This year’s tax season is upon us. Americans everywhere are printing out their W2s or firing up their tax software to make this year’s April 18 filing deadline. It’s an annual tradition that, while not the most enjoyable, is at least a universally shared pain.
Except it’s not. There’s an important group of people who don’t have to pay their taxes every year (much less every month, as most working people do) – the rich.
A well-kept secret about being rich is that most truly wealthy people don’t actually work for their money: they let their money work for them. Rather than earning an income from working like most ordinary people do, really rich people live off their investments, earning capital gains as the assets they own (like stocks, dividends, and real estate holdings) increase in value. The tax code treats these two types of income very differently, giving wealthy investors a discount by taxing capital gains at a much lower rate (20% top rate) than labor income (37% top rate).
But that’s not all. Because capital gains are only taxed when an asset is sold, wealthy investors are actually able to pick and choose exactly when to pay taxes. It doesn’t matter how much an asset increases in value; if it isn’t sold, its owner pays no taxes whatsoever.
That’s how, as ProPublica reported last June, between 2014 and 2018 the 25 richest people in America paid an average effective tax rate of just 3.4% on over $400 billion in collective gains. To make matters worse, some of the very richest – including Elon Musk, Warren Buffett, Jeff Bezos, and Michael Bloomberg – paid even lower rates than this, and sometimes even got away with paying nothing in income tax at all.
The ability to delay tax payments on capital gains has led to a strategy called “Buy, borrow, die,” in which billionaires hold onto their assets without selling for their entire lives in order to pass them onto their children. They live almost exclusively off low-interest loans, allowing them to fund their lavish lifestyles without ever selling their assets. And thanks to another loophole called the stepped-up basis, all of the capital gains they accrued during their lives are wiped clean for tax purposes upon their death, so their heirs can sell them without paying a dime in capital gains taxes.
This needs to change. We need to equalize tax rates for capital gains and labor income but, more importantly, we need to tax capital gains on a more regular basis. Specifically, we need to institute a “mark-to-market” tax that taxes capital gains as they accrue, not just when assets are sold. This would raise hundreds of billions of dollars and would be an enormous step in the right direction for tax fairness. There is no reason why millionaires and billionaires should be able to decide when and how to pay their taxes when ordinary people have to pay taxes every single year.
Thankfully, Senator Ron Wyden proposed just such a tax – “the Billionaires Income Tax” – back in October as part of President Biden’s Build Back Better agenda. It was received very well by the public, with 64% of voters supporting the idea. But unfortunately, the provision was not included in the now-defunct Build Back Better Act because of roadblocking on the part of a few moderate Democrats, most notably Senators Manchin and Sinema.
With the 2022 midterms quickly approaching, there is now renewed interest among Democrats to resurrect parts of the Build Back Better Act as a way to woo voters. Luckily, Senator Manchin has expressed a willingness to support a package that includes tax reform. While it may be a long shot, we hope that Democrats can find the political will to include the Billionaires Income Tax in such a package, especially before the political opportunity to do so potentially closes with the November elections.
It’s beyond time that wealthy people like us and ultra-wealthy billionaires start paying their fair share in taxes. That should start with ensuring that the money that we actually make year on year is taxed on a regular, annual basis just like the rest of the American workforce.