Who Created Tax Loopholes for the Rich
According to a new report from the Institute for Policy Studies, the wealth of the 27 richest American dynastic families has increased by 1,007 percent since 1983, while the wealth of the typical family has increased by only 93 percent over the same period. This divergence has only intensified with the onset of the pandemic: since March 2020, the median growth in the net worth of the 10 richest families has been 25%.  Katie Warren, “9 Damning Facts That Show How Rich Jeff Bezos, the World`s Richest Man, Really Is How,” Business Insider, May 2, 2019, www.businessinsider.com/how-rich-is-jeff-bezos-mind-blowing-facts-net-worth-2019-4. But as President Biden wants to reshuffle the strengthened base to fund his ambitious social spending plan, some members of his own party have teamed up with Republicans and lobbyists from America`s wealthiest families to fight tooth and nail to keep it on the books. The House Ways and Means Committee ostensibly omitted the strengthened base reform of the tax plan released earlier this month. But the reconciliation process is far from complete. The reform could be included in the bill before it reaches the House of Representatives. The stakes are high because what is at stake is nothing less than who we are as a country. If the rulers succeed, they will lock up a system that has created extreme wealth and gives enormous political power to only a few families. ProPublica recently reported that the IRS had only about the same number of financial agents in 2018 as it did in 1953, when the economy was one-seventh of its current size and the financial arrangements of wealthy households were much less complex. The proliferation of confusing multi-level partnership structures and shell companies, complex financial instruments and foreign bank accounts in low-tax countries has led to serious enforcement problems.
For example, the federal indictment of former Trump campaign officials Paul Manafort and Richard Gates lists 17 U.S.-based intermediary companies and a dozen Cyprus-based companies, stating that Manafort and Gates “concealed the existence of foreign companies and bank accounts by falsely and repeatedly reporting to their accountants and in the United States. that they did not have bank accounts abroad.”  “[Biden`s plan addresses] perhaps the most glaring income tax loophole — the complete income tax exemption of most of the wealth accumulation of the super-rich.” Confidential tax records obtained by ProPublica show that the ultra-rich are effectively circumventing this system. In addition, a significant portion of the income that appears on the annual tax returns of wealthy households is taxed at preferential rates. Capital gains and dividends are taxed at a maximum tax rate of 20%, well below the maximum rate of 37% on wages and salaries.  In addition, the 2017 Tax Act introduced a new 20% deduction for certain income from flow-through businesses (income reported by business owners such as partnerships, S corporations and sole proprietorships on their individual tax returns), reducing the tax rate on this income by up to 7.4 percentage points. The deduction disproportionately benefits rich people: 61% of the benefit will ultimately go to the richest 1% of households, estimates the Joint Committee on Taxation (JCT). The 2017 law also lowered the corporate tax rate from 35% to 21%, disproportionately benefiting wealthy shareholders. For insight into what happened and the state of tax policy for the wealthy, we turn to Jesse Eisinger, editor and reporter at ProPublica, an independent, nonprofit news organization focused on investigative journalism. He has written about the IRS`s efforts to tax the rich in recent years. And for the past few months, he`s been editor-in-chief, working with a team of journalists on a series of stories drawn from a vast pool of IRS data obtained by ProPublica. The data included information on the tax returns of thousands of the country`s wealthiest people, spanning more than 15 years. The stories covered various ways the ultra-rich protect federal tax revenues, such as the deduction of expensive hobbies like purebred horse racing.
Jesse Eisinger is an experienced investigative journalist. In 2011, he and Jake Bernstein of ProPublica won a Pulitzer Prize for their reporting on questionable practices on Wall Street. The wealthiest Americans benefit the most because they own an outsized share of capital`s wealth. The richest 1% in terms of wealth owns more than half of all American-owned corporate stock, more than half of private company assets and a disproportionate share of real estate (14%), according to Federal Reserve Board data. In fact, most of the income that people who earn more than $10 million a year report on their tax returns is in the form of capital gains and dividends that receive preferential interest. The wealthy also benefit the most from particularly low interest rates, as the vast majority of American-class wealth is in their homes, which are largely protected from capital gains tax, and in qualifying pension plans, which are also not subject to capital gains tax. In addition, inheritance taxes encourage work, as opposed to taxes on labour. Inheritances can make people much richer, which can encourage them to work less. Treasury Department economist David Joulfaian noted that “a $1 million legacy, all other things being equal, reduces labor force participation by about 11 percent.”  By reducing randomness, an estate tax encourages heirs to work more than they would otherwise.
Similarly, a recent European study concluded that every euro of inheritance tax due to more work “comes with an additional nine cents of tax payments on heirs` salaries”.  One apparent exception: Buffett, who broke with his cohort of billionaires to demand higher taxes for the rich. In a famous New York Times op-ed in 2011, Buffett wrote, “My friends and I have been pampered long enough by a pro-billionaire Congress. It is time for our government to take shared sacrifices seriously. Policymakers could also adopt rules to prevent abuses related to GRAT and excessive valuation discounts, for example by using the minority shareholding discount. The Obama administration`s proposals to combat these abuses would have raised $14 billion over ten years if the 2009 estate tax parameters had been restored.  Going beyond Obama`s proposals to fully close these loopholes could do even more. The wealthiest people enjoy the vast majority of the benefits of these special rates. According to the Tax Policy Center, 80% of the benefit of special rates goes to the top 1% of Americans with incomes above $819,000. Fifty-eight percent of the benefit is accounted for by the top 0.1 percent of Americans — those with incomes above $3.45 million. Households in the top 0.1% receive an average annual benefit of more than $825,000 from lower tax rates alone.
(see Figure 1) The rich might try to keep these and other tax strategies secret. But if used correctly, these tax breaks and tax loopholes can benefit everyone by cutting state and federal taxes. As Congress considers increasing the income of HNWIs and aligning the treatment of wealth income and labor income, it is also expected to eliminate the special deduction for intermediate business income. This deduction, enacted in the 2017 Tax Act, allows owners of businesses such as partnerships, S companies, limited liability companies, and sole proprietorships to claim a 20% deduction on their business income, subject to certain restrictions. Because middle income is extremely concentrated on the rich, meaning they benefit the most from deductions, 61% of the benefit from this provision goes to the richest 1% of Americans. Like the special treatment of capital gains, the passing-on deduction leads to unfair differences in tax rates and invites business arrangements to be structured for tax avoidance purposes. President Biden`s budget does not include a pass-through withdrawal proposal, but Congress should repeal it. Wealthy owners of profitable businesses may choose never to sell their valuable shares and thus avoid paying taxes throughout their lives. If they need access to large amounts of money, they have plenty of options besides selling their shares. Larry Ellison, CEO of Oracle and one of the richest people in the world, pledged a portion of his Oracle stock as collateral for a $10 billion line of credit.
 In other words, he can borrow up to $10 billion, and if he doesn`t repay the debt, the bank can seize his Oracle shares. This allows him to receive money without selling his shares; In this way, it avoids paying taxes and the stock can continue to increase in value. While he has to pay interest on the debt and eventually repay the amounts borrowed, this is often a much cheaper strategy than selling stocks and paying capital gains taxes, especially when interest rates are low.  Josh Bivens, “Reslimiting the Power of the Rich with a 10% Surtax on Incomes Over $2 Million,” Economic Policy Institute, p. 12. April 2019, www.epi.org/blog/restraining-the-power-of-the-rich-with-a-10-percent-surtax-on-top-0-1-percent-incomes/.