How (Not) to Tax Billionaires

Ten years after the Occupy Wall Street movement focussed attention on some of the inequities and scams of twenty-first-century capitalism, Democrats on Capitol Hill are in a position to raise taxes on the members of the 0.01 per cent, who have benefitted enormously, not just from rising inequality and the financialization of the economy but also from the COVID-19 pandemic. Will the Democrats seize this opportunity? Will they force the very richest Americans—the likes of Jeff Bezos, Elon Musk, and Carl Icahn—to pay their fair share, or will they confirm the suspicion of many Occupy supporters that the Party, despite talking a good game, is ultimately in hock to the plutocracy?

The political context for a potential tax hike is that the Democrats need to raise a lot of money to help pay for a big spending package aimed at strengthening the social safety net and boosting green energy—which they intend to pass using the budget-reconciliation process. Last week, Democrats on the powerful House Ways and Means Committee released a proposal that, according to an analysis by Congress’s Joint Committee on Taxation, would raise $2.1 trillion over ten years, while largely honoring President Joe Biden’s pledge not to raise taxes on middle-class Americans who earn less than four hundred thousand dollars a year. (Biden’s definition of “middle class” is an elastic one.) The House proposal is a mixture of the good, the dubious, and the indefensible.

One positive aspect of the plan is that it would reverse many of the giveaways to the rich that were contained in the Trump-G.O.P. tax reform of 2017. The top rate of federal income tax would be raised to 39.6 per cent, which is where it resided during Barack Obama’s second term in office. (If you add in a 3.8-per-cent tax on the investment income of high earners that was introduced to help pay for Obamacare, the top rate would be 43.4 per cent.) The House proposal would also strip away many of the favors that the 2017 bill bestowed upon unincorporated businesses, such as partnerships, S corporations, and sole proprietorships. (These are the business entities favored by the Trumps, the Kushners, and many other rich people.) Another progressive feature of the House plan: it would introduce a new surtax of three per cent on households earning more than five million dollars a year, which would bring their marginal rate to 46.4 per cent.

Over all, according to the Joint Committee on Taxation analysis, the House plan would raise the average federal tax rate for households that earn between five hundred thousand dollars and a million dollars from 28.5 per cent to 29.9 per cent in 2023—a fairly modest increase. The impact on households earning more than a million dollars a year would be more dramatic: their average tax rate would rise from 30.2 per cent to 37.3 per cent. Since many of the Biden spending programs are targeted largely at low-income Americans, the House is effectively proposing a significant redistribution from rich to poor.

So far so good. The dubious part of the House plan is that, in a number of ways, it doesn’t go as far as the White House’s original vision for rebalancing the tax system, which was released earlier this year. For example, the Biden Administration proposed raising the corporate income tax from twenty-one per cent to twenty-eight per cent—still well below the thirty-five-per-cent rate that applied before 2017. The House plan would set the top corporate rate at 26.5 per cent. It would also reserve some tax credits for oil and gas exploration, and omit a White House proposal to require banks to report financial flows annually to the I.R.S. All of these elements smack of caving in to the business lobby.

But the most indefensible element of the House plan is its failure to tackle chronic tax avoidance by billionaires. Earlier this year, a leak of I.R.S. records to ProPublica showed how, in some years, Bezos, Musk, and Icahn managed to pay virtually no federal income taxes at all while breaking no laws. And they were far from alone among their peers. Unlike residential real estate, which is taxed at the local level, financial wealth isn’t subject to direct taxation. So, given the current tax code, it’s fairly easy for billionaires to structure their finances in a manner that generates very little taxable income for them or their heirs. They simply have to hold on to most of their vast wealth and take some of their income in the form of dividends or capital gains, which are taxed at lower rates than wages and salaries. Even when the ultra-rich do incur significant potential tax liabilities, gaping loopholes allow them to minimize their actual payments.

As the chief executive of Amazon, a job he held until earlier this year, Bezos famously paid himself a base salary of less than a hundred thousand dollars. Since the start of the pandemic, the value of his stake in the company has risen by more than eighty billion dollars. Unless he chooses to sell shares, as he does occasionally, he doesn’t incur any immediate tax liabilities. For years, Musk has also paid himself a very modest base salary at Tesla, financing his life style by borrowing money against the value of his stock. On Wall Street, hedge-fund moguls and private-equity barons alike benefit from a particularly egregious loophole that allows them to convert some of their income to capital gains.

In theory, there are two ways to force the billionaires to stump up. The first one, which the Biden Administration has proposed, is to eliminate some of the loopholes and raise the tax rate that very rich people pay on their dividends and capital gains. The second method, which Elizabeth Warren and Bernie Sanders have advocated, is to introduce an annual wealth tax. Remarkably, the House proposal adopts neither of these approaches.

Perhaps it was predictable that a committee known for attracting large donations from lobbyists would eschew the Warren-Sanders approach. But the House proposal would also cap the tax rate on dividends and capital gains at twenty-five per cent rather than the 39.6 per cent envisioned under the Biden plan. It would leave in place the “stepped-up-basis” loophole in the estate tax, which allows billionaires to pass on their fortunes without paying any tax on unrealized capital gains. And it would introduce only minor changes to the notorious “carried-interest” loophole, which benefits hedge-fund and private-equity billionaires, such as Ray Dalio, Henry Kravis, Steve Schwarzman, and George Soros.

In short, the House Democrats’ plan targets the merely rich rather than the plutocrats, and it would do little or nothing to address the glaring concentration of wealth at the very top that has marked our new Gilded Age. Fortunately, there is a bit of time to address these issues. As Democrats in the House and Senate continue to work on the reconciliation bill, other proposals remain on the table. In addition to the White House’s plan to eliminate loopholes and raise the tax rates on dividends and capital gains for high earners, there is a long-standing call from Oregon’s Ron Wyden, the chair of the Senate Finance Committee, for millionaires and billionaires to pay an annual tax on unrealized capital gains—effectively a wealth tax.

Last Friday, I spoke with Gabriel Zucman, an economist at Berkeley, who worked on the wealth-tax proposal that Senator Warren put forward during the 2020 Presidential campaign. He suggested combining Wyden’s idea with the income-tax proposals from the House plan and the White House’s call to raise the corporate income-tax rate to twenty-eight per cent. “I think it would be quite powerful to put together these things,” he said. “You could create something that would really increase the progressivity of the tax system and raise very substantial revenues. I also think it is quite practical.”

Given the differences within the Democratic caucuses on Capitol Hill and the arithmetic imperative of bringing along everybody, it seems unlikely that the Party will go as far as Zucman and other progressives recommend. But it can surely do better than the Ways and Means Committee’s spineless cop-out.