The Real Tax Scandal Is What’s Legal 1

Wealthy Americans can save a lot of money by cheating on their federal income taxes, but that’s nothing compared with how much money they’ve been saving by following the rules.

In a revealing examination of tax records for 25 of the wealthiest Americans, the journalism nonprofit ProPublica reported Tuesday that some of the nation’s most prominent billionaires declared relatively little taxable income in comparison with the rapid growth of their wealth.

Jeff Bezos, for example, added an estimated $99 billion in wealth between 2014 and 2018 but reported only $4.22 billion in taxable income during that period. Warren Buffett, who amassed $24.3 billion in new wealth over those years, reported $125 million in taxable income.

ProPublica, which says it doesn’t know who provided the confidential data, has performed a valuable public service by publishing it, illuminating how some of the wealthiest people in the United States essentially live under a different system of income taxation from the rest of us.

An army of volunteers quickly rushed to the defense of the nation’s billionaires, insisting that they can’t be faulted for following the rules. But it is not a coincidence that the United States uses a definition of taxable income that happens to be hugely advantageous for rich people. The new data suggests that we need to consider a different definition of taxable income.

For tax purposes in the United States, income is basically defined as money. A person who receives a share of stock, for example, does not need to report the value as income. If an investment increases in value, that also does not count as taxable income. The economists Emmanuel Saez and Gabriel Zucman estimated in April that the wealthiest Americans are holding about $2.7 trillion in wealth on which they have not paid taxes.

The logic of this standard rests on a tripod of assumptions that aren’t true.

The first is that an increase in asset value is in some sense unreal, or at least unusable. The Supreme Court established the standard in 1920, ruling that a woman who received some shares of stock didn’t need to pay tax on the value because the transfer of the shares “takes nothing from the property of the corporation and adds nothing to that of the shareholder.”

The reality, however, is that many wealthy Americans live lavishly by borrowing against the value of their assets. ProPublica provides the example of Elon Musk, who has pledged shares of Tesla stock worth $57.7 billion as collateral for personal loans. That provides Mr. Musk with plenty of spending money. Indeed, he apparently has relatively little need for conventional income. ProPublica reported that in 2018 he paid nothing in federal income taxes.

The second and very common falsehood is that people will eventually pay taxes on their wealth — that they get to determine the timing but they do not get to avoid the taxman.

This is risible. It is easy to accumulate wealth that is never taxed. Assets can be siloed in nonprofit foundations whose main beneficiaries may be the people who run them. Assets can also be passed on to children and grandchildren. Better yet, the government allows heirs to take ownership at the present value, erasing the accumulated tax liability.

Mr. Buffett is never going to pay taxes on the vast majority of his wealth. He is quite open about this, telling ProPublica that he believes it’s better for society for his fortune to be distributed as charity “than if it is used to slightly reduce an ever-increasing U.S. debt.”

The third objection is that taxing wealth is a bureaucratic nightmare. There are difficulties, such as fixing rules for determining the value of assets. There also are downsides, such as the possibility that someone might have to sell an asset to pay taxes. But we know it can be done because Americans already pay property taxes, and it seems to work fine.

Even for those who aren’t ready to jump onto the wealth tax bandwagon, the data obtained by ProPublica underscores the need for a significant overhaul of the system.

The federal income tax is designed to be progressive, meaning that those who make more money are supposed to pay taxes at higher rates. But the richest Americans don’t. Public data shows that in 2018, the most recent year for which data is available, the top 0.001 percent of taxpayers — roughly 1,400 households — paid a smaller share of income in taxes than the rest of the top 1 percent. The effective tax rate for that elite group was 22.9 percent.

According to ProPublica, the very richest Americans paid taxes at an even lower rate — just 13.3 percent of their taxable income in 2018. That was less than the median American household, which paid about 14 percent in federal taxes on about $70,000 in taxable income.

For some, the effective tax rate was significantly lower. ProPublica reported that Michael Bloomberg, a former New York mayor, paid just 3.7 percent of income in taxes.

The ProPublica story does not say that the rich broke any laws. For all we know, they all followed the law punctiliously. But it’s worth noting that we don’t really know, because the government has largely given up on verifying that the rich pay what they owe.

The Biden administration has proposed a number of changes that would chip away at these inequities, including a higher top tax rate on reported income, more funding and changes in rules that would help the I.R.S. to crack down on tax avoidance and eliminating the “step up” rule that allows heirs to avoid taxes on some accumulated wealth.

But none of those changes suffice to address the basic unfairness that the wealthy are living by a different set of rules, lavishly spending money that isn’t taxed as income.

I’ve argued that the government should disclose the amounts that everyone pays in income taxes, just as it discloses property taxes. The ProPublica story underscores the argument for transparency: It allows Americans to judge how well the system is working.

As I wrote in 2019, “Publishing a list of millionaires who paid little or no taxes this year could significantly reduce the number of millionaires who pay little or no taxes next year.”

Past disclosures, including the Panama Papers and the revelations about Donald Trump’s finances, have offered glimpses of the prevalence of tax avoidance. This newest data offers something more comprehensive. I hope it is enough to convince people that change is necessary.

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