This article was originally published in ProPublica, a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.
Two prominent members of the Senate Finance Committee are calling for an investigation into tax avoidance by the ultrawealthy, citing ProPublica’s Secret IRS Files series.
In a letter sent today, Elizabeth Warren (D-Mass.) and Sheldon Whitehouse (D-R.I.) wrote to the committee’s chairman, Ron Wyden (D-Ore.), that the “bombshell” and “deeply troubling” report requires an investigation into “how the nation’s wealthiest individuals are using a series of legal tax loopholes to avoid paying their fair share of income taxes.” The senators also requested that the Senate hold hearings and develop legislation to address the loopholes’ “impact on the nation’s finances and ability to pay for investments in infrastructure, health care, the economy, and the environment.”
Last month ProPublica began publishing a series of stories about tax avoidance among the ultrawealthy, based on a vast trove of tax data concerning thousands of the wealthiest American taxpayers and covering more than 15 years. ProPublica conducted an unprecedented analysis that compared the ultrawealthy’s taxes to the growth in their fortunes, calculating that the 25 richest Americans pay a “true tax rate” of just 3.4%.
The wealthy pay so little in taxes primarily because they keep their incomes low, the article explained, often borrowing against their fortunes to fund their lifestyles. Amazon’s Jeff Bezos, Tesla’s Elon Musk, Bloomberg L.P.’s Michael Bloomberg and other billionaires have each paid no federal income taxes in one or more recent years. The tax avoidance techniques described in “The Secret IRS Files: Trove of Never-Before-Seen Records Reveal How the Wealthiest Avoid Taxes” are legal, and routine among the ultrawealthy.
In a subsequent article, ProPublica highlighted how some rich people, such as Peter Thiel, have been able to use Roth individual retirement accounts, intended as vehicles to bolster middle-class savings, to create vast untaxed fortunes. A third article showed how billionaires use a provision in the tax code to reduce their taxes after buying sports teams.
Banks and financial institutions are lending more to the rich than ever, according to a story in The Wall Street Journal last week. The senators called for an investigation of banks and wealth management firms to understand the techniques, strategies and products offered to the wealthy that enable them to avoid paying taxes. Morgan Stanley’s wealth management clients have $68 billion worth of loans backed by securities and other investments, more than double the amount they had five years ago, and Bank of America has loans worth over $62 billion, the Journal reported.
In March, Warren introduced a bill, co-sponsored by Whitehouse, that would create a tax on the wealth of the richest Americans. Most Republicans and some Democrats oppose such a measure.
I certainly hope they are successful. It’s far past time we had a return to “We The People.”
If they can avoid the estate tax, a rich person borrowing to fund their lifestyle can live tax-free essentially indefinitely.
(In practice, they would have to rebalance their portfolios every now and then, and some of their stocks would have dividend, so they’d have to figure out how to get the money into a tax-sheltered vehicle. But since close to no one audits the actual value of stuff going into retirement plans…)
Those loans are going to come due someday and will have to be repaid to avoid relief of indebtedness income. But the heirs get a step up in basis so they can sell enough of the underlying assets to retire the debt with zero tax liability and still live very comfortably. That’s what we told our kids to do
The debts belong to the estate, so they get settled when the estate goes through probate. But then the kids can just borrow against their inherited fortunes for their whole lives and pay no tax, except on money they’re stupid enough to earn by working.
It really was a bit shocking to see all of that laid out in the articles…the question is what the Democrats can do about it. Funding the IRS to catch the cheaters, and passing legislation to close loopholes, will cut into some of it, but really the system is so rigged in favor of the wealthy now that it’s going to be difficult to get their taxes back to a level where they actually pay their fair share. A wealth tax, applied to money above $50 million, would go a long ways, but that’s really hard to sell (because they lie about it and try to claim it hits everyone instead of just the stupidly wealthy).
Really, the worst part of this is what it says about our culture, and how unhealthy it is…we wouldn’t have the ultra wealthy if our system was balance and fair, with workers getting a fair share of what the wealthy are extracting from them. Just imagine if Bezos had shared his tax options with the workers of Amazon, so the wealth spread among them instead of just going to him (and the rest of the management team). That’s why this is so unfair, these few people made their fortunes on the backs of their employees.