Why Does the US Keep Allowing Billionaires to Not Pay Their Taxes?

By Annie Cerria

Recently, Elon Musk made headlines for selling a large portion of his Tesla stock, a sale valued at over $5 billion. Musk claimed in a tweet that, “Much is made lately of unrealized gains being a means of tax avoidance, so I propose selling 10% of my Tesla stock.” Only about $1.1 billion of the sale was taxed, making the tax rate about 4.5%, while still leaving Musk with about 167 million Tesla shares. While the action was intended to be a symbolic gesture by Musk to demonstrate a lack of tax evasion on his part, his very ownership of that much stock and the low taxation rate on the sale provides a glimpse into how many American billionaires, including Musk, avoid paying substantial federal income taxes. The action therefore called attention to a question that has been on the forefront of many Americans’ minds recently: why does the United States allow so many billionaires to not pay their taxes?

From 2014-2018, Musk—who is worth $162 billion—paid a 3.27% true tax rate on his income, and in 2018, he paid a total of $0 in Federal income taxes. Musk is not alone in this phenomenon—in 2007 and 2011, Jeff Bezos, a multibillionaire in both years, paid no federal income taxes. Michael Bloomberg, George Soros, and investor Carl Icahn have all done the same, with Soros managing to do it three years in a row. To put this in perspective, the average single American worker in 2020 paid a true tax rate of 22.4%. So, how are the world’s richest people able to get away with paying so much less in taxes than the average citizen, and why does the U.S. government allow it to happen? 

Musk’s recent selling of his stock highlights one of the most common methods used by the ultra-rich to avoid income tax, known as the ‘buy, borrow, die’ method. As an analysis in Vanity Fair explains: “The ultrarich are able to pay for stuff, while holding on to their extremely valuable stock and taking $1 salaries to further avoid taxes, by repeatedly taking out loans with single-digit interest rates that the IRS does not consider income.” Essentially, executives like Musk and Bezos can borrow against the value of their massive stock ownership and live comfortably without selling said stock or receiving any income from dividends, which Tesla and Amazon don’t pay. Stock ownership is subject to an extremely low tax rate by the IRS. Of the $4.25 trillion in wealth held by U.S. billionaires, some $2.7 trillion of it is held in these so-called ‘unrealized gains.’ By taking little to no salary, and instead pooling the majority of their money into stocks, these billionaires therefore are subject to an extremely low income tax rate. 

Musk’s sale of his stock was clearly a strategic one, as his diminished ownership will now cost him even less in taxes. This perceived loss on his investment then allows him to offset the $150 billion increase to his net worth during the past year, discouraging the government from raising his tax rate. Jeff Bezos engaged in the same avoidance tactic, as an exposé in ProPublica highlights: “In 2011, a year in which his wealth held roughly steady at $18 billion, Bezos filed a tax return reporting he lost money — his income that year was more than offset by investment losses. What’s more, because, according to the tax law, he made so little, he even claimed and received a $4,000 tax credit for his children.” 

Evidently, the ultrarich have found and exploited the loopholes in the U.S. tax system to an incredible degree. Wealth inequality has become rampant in America, due in large part to these corporate executives amassing huge amounts of wealth without having to repay any of it to the system they made it from. As a report in Bloomberg puts into perspective, the 50 richest people in America are worth as much money as the poorest 165 million. Time also reported last September that on average, this extreme wealth inequality costs the average median income full-time American worker $42,000 a year, significantly weakening the overall economy by knocking off over $2 trillion of the country’s GDP. 

At a time when the U.S. government is publicly struggling to fund many basic social programs, such as Medicare, Medicaid and Social Security—with the problem extending far enough to put the government at risk of completely running out of money—it seems illogical to be letting tax evasion tactics slide. Taxes serve as the federal government’s main source of revenue and mandating that the ultra-rich actually pay their taxes would provide a huge increase in that revenue. This increased revenue could then be put back into the aforementioned social programs, providing crucial aid to the 37.2 million Americans currently living in poverty, who the government has a responsibility to protect. 

Simply raising the tax rate by two percentage points for American households that make over $50 million a year, and by three percentage points for those that make over $1 billion, would raise over $2.75 trillion in ten years. Even with just $2.75 trillion, the federal government would have enough money to make college free at all public universities in the U.S., provide crucial funding for Social Security and Medicare, or completely repay the funds used for the massive new infrastructure bill that was just passed. 

This revenue would only be further increased with a tax on unrealized gains. As a report from the Brookings Institute explains: “Using Survey of Consumer Finance data, Batchelder and Kamin [two professors from NYU Law] calculate that accrual taxation (a) on marketable assets only and (b) limited to the top 1 percent of households would raise $1.7 trillion over ten years, even after allowing for a 15 percent avoidance rate.” 

The Democratic party, which currently controls both the legislative and executive branches of the federal government, has traditionally been the party of raising taxes. Given this, it seems odd that they are continuing to allow these prominent individuals to blatantly manipulate the tax code. They have also historically been the party supporting the bolstering of social programs, further obfuscating the logic behind their stagnation on this issue. However, their rationale can also be explained entirely along the lines of serving self-interests. 

As former U.S. Secretary of Labor Robert Reich explained in September after House Democrats announced their intention not to raise taxes on the wealthy, “many Democrats rely on that wealth to bankroll their campaigns. They also dread becoming targets of well-financed ad campaigns accusing them of voting for ‘job-killing’ taxes.” 

Federal politicians, therefore, are putting their own self-interests ahead of pursuing equality. They are actively allowing the ultra-rich to game the system, and are allowing the working class to disproportionately shoulder the cost. According to the Time analysis, the wealthiest 1% of Americans have taken $50 trillion from the bottom 90% since 1975. For a government that was meant to be created by and for the people, perpetuating a reality of blatant exploitation is an act of betrayal to the American people by their own leaders.

60% of Americans polled by the Pew Research Center in a recent survey said that the fact that the wealthiest Americans do not pay their fair share in taxes is the thing that annoys them the most about the American tax system. In a country meant to be a representative democracy, it is therefore the responsibility of the federal government to address the pressing concerns of the citizenry. 

Ensuring that wealth giants like Musk and Bezos pay their fair share in income tax would not only help fund several important social programs and legislative initiatives, but also would address the concerns of a large majority of Americans. The government therefore has a responsibility to force the ultra-rich to pay the same amount of income taxes as the rest of the country, and to tax their massive hoards of wealth they have placed into their stocks. Doing so would reduce the significant wealth inequality permeating a nation that supposedly values equality, while proving to the American people that their federal government is still one that pursues justice for all, regardless of wealth or status.

The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.

Photo by Morgan Housel on Unsplash

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