The richest people in the United States pay little in income tax relative to their total wealth. That’s the obvious takeaway from Tuesday’s high-profile ProPublica story that used leaked IRS information to analyze the actual tax returns of the country’s 25 richest people. Between 2014 and 2018, it reported, these billionaires paid $13.6 billion in income taxes, which seems like a lot — until you learn their wealth grew by $401 billion during that same period.
Seven of the nine richest people in the U.S., according to Forbes, are company founders.
The ProPublica story describes this as the result of “tax avoidance,” which makes it sound somehow sinister (though the report does not allege they did anything illegal). But the gap between how much really rich people are worth and how much they pay isn’t, for the most part, the result of them using complicated tax loopholes to protect their money. It has to do with a change in how the people at the top have gotten so rich — and that poses a major challenge for people concerned about the concentration of wealth at the very top.
Decades ago, really rich people were the ones who typically earned a lot of money each year, either from salaries or — if they were what used to be called rentiers — from dividend payments from stocks, interest payments from bonds and rents from the properties they owned.
Of course, they would try to shelter their wealth and exploit every loophole they could. But they typically had a lot of income (and therefore income taxes) relative to their wealth. This is still the case today for many rich people, like doctors and lawyers and even corporate executives: They get paid a lot and therefore also pay a lot in taxes, relative to their wealth.
For the really really rich today — the people the ProPublica article is talking about — things are very different. Most of them are not paid very much at all. Even for those who are, their pay accounts for a small sliver of their total net worth.
In the U.S. tax system, capital gains don’t count as income — meaning you don’t have to pay taxes on them.
Jeff Bezos, for instance, has earned a salary of $81,840 a year from Amazon for two decades and has never gotten an award of stock or stock options from the company. He’s the world’s richest man because he’s held onto a significant stake in the company he started and because since it’s gone public, Amazon stock is up more than 12,000%. You can tell similar stories about Mark Zuckerberg at Facebook or Larry Page and Sergey Brin at Google or Warren Buffett at Berkshire Hathaway. (Elon Musk is an exception, in that Tesla gave him billions in options, but even then, he owns roughly 20 percent of the company.)
In fact, seven of the nine richest people in the U.S., according to Forbes, are company founders. They’re absurdly wealthy for a very simple reason: They’ve all held on to sizable stakes in the companies they started, and the stock prices of those companies have soared over the last 20 years. The increase in their wealth, in other words, is largely in the form of what are called “unrealized capital gains.”
In the U.S. tax system, capital gains don’t count as income — meaning you don’t have to pay taxes on them — until you actually realize those gains by selling an asset. So the billionaires in Tuesday’s article have been getting richer and richer while having income tax bills that are tiny next to their total wealth.
Bezos, for instance, actually reported more than $4 billion in income between 2014 and 2018 and paid almost $1 billion in income taxes, according to ProPublica, which isn’t what you’d expect if he was trying to “avoid” taxes. But he could afford it: Over that same period, his wealth grew by $99 billion. (Bezos' representatives declined to receive questions from ProPublica.)
No politically plausible changes to the income tax system will make a material dent in the massive concentration of wealth at the top.
In practical terms, then, the ProPublica piece is pointing to a problem with the American tax system: It’s not designed for a world in which the richest people can keep their money in stocks and let them keep appreciating (assuming the market keeps going up, of course), without ever having to sell.
So the story will lend support to ideas like Democratic Massachusetts Sen. Elizabeth Warren’s proposal for an annual wealth tax or Democratic Oregon Sen. Ron Wyden’s proposal for the government to tax unrealized capital gains every year. It should also increase support for a higher capital gains tax and for eliminating what’s called the “stepped-up basis” loophole, which allows heirs to avoid capital gains taxes on assets they inherit.
But what the article also makes inadvertently clear is that no politically plausible changes to the income tax system will make a material dent in the massive concentration of wealth at the top, because that concentration isn’t the result of people gaming the tax system. It’s largely the result of the rise in stock prices over the last few decades (the total market capitalization of global stock markets today is almost 40 times what it was in 1980) and in particular the incredibly steep rise in the value of a small number of world-dominating corporations like Amazon, Microsoft, Google and even Tesla. Those gains have been so big that even had these billionaires been paying, say, an annual wealth tax, they’d still be stunningly rich.
Why we’ve seen this sharp rise in stock prices is an interesting and complicated story. But the uncomfortable truth for people concerned about wealth inequality is that unless that rise is reversed — that is, unless stock prices fall quite a bit — the concentration of wealth at the top isn’t going away. And it’s not obvious that politicians and policymakers really have the appetite to drive down corporate profits and, thus, stock prices.
As long as Amazon and Tesla are incredibly valuable in the eyes of the stock market, Jeff Bezos and Elon Musk are going to be unimaginably rich. Tweaking the way capital gains are taxed isn’t going to change that.