Our nation is facing a fundamental question: Should the very rich pay taxes the same way working people do, or should they have special rules? I have nothing against rich people. I also have nothing against poor people. I do think that the tax rules should be applied fairly to all people, not just a privileged few.
Wealthy members of the executive branch have access to an obscure tax provision, not available to the wider public, that allows them to delay paying taxes when they sell their assets indefinitely, if not forever. This rule gives the ultrawealthy an incredible financial incentive to enter public service, and President-elect Trump’s incoming cabinet (the wealthiest in American history) is about to use this rule to save millions.
Let’s take the case of Rex Tillerson, the Chief Executive Officer of ExxonMobil, who will likely be our nation’s next Secretary of State.
He has worked for ExxonMobil since shortly after he graduated from college, rising through the ranks to become CEO over the course of around 40 years. Last year Mr. Tillerson was paid about $27.3 million. Over $4 million was paid in cash, and the rest was paid into various savings plans, primarily in the form of stock which is scheduled to vest over many years. ExxonMobil tries to make sure that its executives are aligned with the owners by requiring the executives to hold large amounts of stock. In Mr. Tillerson’s case, he owns about 1.8 million shares of stock (worth about $100 million dollars), and he also is scheduled to receive another 1.9 million shares (currently worth another $105 million) over the coming years in addition to a pension which is worth over $70 million. (This is all described in detail in the 14-A form which ExxonMobil filed with the SEC and is available here)
When Mr. Tillerson becomes the Secretary of State he will divest himself of his financial connections with ExxonMobil -- or at least I hope he will.
How the Loophole Works
If I had $100 million dollars worth of stock, and I sold it, I would pay long term capital gains tax (a little under 20%) on whatever profit I made. I don’t know what Mr. Tillerson paid for his shares, but it was surely not zero. Assuming that he actually paid $70 million, his profit will be $30 million, and he would owe about $6 million in taxes.
However, due to a special rule for rich people who are appointed to government positions by a newly elected president, he won’t have to pay that $6 million. Certainly not now, and possibly not ever. Unlike me, Mr. Tillerson could take the $100 million, invest it in a mutual fund that pays him $3 or $4 million per year in dividends, and assuming that he continues that for the rest of his life, neither he, nor his heirs, nor anyone else will ever need to pay any tax on the $30 million of capital gains.
Now, I can understand that it could be inconvenient to go through a career change and become the Secretary of State. I don’t know for sure, because I’ve never done it, but maybe it is tough. Perhaps Mr. Tillerson would just as soon continue in his $27 million per year job, but he just can’t turn down the President of the United States. Maybe that extra $6 million can help alleviate that inconvenience. I have sympathy for Mr. Tillerson, but that doesn’t change the fact that no one, not even members of the government, should have their own special tax rules.