Elizabeth Warren wants to investigate Warren Buffett and other billionaires’ tax practices – and probe the banks and wealth managers behind them

Warren Buffett
Warren Buffett.

  • Sen. Elizabeth Warren criticized Warren Buffett’s tax practices in an open letter.
  • The senator wants an investigation into how banks and wealth managers enable tax avoidance.
  • ProPublica recently reported how Buffett and other billionaires minimize their tax bills.
  • See more stories on Insider’s business page.

Billionaires aren’t paying their fair share of taxes, and the banks and wealth managers enabling them should be investigated, Sen. Elizabeth Warren and Sen. Sheldon Whitehouse said in an open letter on Wednesday.

Warren and Whitehouse wrote to Ron Wyden, the chairman of the Senate’s finance committee, after ProPublica obtained the tax records of many ultra-wealthy Americans and published some of its findings.

The lawmakers highlighted the non-profit journalism outlet’s “deeply troubling allegations” that billionaires have borrowed huge sums against their companies’ stock to fund their lavish lifestyles, then deducted the interest on those loans from their taxable income, meaning they’ve paid zero federal income tax in some years. Borrowing also spares them from having to sell stock and incur capital-gains taxes.

The senators called out Warren Buffett, the famed investor and Berkshire Hathaway CEO, for paying taxes equivalent to less than 0.1% of the $24 billion increase in his wealth in 2018. They also noted that Amazon founder Jeff Bezos claimed a $4,000 child tax credit and reported a loss on his tax return in 2011, when he was worth $18 billion.

“This tax avoidance by the nation’s wealthiest individuals is profoundly unfair,” Warren and Whitehouse wrote. The pair argued that billionaires shortchanging the government prevents it from investing in education, healthcare, infrastructure, and the environment. It also exacerbates inequality, distorts the US economy, and results in an unfair tax burden for low-income and middle-class families, they added.

While the vast majority of the ultra-wealthy’s tax practices are legal, they allow those individuals to “reap billions from their investments and live lives of privilege that are beyond the imagination of most families,” the lawmakers said.

Warren and Whitehouse called on Wyden and his committee to investigate the matter, hold hearings, and craft new laws to prevent tax avoidance. In particular, the pair urged them to investigate the large financial institutions that provide large, cheap, stock-backed loans to the super rich, letting them live on borrowed money instead of taxable income.

While the senators singled out Buffett, there’s no indication the investor borrows money to fund his relatively modest lifestyle, or has ever paid zero federal income tax. ProPublica said the billionaire minimizes his tax bill by not paying a dividend and keeping his wealth in Berkshire stock. Yet his shareholders have overwhelmingly voted against a dividend, and long-term stock ownership is a key element of Buffett’s investing philosophy.

Moreover, Buffett has called for higher taxes on the wealthy, and recently reached the halfway point in his goal of gifting 99% of his fortune to good causes.

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A ProPublica journalist explains how Jeff Bezos, Elon Musk, and other billionaires approach taxes in a new interview. Here are the 15 best quotes.

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Elon Musk and Jeff Bezos.

  • ProPublica’s Jesse Eisinger explained how billionaires may minimize their income to avoid taxes.
  • The journalist discussed Jeff Bezos, Elon Musk, Warren Buffett, Carl Icahn, and Michael Bloomberg.
  • He flagged the tax system’s shortfalls and argued that philanthropy can’t replace government.
  • See more stories on Insider’s business page.

ProPublica recently published a bombshell report on how billionaires including Jeff Bezos, Elon Musk, and Warren Buffett pay minimal federal income tax relative to their vast fortunes. Jesse Eisinger, one of the journalists responsible for the story, discussed his key takeaways on the latest episode of The New York Times’ “Sway” podcast.

Eisinger explained how some of America’s wealthiest people have minimized their incomes and paid zero federal income tax in recent years, argued that philanthropy isn’t a substitute for government, and called for changes to the tax system.

