How the rich stay rich

The rich get richer, and the rest of us pay taxes.
That, in a nutshell, was the finding of a blockbuster exposé made possible by the leak of a massive trove of IRS tax returns of some of the richest people in the country, to the investigative news organization, ProPublica.
Many Americans have long suspected that the truly wealthy pay very little in taxes, but the analysis by ProPublica demonstrated in stark terms how the tax system as it exists in the U.S. today is designed to leave the wealthiest Americans virtually unscathed.
Average Americans are taxed from virtually the first dollar they earn, because so much of the nation’s tax structure is focused on wage income. We pay both federal and state income taxes on our paychecks. We pay Social Security and Medicare taxes on our paychecks.
Most of the truly rich, however, are able to game the system to pay next to nothing, while the average American pays a significant portion of their income every payday. Now, thanks to the leak of these IRS documents, we can speak in specifics rather than generalities.
For example, Jeff Bezos, the world’s richest man, paid not a penny in federal income taxes in 2007, despite seeing his wealth grow by an estimated $3.8 billion that year, according to Forbes. In 2011, he utilized tax investment loopholes to report he actually lost money and even claimed a $4,000 tax credit for his children at a time he was reportedly worth $18 billion.
ProPublica concluded that Bezos’ wealth increased by $127 billion between 2006 and 2018, yet he reported just $6.5 billion in income and paid just $1.4 billion in personal federal taxes, or 1.1 percent of the increased wealth he experienced during that same period.
Bezos was hardly alone. Warren Buffet, who has argued for higher taxes on the uber-rich, saw his wealth grow by $24.3 billion between 2014 and 2018, yet he reported paying just $23.7 million in income taxes. That works out to a tax rate on his increased wealth of just 0.1 percent. Michael Bloomberg, Elon Musk, and other of the nation’s richest people paid similar amounts.
The richest Americans benefit immensely from a tax system that largely avoids taxing wealth. The super-rich don’t really rely on wages to fund their lifestyles. Whether they actually work or sit poolside sipping piña coladas all day, makes little difference to their true income, since the vast majority comes from stocks, bonds, and other investments, most of which are handled by their money managers. The wealthy, in short, make money by being wealthy, whether their fortunes are earned or inherited. And because our system avoids taxing wealth, the rich just keep getting richer. While they are required to pay capital gains taxes on their investments when or if they sell them, the tax rates they pay are invariably less than the payroll taxes that average Americans pay.
The ProPublica analysis had other interesting comparisons. While the wealthy watched their riches grow immensely in recent years, while paying only a tiny percentage of that increase in taxes, that was not the case for average Americans. In fact, according to ProPublica, the average American family saw its wealth increase by just $89,000 from 2006-2018, most of that due to increases in the value of their home. During that same period, that family paid an average of $142,000 in federal taxes. No wonder so many Americans feel they’re going backward.
The situation makes the current debates in Washington over income tax rates seem like a sideshow. Even if the income tax for the nation’s richest billionaires were set at 100 percent, it would matter little because their increased wealth doesn’t come from sources subject to that tax. That’s one reason why some members of Congress, most notably Sen. Elizabeth Warren, have urged adoption of a wealth tax, that would enable the treasury to collect at least a small amount of the increase in wealth from the very richest people in the country. Such a tax is long overdue, if only because the current tax structure is dangerously unfair. Americans have long felt that the ultra-rich weren’t paying their fair share, but few of us realized how bad it really is. If Washington wants average Americans to continue to pay their taxes, it’s about time they demand the same of the richest Americans. Right now, they’re getting off virtually scot-free.