The pandemic has been good for the ultra rich like Elon Musk and Jeff Bezos whose fortunes are tied to the stock market.
Yet many of these billionaires pay little in taxes, and that has sparked a big push by progressives for a “wealth tax.”
Recently, Sen. Ron Wyden (D-OR), the chairman of the Senate Finance Committee, introduced a version of that. Wyden calls it a “billionaires tax,” targeting the ultra rich as a way to help pay for President Biden’s agenda.
It didn’t get far. Barely a day after he proposed the plan, it was cut from the bill.
Tax experts were not surprised. As it turns out, taxing billionaires is incredibly difficult, and a wealth tax would be even harder to pull off.
Here are a few reasons why (and why Wyden’s proposal has failed to gain traction).
So first, how much wealth are we talking about here?
A lot. Over the last 12 months, as many Americans struggled, U.S. billionaires such as Jeff Bezos saw their aggregate net worth surge by more than $1.2 trillion, according to Bloomberg News.
To put that in context, that’s roughly the size of Japan’s entire economy, and it’s almost two times the size of India’s.
“What’s happened during the pandemic is that the wealthiest of the wealthy seem to be reaping a huge percentage of the rewards,” says journalist Ben Steverman, who helps compile the Bloomberg Billionaires Index.
Yet, according to recent reporting by ProPublica, some of the world’s richest people have paid little or nothing in federal income taxes. (ProPublica obtained data from confidential tax returns, sparking outrage among some lawmakers about how the information was leaked).
How is that possible?
Fundamentally, it has to do with how the U.S. tax system is structured. Income is subject to federal taxes, but wealth isn’t.
“It’s not complicated,” says Scott Dyreng, a professor of accounting at Duke University. “It’s just the magnitude of the wealth is so great that they’re able to do things that you and I wouldn’t be able to do.”
And the super rich often earn the bulk of their compensation in company stock, not salaries.
That means they have seen their wealth balloon as markets have set records during the pandemic.
“I do not take a cash salary or a bonus from anywhere,” Elon Musk wrote on Twitter this month when he waded into the wealth tax debate. “I only have stock, thus the only way for me to pay taxes personally is to sell stock.”
Getting compensation in shares has another huge advantage. In the U.S., stocks are not liable for taxes unless sold, and the rich often don’t sell their holdings unless they have to.
In fact, they often pass them on to their offspring, who can also hold onto the stock.
What if the rich need money?
Rather than sell their shares, the super rich can borrow against their holdings. In effect, they use them as collateral for loans.
“They have so much stuff that they can convince a bank to lend them money for their cashflow needs,” Dyreng says. “So, they don’t need to have income. They just have assets that back loans.”
Billionaires also use stock to cover other expenses.
So what is Sen. Wyden suggesting?
Wyden has proposed a tax narrowly targeted at U.S. billionaires’ assets. According to Wyden’s office, “they would pay tax on gains or take deductions for losses, whether or not they sell the asset.”
The Joint Committee on Taxation in Congress has analyzed Wyden’s proposal, and its economists estimate it could raise $557 billion in revenue over the next decade.
Why did it fail to gain traction?
A key reason why a wealth tax, or even just raising taxes on the rich, is difficult is Congress.
Many lawmakers fear the political consequences of doing away with loopholes or increasing taxes.
“I don’t like the connotation that we’re targeting different people,” Sen. Joe Manchin (D-WV) told reporters after the billionaires tax was introduced. “It’s time that we all pull together and grow together.”
Manchin, who opposed the proposal, also said the super rich shouldn’t be vilified when they “create a lot of jobs and a lot of money, and give a lot to philanthropic pursuits.”
Musk also objected on Twitter, saying Wyden was just targeting people like himself.
“Eventually, they run out of other people’s money and then they come for you,” he wrote.
Days after that tweet, Musk polled his 63 million followers about whether he should sell 10% of his stock, presumably as a way to show he was willing to pay taxes.
This week, Tesla announced Musk sold around $5 billion worth of his shares in the company. Some of the transactions were planned before he published his Twitter poll, and part of the proceeds were used to cover taxes on stock options he exercised.
Collection is a challenge even if a wealth tax is passed
ProPublica’s report showed how the rich often find a myriad of ways to avoid taxes.
The U.S. tax code is full of loopholes, and time and time again, U.S. billionaires have demonstrated how skilled they — and their accountants — are at making use of them.
The rich can also relocate to avoid paying higher taxes. Recently, Musk moved to Texas, a state that has no income tax.
France is another example of the limits of a wealth tax. After imposing higher taxes on the rich, more than 40,000 millionaires left the country.
Because of all this, Dyreng, the Duke professor, sounds a cautionary note about how effective a wealth tax could be.
Even if there were the political appetite in congress to pass Wyden’s “billionaires tax,” or something like it, it’s almost certain the super rich would try to find ways to get around it, according to Dyreng.
“I have never seen a tax that was not avoided in some way,” he says.