The invaluable investigate journalism organization ProPublica has started releasing analyses of tax data of wealthy people that it received from a source that reveal in great detail what we have always suspected, that the rich find all manner of ways to avoid paying taxes. Their receipt of this confidential information was likely made possible because of the ways that media organizations created in the wake of the Edward Snowden revelations that enabled sources and whistleblowers to anonymously transmit confidential information to trusted media sources with the media source not knowing where it came from and thus unable to reveal them either accidentally or under coercion.
ProPublica is not disclosing how it obtained the data, which was given to us in raw form, with no conditions or conclusions. ProPublica reporters spent months processing and analyzing the material to transform it into a usable database.
We then verified the information by comparing elements of it with dozens of already public tax details (in court documents, politicians’ financial disclosures and news stories) as well as by vetting it with individuals whose tax information is contained in the trove. Every person whose tax information is described in this story was asked to comment. Those who responded, including Buffett, Bloomberg and Icahn, all said they had paid the taxes they owed.
This first report is eye-opening.
ProPublica has obtained a vast trove of Internal Revenue Service data on the tax returns of thousands of the nation’s wealthiest people, covering more than 15 years. The data provides an unprecedented look inside the financial lives of America’s titans, including Warren Buffett, Bill Gates, Rupert Murdoch and Mark Zuckerberg. It shows not just their income and taxes, but also their investments, stock trades, gambling winnings and even the results of audits.
Taken together, it demolishes the cornerstone myth of the American tax system: that everyone pays their fair share and the richest Americans pay the most. The IRS records show that the wealthiest can — perfectly legally — pay income taxes that are only a tiny fraction of the hundreds of millions, if not billions, their fortunes grow each year.
Many Americans live paycheck to paycheck, amassing little wealth and paying the federal government a percentage of their income that rises if they earn more. In recent years, the median American household earned about $70,000 annually and paid 14% in federal taxes. The highest income tax rate, 37%, kicked in this year, for couples, on earnings above $628,300.
The confidential tax records obtained by ProPublica show that the ultrarich effectively sidestep this system.
To capture the financial reality of the richest Americans, ProPublica undertook an analysis that has never been done before. We compared how much in taxes the 25 richest Americans paid each year to how much Forbes estimated their wealth grew in that same time period.
We’re going to call this their true tax rate.
The results are stark. According to Forbes, those 25 people saw their worth rise a collective $401 billion from 2014 to 2018. They paid a total of $13.6 billion in federal income taxes in those five years, the IRS data shows. That’s a staggering sum, but it amounts to a true tax rate of only 3.4%.
It’s a completely different picture for middle-class Americans, for example, wage earners in their early 40s who have amassed a typical amount of wealth for people their age. From 2014 to 2018, such households saw their net worth expand by about $65,000 after taxes on average, mostly due to the rise in value of their homes. But because the vast bulk of their earnings were salaries, their tax bills were almost as much, nearly $62,000, over that five-year period.
The article goes on to describe how these tax avoidance schemes work. For example, in 2007 Bezos earned a meagre $46 million in income but was able to offset every penny of it “with losses from side investments and various deductions, like interest expenses on debts and the vague catchall category of “other expenses.””
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. [My italics-MS]
His tax avoidance is even more striking if you examine 2006 to 2018, a period for which ProPublica has complete data. Bezos’ wealth increased by $127 billion, according to Forbes, but he reported a total of $6.5 billion in income. The $1.4 billion he paid in personal federal taxes is a massive number — yet it amounts to a 1.1% true tax rate on the rise in his fortune.
The article goes on to give the true tax rates of some of the biggest avoiders over the period 2014 to 2018: Warren Buffet 0.10%, Jeff Bezos 0.98%, Michael Bloomberg 1.3%, Elon Musk 3.27%
Wealthy people and corporations use their political donations and lobbyists to include all manner of provisions in the tax system that enable them to avoid paying taxes. Then when their low tax rate is exposed, they defend themselves by saying that they were simply playing by the rules.
Every person whose tax information is described in this story was asked to comment. Those who responded, including Buffett, Bloomberg and Icahn, all said they had paid the taxes they owed.
One of the billionaires mentioned in this article objected, arguing that publishing personal tax information is a violation of privacy. We have concluded that the public interest in knowing this information at this pivotal moment outweighs that legitimate concern.
The consequences of allowing the most prosperous to game the tax system have been profound. Federal budgets, apart from military spending, have been constrained for decades. Roads and bridges have crumbled, social services have withered and the solvency of Social Security and Medicare is perpetually in question.
There is an even more fundamental issue than which programs get funded or not: Taxes are a kind of collective sacrifice. No one loves giving their hard-earned money to the government. But the system works only as long as it’s perceived to be fair.
