The rich got richer while millions lost their livelihoods. It’s time for a wealth tax

Opinion by Chuck Collins for CNN Business Perspectives

If you paid $5 in taxes in 2011, you paid more that year than Jeff Bezos, one of the wealthiest people in the world.

That’s just one of the many revelations from ProPublica’s release of secret IRS files.

The fact that the US tax system is rigged in favor of the wealthy isn’t a surprise to anyone paying attention. But the report does highlight the urgent need to modernize the federal tax code — not only to raise revenue and ensure the wealthy pay their fair share, but also to slow these democracy-distorting levels of concentrated wealth and power.

The ProPublica report shows that 25 billionaires paid a true tax rate of just 3.4% on their gains between 2014 and 2018. Several billionaires paid zero taxes in some years over a more-than 15-year period, despite reaping historic wealth gains.

This information especially stings during a pandemic when millions have lost their livelihoods, savings and health, if not their lives. By contrast, US billionaires have seen their wealth increase collectively by more than $1 trillion since March 2020.

The top marginal income tax rate, which most recently peaked at 92% in the 1950s, has declined steadily since then — picking up downhill speed during Ronald Reagan’s presidency. In 2018, the effective tax rate on US billionaires was 23%, below the 24.2% rate paid by the bottom half of US households, according to tax economists Emmanuel Saez and Gabriel Zucman.

Declining top rates are part of the cause. Another is that the tax code provides preferential treatment for income from wealth over income from work.

Warren Buffett said in 2013 that he’d probably be the lowest taxpayer in his office because his income came from capital gains. Long-term capital gains are taxed at lower rates than income from work. Today, the top marginal income tax rate is 37%, compared to just 20% for long-term capital gains. The ProPublica report found Buffett’s wealth grew by $24.3 billion between 2014 and 2018, while he paid only $23.7 million in taxes — roughly 0.10% of this gain.

While ordinary taxpayers have their income taxes withheld from their paychecks, the wealthy have innumerable opportunities to shift, limit or hide their taxable income and assets.

Wealthy households take advantage of the fact that most of their income and wealth gains don’t appear on their tax returns because current tax rules don’t consider it “taxable income.” Unrealized wealth gains — like the increased value of a stock that hasn’t been sold or transferred yet — are not subject to tax, even though they account for the bulk of billionaire assets.

As I document in my book The Wealth Hoarders, the very wealthy can also hire “wealth defense industry” professionals — accountants, tax attorneys and wealth managers — to construct tax-minimizing business transactions, take advantage of loopholes or shift wealth into trusts. They will claim these are legal, but that is because they lobbied to rig the rules and construct the dodges themselves. These billionaires spend millions to hide trillions.

Now, it’s time for a tax system that, as President Biden calls for in his American Families Plan, “rewards work — not wealth.” Biden proposes to have the wealthy pay the same rate on capital gains and dividend income as they do on wages. That means households with incomes over $1 million would pay Biden’s proposed 39.6% rate on wages and investment returns. President Biden’s plan would also close a loophole that enables wealthy Americans to escape taxes on appreciated assets when passed down to heirs.

These are solid, popular proposals. And some lawmakers have offered strong ideas of their own to ensure the wealthy pay their fair share.

Senate Finance Committee Chair Ron Wyden proposes to tax unrealized capital gains in a policy paper, “Treat Wealth like Wages.” Senator Elizabeth Warren, Representative Pramila Jayapal and Representative Brendan Boyle introduced an annual wealth tax on fortunes over $50 million. Both of these proposals would reduce the concentrations of wealth and power in addition to raising substantial revenue.

The ProPublica report — along with growing research showing the completely inadequate tax contributions from the rich — will hopefully be the catalyst for a wave of progressive tax reforms like these.