To people who follow tax policy closely the story, while jarringly vivid, was not a surprise. E.g., we wrote a paper in 2019, which their story linked to, that explains how this works and used some of the same examples from publicly available documents:
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In a nutshell, how it works: the reason the richest people in the country pay so little individual income tax is that much of their income does not count as taxable income.
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I'll admit, I like getting packages delivered right to my doorstep as much as the next guy, but Jeff Bezos is a classic example. He is paid a salary of about $80,000 which, obviously, is not why he is the richest person in the country
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What makes Mr. Bezos rich are his holdings of Amazon stock. His primary source of income is the gains in the value of that stock. While all of the increased value is economic income, the current tax system, as a policy choice, only considers some of it taxable income.
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Specifically, the only income that is taxable from the increase in value of his stock holdings (i.e. capital gains) is from the shares of stock he sells. This is why the income tax is essentially a voluntary tax for the richest people in the country like Mr. Bezos.
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And as the story underscores, many very rich people decide not to volunteer to pay taxes on a large share of their income. In fact, they go to great lengths to opt out. To avoid paying taxes, many borrow huge sums to pay for their yachts and lavish lifestyles.
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They “defer” the taxes they would owe because this is a powerful way to get even richer and they know that the taxes they owe will simply be erased when they die. This combination is the “radical” circumstance I was referring to in this story:
nyti.ms/3vcjB2q
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Here is bit more detail on the Bezos example, as well as two other examples: Warren Buffett and Steve Jobs. This is from a paper we wrote based on publicly available information before the story.
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So what now? While the general public correctly perceives that wealthy have all kinds of high-priced lawyers and accountants to lower the taxes they pay, the fact that in some years the two richest people in the country pay no income taxes is likely to be shocking.
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Calls for proposals to ensure that the richest people in the country pay a fair amount of tax each year are likely to grow.
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One example is the “mark-to-market” proposal Senate Finance Chairman Wyden and others have advanced. It would tax rich people’s capital gains income on an “accrual” basis, as opposed to a cash or realization basis.
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The wealth tax proposed by Senator Warren and others is another way, outside of the income tax, to have the wealthiest people in the country pay some tax each year.
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The proposal that is front and center is President Biden’s. His approach is modest (as it leaves deferral in place).
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But the Biden approach is still significant. It at least would eliminate the provision that allows the richest people to have their deferred tax liability erased when they die, i.e. it would taxes capital gains at death. At a minimum, this Biden proposal needs to be enacted.
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The story should be a game-changer as far as this year’s – and future years’ – tax debate. Up until now it has been widely known that increasing taxes on wealthy people and corporations is popular. Now though there is more pressure for Congress – to act.
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