Our analysis of tax data for the 25 richest Americans quantifies just how unfair the system has become.
By the end of 2018, the 25 were worth $1.1 trillion.
For comparison, it would take 14.3 million ordinary American wage earners put together to equal that same amount of wealth.
The personal federal tax bill for the top 25 in 2018: $1.9 billion.
The bill for the wage earners: $143 billion.
The biggest loophole was identified at its very inception as an open invitation for the wealthy to avoid taxes.
In the early years, the personal income tax worked as Congress intended, falling squarely on the richest. In 1918, only 15% of American families owed any tax. The top 1% paid 80% of the revenue raised, according to historian W. Elliot Brownlee.
But a question remained: What would count as income and what wouldn’t? In 1916, a woman named Myrtle Macomber received a dividend for her Standard Oil of California shares. She owed taxes, thanks to the new law. The dividend had not come in cash, however. It came in the form of an additional share for every two shares she already held. She paid the taxes and then brought a court challenge: Yes, she’d gotten a bit richer, but she hadn’t received any money. Therefore, she argued, she’d received no “income.”
Four years later, the Supreme Court agreed. In Eisner v. Macomber, the high court ruled that income derived only from proceeds. A person needed to sell an asset — stock, bond or building — and reap some money before it could be taxed.
Since then, the concept that income comes only from proceeds — when gains are “realized” — has been the bedrock of the U.S. tax system. Wages are taxed. Cash dividends are taxed. Gains from selling assets are taxed. But if a taxpayer hasn’t sold anything, there is no income and therefore no tax.
Contemporary critics of Macomber were plentiful and prescient. Cordell Hull, the congressman known as the “father” of the income tax, assailed the decision, according to scholar Marjorie Kornhauser. Hull predicted that tax avoidance would become common. The ruling opened a gaping loophole, Hull warned, allowing industrialists to build a company and borrow against the stock to pay living expenses. Anyone could “live upon the value” of their company stock “without selling it, and of course, without ever paying” tax, he said.
And sure enough, that is what is happening.
Certainly, there are illegal tax evaders among them, but it turns out billionaires don’t have to evade taxes exotically and illicitly — they can avoid them routinely and legally.
Most Americans have to work to live. When they do, they get paid — and they get taxed. The federal government considers almost every dollar workers earn to be “income,” and employers take taxes directly out of their paychecks.
The Bezoses of the world have no need to be paid a salary. Bezos’ Amazon wages have long been set at the middle-class level of around $80,000 a year.
For years, there’s been something of a competition among elite founder-CEOs to go even lower. Steve Jobs took $1 in salary when he returned to Apple in the 1990s. Facebook’s Zuckerberg, Oracle’s Larry Ellison and Google’s Larry Page have all done the same.
Yet this is not the self-effacing gesture it appears to be: Wages are taxed at a high rate. The top 25 wealthiest Americans reported $158 million in wages in 2018, according to the IRS data. That’s a mere 1.1% of what they listed on their tax forms as their total reported income. The rest mostly came from dividends and the sale of stock, bonds or other investments, which are taxed at lower rates than wages.
The tax math provides a clear incentive for this. If you own a company and take a huge salary, you’ll pay 37% in income tax on the bulk of it. Sell stock and you’ll pay 20% in capital gains tax — and lose some control over your company. But take out a loan, and these days you’ll pay a single-digit interest rate and no tax; since loans must be paid back, the IRS doesn’t consider them income. Banks typically require collateral, but the wealthy have plenty of that.
The vast majority of the ultrawealthy’s loans do not appear in the tax records obtained by ProPublica since they are generally not disclosed to the IRS. But occasionally, the loans are disclosed in securities filings. In 2014, for example, Oracle revealed that its CEO, Ellison, had a credit line secured by about $10 billion of his shares.
And the tax avoidance schemes even continue after death for the wealthy and their heirs.
Ultimately, after decades of wealth accumulation, the estate tax is supposed to serve as a backstop, allowing authorities an opportunity to finally take a piece of giant fortunes before they pass to a new generation. But in reality, preparing for death is more like the last stage of tax avoidance for the ultrawealthy.
University of Southern California tax law professor Edward McCaffery has summarized the entire arc with the catchphrase “buy, borrow, die.”
The notion of dying as a tax benefit seems paradoxical. Normally when someone sells an asset, even a minute before they die, they owe 20% capital gains tax. But at death, that changes. Any capital gains till that moment are not taxed. This allows the ultrarich and their heirs to avoid paying billions in taxes. The “step-up in basis” is widely recognized by experts across the political spectrum as a flaw in the code.
Wealth managers offer clients a range of opaque and complicated trusts that allow the wealthiest Americans to give large sums to their heirs without paying estate taxes. The IRS data obtained by ProPublica gives some insight into the ultrawealthy’s estate planning, showing hundreds of these trusts.
