Recent White House tax study shows rich people pay lower rate than everyone else – ProPublica

ProPublica is a non-profit newsroom that investigates abuse of power. This column was originally published in Not Shutting Up, a newsletter on issues of journalism and democracy. Register here.

Ten years ago, in an essay for the New York Times, Warren Buffett revealed that he paid nearly $ 7 million in federal taxes in 2010. “That sounds like a lot of money,” he said. -he writes. “But what I paid was only 17.4 percent of my taxable income – and that’s actually a lower percentage than that paid by one of the other 20 people in our office. Their tax burden ranged from 33% to 41% and averaged 36%.

The words “taxable income” do a lot of work in this sentence.

Buffett owns a substantial number of shares in Berkshire Hathaway, the hugely successful holding company he founded decades ago. As the company’s shares have skyrocketed almost every year, its wealth has increased by billions. Under the US tax code, none of this is taxed until he sells stocks at a profit.

A little math shows that Buffett’s 17.4% rate meant he reported income of around $ 40.2 million in a year that Forbes said his wealth increased by $ 3 billion. of dollars. His revelation compared how much he was paying the government to the increase in the size of his fortune.

No one did, and Buffett became something of a folk hero for calling for a tax increase.

When we had access to a wealth of tax data on the richest Americans, it quickly became clear to our reporters that Buffett’s comparison of his own tax rate and that of his employees significantly underestimates the inequity. of our tax system. Buffett is far from unique; the documents showed that the amount of money people like Michael Bloomberg, Jeff Bezos, or Elon Musk reported to the IRS as income was infinitesimal compared to their annual wealth gains.

Thus, the first story of our “Secrets IRS Files” series introduced a new concept that makes more sense in our golden age of the 21st century; we called it “the real tax rate”. We’ve compared the annual taxes paid by the ultra-rich to their wealth gains to give readers a sense of how the system actually works.

From 2014 to 2018, we noted, Buffett paid $ 125 million in federal taxes. Like he said, that sounds like a lot. But according to Forbes, his wealth grew by $ 24.3 billion during that time, bringing his true tax rate to 0.1%. In a detailed written response, Buffett defended his practices but did not directly address the true calculation of ProPublica’s tax rate.

When we published this story, howls of rage rang out from the free corners of Twitter to the ornate offices of Wall Street. Some of the more pissed off critics wrote to me directly and asked if I was if @ #[email protected] stupid not to have understood the meaning of the word “income tax”.

“This story, unfortunately, reeks of ‘class envy’,” wrote one angry reader. “If this was all about getting clicks, you made your money. We are a non-profit organization and our ad revenue adds next to nothing to our annual budget, but I understand this reader’s most important point, which we noted in the story: the ultra-rich just do what the current tax code invites them to do so.

The debate intensified, and the tax proposals backed by the White House and put forward by Congressional Democrats largely followed the traditional approach of raising rates on income. A separate bill introduced by Senators Elizabeth Warren and Bernie Sanders to impose a 3% tax on all wealth over $ 1 billion is seen as unlikely to pass.

The reluctance to adopt a wealth tax runs deep. The biggest donors on both sides would be hit hard by such a law. And as we pointed out in our initial story, the complexities of taxing wealth are not trivial. Several countries have tried and struggled to find a fair way to tax capital gains. Does an entrepreneur whose shares skyrocket in one year and pay a hefty tax deserve a rebate if his company’s shares fall the following year?

That said, we took note when White House economists released a study that used publicly available data to estimate “the average federal personal income tax rate paid by the top 400 richest American families. “in recent years, determined using a more comprehensive measure of income. . “Their methodology was similar to ours, and their findings – that these families earned $ 1.8 trillion from 2010 to 2018 and paid 8.2% in taxes – are consistent with what we found in the data. tax.

The authors say their findings are evidence to support President Joe Biden’s plan to tweak the existing system; the words “wealth tax” are not mentioned. They highlight the administration’s proposal to impose higher tax rates on stock dividends and on capital gains, the profit an investor earns from the sale of a stock whose value has increased. .

(The Biden administration proposed to remove a provision in the tax code that protects heirs who inherit shares from payment of capital gains tax on growth in value that occurred before the shares were transferred. )

None of the proposed changes come close to filling the biggest hole in the system – that an ultra-rich person can live comfortably on wealth gains without ever selling a single stock. As our initial story pointed out, the Buffetts and Bezos of the world can borrow against the value of their considerable holdings and live comfortably without selling stocks or receiving dividend income, which new companies like Tesla and Amazon do not pay. not.

The strategy, known as “buy, borrow, and die,” allows the rich to quickly amass fortunes, pay no tax on those gains, and pass much of the wealth on to their descendants.

Herb and Marion Sandler, the founders of ProPublica, made it clear from the start that they hoped our journalism would spur change in the real world. They weren’t particularly interested in stories whose greatest effect was that they had “started a conversation.”

We always measure our success by tangible effects. But over the years, we’ve seen that the path to impacting very complex issues can begin by changing the conversation.

Lawmakers have said some of the most egregious tax loopholes we’ve exposed, including multibillion-dollar Roth IRA accounts, will be investigated as Congress passes tax legislation in the coming months.

It is not clear where the larger conversation on taxation of wealth will lead. As the White House document suggests, a new way of thinking about equality and taxation has taken center stage. Whether this ultimately results in change remains an open question.

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