that makes it true and do something about it,” he said.
Senate Democrats are already working on a series of tax proposals that would be tied to infrastructure spending, either in a bipartisan deal or in a stand-alone Democratic bill that would have to go through a budget process called reconciliation. They include a package of energy tax credits and a plan targeting multinational tax evasion.
The Democrats’ approach to personal taxation will likely stem from a 33-page plan to convert wealth into income for tax purposes. Instead of taxing only when assets are sold, taxpayers with income of $ 1 million and assets worth $ 10 million should pay income taxes on some of their assets each year. The transfer of certain assets, especially stocks, for example, from a wealthy parent to a child, would be considered a sale and taxed accordingly to prevent wealth from passing from generation to generation without taxation.
These income thresholds, set in 2018, are likely to be higher; but the goal will be the same.
“A tax on these stocks allows us to start a wealth tax that begins to equalize the burden on all Americans,” Ms. Warren said. “From there we can include a tax on other forms of wealth, including real estate, jets, yachts, paintings. These things are assessed for insurance purposes every year.
Certain protections would be granted to principal residences, family farms and retirement accounts.
Democrats also want to bolster the IRS budget to crack down on cheating. And they want to strengthen the inheritance tax by setting the price of estates at their value on the death of a rich person and not at the value at the time of purchase of the property.