The result is that large fortunes can pass largely intact from one generation to the next. Of the 25 richest people in America today, about a quarter are heirs: three are Waltons, two are scions of the Mars candy fortune and one is the son of Estée Lauder.
Warren Buffet is one of the biggest hypocrites, publicly saying that rich people should pay more taxes while being the biggest tax avoider. The article lists all the ways that Buffet avoids paying taxes. There is no use just saying that you are in favor of rich people paying higher taxes. If Buffet really cared about this, he would spend some of his billions lobbying Congress and funding an advertising blitz calling for changes in the tax laws to eliminate all the loopholes that he and his cohort take advantage of.
This is why Republicans have been deliberately gutting the IRS over the years. They do not want it to have agents who will look too closely into the tax avoidance schemes of the wealthy. This is also why they are outraged at the Inflation Reduction Act passed by Democrats at the very end of the last Congress and signed into law by Biden to allow the IRS to hire 87,000 more employees. The wealthy skate very close to the edge in their tax avoidance schemes and they do not want close examinations of what they do. So their Republican stooges lie in order to shift the focus from these agents helping to raise more money from the rich (which is very popular) to suggesting that these IRS people will act like jack-booted thugs raiding ordinary people. Indeed one of the first actions that the new Republican majority in the House of Representatives did was to pass a bill removing $80 million from the IRS so that they would have to let go all those people. Of course the bill went nowhere in the Democratic-controlled senate and Biden would veto it anyway, but it shows how devoted Republican legislators are to their paymasters.
As someone once said, what is scandalous in the US is not what is illegal but what is legal.
And yet even here, repeatedly, there’s talk of the “middle class”, as though they’re in some way not “working class”. If you have to work to live, you’re working class.
“wage earners” = working class people.
Oh that’s the “middle class” level, is it? The middle class level of the money that you have to make, every year, otherwise you lose your house? Sounds working class to me. If someone took that $80k off Bezos, he’d not notice the difference. Sting was famously defrauded by his accountant to the tune of over six MILLION pounds, six million pounds Sting didn’t even register as missing, and Sting isn’t even worth half a billion.
There are two classes. You can argue about the name for the other one, but if you have to work, whether you make £18k or £80k or £180k -- if you have to work, face it, you’re working class.
Marcus Ranum says
The rich steal harder.
Marcus Ranum says
Bezos’ Amazon wages have long been set at the middle-class level of around $80,000 a year.
Meanwhile, the value of his stock in the company soared off the chart. The $80k is chump change for him.
This is another of the tricks -- founders of a company essentially grant themselves shares at very little cost when they found the company. Say you start amazon.com and value it at $10,000, sell yourself half of the company for $5,000 and then when you raise money in a venture round at a valuation of $500,000,000 your 50% shares are worth $250,000,000 but you have no tax consequences until you start selling shares. Normally, a person would think “wow, I just made $250,000,000 maybe I can sell some shares and buy lamborghinis hookers and blow!” but that’s not enough for some people -- like the founder of Patagonia -- who create a charity, give the shares to the charity which then sells them and incurs no tax because it’s a 501C3 -- then, it pays the founder a directors’ fee of 5% of the total asset value every year…
[Disclosure, I have been on the board of directors or a founder of 4 publicly traded companies. I know this dodge because I’ve done it. It’s easy to justify, too -- “any dollar I give the US government is just going to be funnelled into the department of defense and spent on high explosive, so fuck that I’m going to avoid every tax I can and actively spend the money to do good and buy hookers and blow because at least that doesn’t kill anyone]
Federal taxes at 14% is only part of what wage earning people have taken from their wages.
Add on SS/Medicare/State taxes, and self-employed people making 40,000 to 60,000 annually pay 29% of their gross income in taxes.
That doesn’t include sales tax, property tax, licensing, and all the hidden taxes on services and utilities.
John Morales says
sonofrojblake, different use of the terminology in the USA to that of the UK.
If you work and then you die, you’re working class.
If you work and then you retire, you’re middle class.
Surely if you work… you’re working class. Unless you don’t HAVE to. Unless you’re just a tourist. https://youtu.be/yuTMWgOduFM
John Morales says
Elon Musk works.
Bill Gates works.
Vladimir Putin works.
Reading this entry readily put me into a funk. How so few can oppress so many.
John Morales says
antaresrichard, the Golden Rule.
(Who has the gold makes the rules)
Capital gains are taxed at a much lower rate than earned income aka wages.
This enables those who have disposable income to invest risk free, since they can offset their gains by subtracting their losses off the top.
Wage earners never see their gross income, as their taxes are subtracted from their paychecks regardless of their ability to live on that wage.