Americans Pay Their Taxes. Well, Unless You’re a Billionaire.
The argument over raising or lowering taxes has always been at the forefront of debate in elections, especially with wealth inequality becoming one of the defining issues of our time. The US currently has seven federal income tax brackets, with the lowest rate being 10% and the highest being 37% (Josephson, 2021). But there’s an invisible bracket as well: that of the richest in our nation, who sometimes pay close to zero in taxes on a given year. How is this fair? It is not. With certain tax loopholes, it’s definitely possible if you’re amongst the wealthiest in the country. The consequences of allowing the most affluent to game the system are evident, as federal all levels of budgets, particularly local budgets have been tight for years, and issues such as social security and Medicare are constantly in question and debated. Let’s deconstruct the myth of the American tax system, where everyone pays their fair share of taxes, and the richest Americans pay the most.
Most Americans live paycheck to paycheck. They pay the federal government a percentage of their income based on their income bracket, and this percentage rises if they earn more. In the US, the average single worker faced an average tax rate of 22.4% in 2020 (OECD, 2021). The highest income tax rate, for couples who earn above $628,3000, is 37%. Anger and frustration over billionaires not paying their fair share of taxes has been increasing, especially when ProPublica, a nonprofit newsroom that investigates abuses of power, obtained IRS information on the tax returns of thousands of the nation’s wealthiest people for over 15 years, uncovering how they pay little to no income tax compared to their wealth. In 2007 and 2011, Jeff Bezos paid zero in federal income taxes. Elon Musk paid no federal income taxes in 2018. George Soros paid no federal income taxes for three years in a row. (Ernsthausen et al., 2021)
This discrepancy is loud and clear. Using how much in taxes the 25 richest Americans paid each year, ProPublica compared this to Forbes estimates on how much their wealth grew in that same time period, to find their true tax rate. According to Forbes, this group’s worth rose collectively by $401 billion from 2014 to 2018 and IRS data shows that they paid a total of $13.6 billion in federal income taxes in those years, which results in a true tax rate of a mere 3.4% (Dolan, 2021). Compare this to a middle-class American, who from 2014 to 2018 saw on average his/her net-worth increase by $65,000 after taxes, mainly due to the rise in value of their home. With a majority of their earnings being from salaries, their tax bills are almost as much, staying at nearly $62,000 over that period. Let’s now take this person and sit them next to Warren Buffett, who ironically is one of the richest advocates for a tax increase. Warren Buffett’s wealth rose by $24.3 billion in this same time period, but he paid $23.7 million in taxes, which is a true tax rate of 0.1% (Ernsthausen et al.).
So how do billionaires avoid paying their “fair share” of taxes like the rest of Americans? Well, their wealth, which comes from the extremely high value of their assets, such as stock and property, are not defined by US laws as taxable income unless and until sold. Billionaires actually derive a minority of their wealth from their annual income, as it is mainly tied to stock holdings. They’re then able to turn the stocks into usable cash without selling by borrowing. Let’s take a look at Jeff Bezos to see how this works. Bezos owns a 10.3% stake in Amazon that’s valued at around $170 billion. This means a majority of his net worth is tied to Amazon stock. Since stock gains aren’t taxed until they are sold, Bezos skips paying taxes on his accumulated wealth tied to Amazon stock. This results in Bezos’ reported income being $6.5 billion from 2006 to 2018 and a tax bill of about $1.4 billion which is a 21% income tax, while his net worth increased by $127 billion (Gilbert, 2021). If you took into consideration the $127 billion increase in his net worth that came from the stock appreciating in value, the income taxes he paid account for just barely over 1%. But that doesn’t mean Bezos can’t spend the money tied to his stock. Without selling, he’s able to turn those stocks into usable cash by borrowing money against stock holdings, through extremely low interest rates since banks consider people with this amount of wealth very low risk (Germain, 2021). People with a high net worth also hire professionals, donate to lawmakers, and invest in policies that are dedicated to keeping taxes low (Germain).
How can we change this? One way that politicians, such as Elizabeth Warren, and economists, such as Thomas Pikkety and Joseph E. Stiglitz, propose is a wealth tax. This is a tax on the value of a person’s net worth rather than a tax based on a person’s income. Stiglitz says, “the wealth tax often can get income that can be avoided or evaded through capital income tax.” (Clifford, 2020) But Stiglitz still points out that capital gains taxes are in need of reform, as, according to the Tax Policy Center, the maximum a person can pay in this is less than the maximum individual income tax rate, which means that those who have the resources and wealth to invest are being taxed at lower rates (Tax Policy Center, 2020). So, we need reform. Unfortunately, money is power, and we need politicians to fight for the people, instead of for billionaires. Only then will we maybe see a change.
