Because we prioritize taxing income over wealth, and because even taxes paid on income are riddled with loopholes favoring the ultrawealthy, their tax bills remained strikingly low relative to the gargantuan fortunes amassed.
The New York Times reports that Democrats in Congress are examining new ways to tax the wealth and income of the super-rich, and to close various loopholes that keep their fortunes and their returns out of reach.
A big idea behind such proposals is that the real scandal here is what’s legal, since the tax code itself allows such accounting trickery to flourish. Some writers have renewed calls for a debate along these lines.
But this should also prompt an even more fundamental rethink. We need to mainstream the idea, long understood in academic and progressive circles, that in a broader sense, soaring inequality — in both pre-tax and in post-tax income — is in no small part created by policy choices.
ProPublica’s methodology is controversial. It looked at the wealth that 25 billionaires amassed during the given time period (based on data from Forbes), and compared that with the amount they paid in taxes. That latter was obtained via leaked IRS data.
ProPublica calls the resulting percentage their “true tax rate.”
This has prompted some to dismiss the whole project, arguing that, because wealth and income are different things, calculating taxation on declared income as a percentage of amassed wealth is fundamentally misleading.
But the fact that this is seen as controversial is exactly the point. ProPublica is seeking to capture the overall distributional unfairness that results from how we tax people’s various sources of income and wealth.
The idea is that we tax income and investment returns but not overall worth, and this is a policy choice we make, rather than something handed down on stone tablets. In part because of this choice, ProPublica calculates, this is what happened with those 25 billionaires:
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%.
How is this happening? In a good piece, Binyamin Appelbaum explains the basics. Most obviously, the superrich stockpile much wealth from returns on investments that are taxed at a lower rate than labor income. Meanwhile, those assets can be transferred at death to heirs who, due to loopholes, don’t pay taxes on the inherited growth in those assets’ value when they sell them.
But underneath that, Appelbaum notes, is another trick. The wealthy can hold on to those assets (and pass them down to wealthy heirs) without spending off of them, because they can borrow against their value and spend that to finance lavish lifestyles instead.
As Appelbaum summarizes, this all flows from how we choose to define “taxable income,” and how we choose to tax its various iterations. The result: “The wealthy are living by a different set of rules, lavishly spending money that isn’t taxed as income.”
Democrats are proposing various responses. President Biden’s tax plans would raise income tax rates on top earners and corporations and beef up enforcement against tax avoidance. But those proposals, while mitigating inequality, wouldn’t really strike at these problems.
And so, as the Times reports, proposals from Biden and Democrats would also seek to tax investment returns like labor income, and tax the increase in value of inherited assets when heirs sell them.
Meanwhile, Sen. Ron Wyden (D-Ore.), the chair of the Finance Committee, is also pursuing a plan to regularly tax gains on assets such as stocks so they can’t be perpetually held out of reach of taxation.
“Billionaires can defer, defer, and defer,” Wyden told me in a statement. “They can borrow against their untaxed income to fund lavish lifestyles without ever paying what they owe. After years — or even decades — of deferring, they can even avoid paying tax on billions in gains.”
“No working person in America can play those games,” continued Wyden, adding that we must “equalize the tax treatment of wages and wealth” and do a “complete overhaul of how we tax income from wealth for those at the very top.”
Beyond all this, we need to recapture a sense of how policy choices shape both pre-tax and post-tax distributive outcomes in other ways. As Berkeley professor of political economy Steven Vogel outlines, government rules have restructured markets to aggressively channel gains upward for decades.
For instance, worker power is weaker due to changes in labor market law, shareholder gains are prioritized over other stakeholder interests due to changes in corporate governance, the financial sector swelled due to regulatory changes, and expanded government protection for intellectual property rights has boosted market power for Big Pharma and Big Tech.
The folk theory that such outcomes flow from naturally free markets has insulated such changes from public scrutiny. Getting this right will allow us to try to choose policies that generate more equitable outcomes.