Tax the rich
Earlier this month, the non-profit newsroom ProPublica, published an analysis of the taxes paid by the wealthiest Americans. The report examines more than 15 years of International Revenue Service (IRS) data, and reveals that America’s wealthiest citizens pay little to nothing in federal income tax.
ProPublica’s report compares the annual taxes paid by the 25 richest Americans to the increase in their total wealth. According to this analysis, the collective wealth of these 25 individuals increased by $401 billion between 2014 and 2018. During the same time period, they paid a combined $13.6 billion in federal income taxes – only 3.4% of their total wealth growth. A typical middle-class American pays 7% of their total wealth (not just wealth growth) in taxes each year.
These 25 wealthy individuals were worth a combined $1.1 trillion in 2018, making their wealth equivalent to that of 14.3 million average American workers. While these 14.3 million Americans paid a total of $143 billion in taxes during 2018, the 25 super-rich individuals paid only $1.9 billion in total – about 1.3 % of what average American workers contributed for the same amount of wealth.
In some years, the ultra-rich pay no federal income tax at all. Tesla CEO Elon Musk paid nothing in 2018, Amazon’s Jeff Bezos did the same in 2007 and 2011, and billionaire investor George Soros paid no federal income taxes in three consecutive years.
This inequity is backwards and grotesque, but it’s perfectly legal. The rich avoid taxes by using the American tax code exactly as it was written by Congress.
When an American worker like a teacher, doctor, or mechanic earns a paycheck, a percentage of their earnings are deducted as income tax. Today, the median American household earns about $70,000 per year and pays 14% of these earnings as federal taxes. After taxes, bills, and other expenses, the household might have income left over that can be saved or invested, adding to that household’s wealth.
But for the super-rich, most wealth doesn’t come from a paycheck. It is largely generated by the appreciation of assets like stocks and real estate. As the value of assets rise, the owner becomes wealthier.
Jeff Bezos, the richest person in the world, receives a relatively modest salary of $81,840 per year. His federal income taxes reflect only this salary, and not his immense wealth.
Instead of receiving large paychecks, many CEOs and corporate officers receive some of their compensation in the form of stock options – the opportunity to acquire stock in the company. These stocks increase their recipient’s wealth, but no taxes are paid on this growing wealth unless the assets are sold.
If an owner does decide to sell assets, a capital gains tax is paid. But this tax applies only to the wealth that the asset has gained (if a stock is acquired at $20 and sold for $30, only the $10 of appreciation is taxed). Under the US tax code, capital gains are usually taxed at a lower rate than earned income
If you are extremely wealthy, you can even avoid paying capital gains taxes. If a billionaire needs a large chunk of spending money, they can request a low interest loan backed by the value of their wealth. This allows them to avoid selling assets, avoid capital gains taxes, and pay only a comparatively small amount of interest on the loan.
ProPublica’s report lays bare the failings of America’s tax system. These loopholes are baked into the tax code. They are inaccessible to normal Americans, but allow the mega-rich to pay next to nothing.
These loopholes are a big problem. Both because wealth inequality in the United States continues to grow, and because collecting taxes is important. The US needs tax revenue to maintain infrastructure, fund programs like Medicare, finance the military, tackle climate change, and even balance the federal budget.
This is not to say that the rich should be punished for accumulating gigantic fortunes. Paying taxes is simply part of being an American – we each contribute a portion of what we earn to sustain our country. It is wrong for the wealthiest individuals to contribute far less than normal Americans. Those who are extremely successful have a responsibility to contribute to the nation that has helped enable their success.
Nicholas Wilson is a Keweenaw Resident and a freelance journalist.