Here are Eisinger’s 15 best quotes, lightly edited and condensed for clarity:

1. “The ultra-wealthy are not in our tax system. They’re off in an entirely different universe, one where income is essentially voluntary. The shorthand for what they’re doing is ‘buy, borrow, die.’ You buy, or you build, or you inherit your money. You borrow against it. You don’t pay taxes on the gains. And then when you die, there are various ways that you can avoid estate tax.”

2. “The means that they have at their disposal – their purchasing power, their political power, their influence, their charitable givings – all emanate from their wealth and, more directly, their wealth growth. We thought that wealth growth is more properly thought of as income for these people. Everybody has said, ‘Checkmate, ProPublica, you idiots, we don’t tax unrealized gains in this country,’ to which we say, ‘Yes, that is the point of our article.'”

3. “If you had asked tax experts and wealth experts last week, ‘Does Jeff Bezos pay zero in federal income tax? Does Elon Musk pay zero? Does Mike Bloomberg?’ – most people would say no. That’s a pretty shocking thing.”

4. “There is a wealth tax in this country for average Americans. It’s property tax. Most people’s houses are their font of wealth, and they’re taxed every year.”

5. “Warren Buffett is really astonishing. He’s the king. He has avoided more tax than anyone in America by our measurements.” – the famed investor minimizes his income by keeping his fortune in Berkshire Hathaway stock and not paying a dividend, ProPublica reported. He defended himself to the publication.

6. “Elon Musk is outside of the regular tax system. He gets paid when he wants to get paid. He takes income at the time and place of his choosing. If you can imagine arranging your affairs so that you can control when income comes in, that gives you an enormous amount of leeway over your taxable income.”

7. “Carl was great. He was incredibly charming and was totally perplexed by the concept of needing to pay taxes. ‘If you don’t have income, you don’t pay taxes.’ He was very amusing.” – discussing how billionaire investor Carl Icahn declared $500 million of income between 2016 and 2017, but reduced his taxable income to zero by borrowing against his assets to boost his investment returns, then deducting the interest costs of the loans.

8. “What the wealthiest person in the country contributes to American society through a tax system that we all need to contribute to – that’s a little bit more newsworthy than a crotch shot.” – dismissing a comparison between ProPublica publishing details of Amazon CEO Jeff Bezos’ tax returns and tabloids releasing supposedly intimate photos of him.

9. “We don’t have any evidence that Warren Buffett borrows. Not all these guys have exactly the same model or do all of this in lockstep with each other. But what we do know is that Buffett takes hardly anything for income, so when he talks about raising tax rates for the rich, it’s essentially irrelevant to him. It’s really irrelevant for all these guys.”

10. “Bloomberg said it’s a violation of his privacy, which was an interesting statement for a person who runs one of the most important media companies in America.” – on Michael Bloomberg’s response to ProPublica publishing details of his tax returns.

11. “We have thousands of people. We’re going to be doing stories all year on various aspects of it. And we’ll name many, many more people, but only in what we consider to be responsible ways that are in the public interest.”

12. “Warren Buffett said to us, ‘I’m going to give 99%-plus of my fortune to charity … that’s going to be better for society than paying down the United States debt.’ I would like to allocate my tax dollars the way I want, spend them on this and not that. But we collectively have a society, and we have a democracy. And the democracy gets together and makes priorities. And then we influence the democracy through the vote.”

13. “There are certain collective functions of government that charities could never do. We do need government to do some things, and government can’t do it if it’s starved, if the roads and bridges are crumbling, if we think that Social Security and Medicare are going to go bankrupt.”

14. “There are whole swaths of the tax system that just simply do not function anymore. We don’t have enforcement. We don’t have auditing from the IRS. The budget has been gutted. The wealthiest among us could be paying tens of billions of dollars more every year in income taxes – not even talking about a wealth tax -if we had a different kind of income tax system or taxation system in general.”

15. “There are two extraordinary things about death in our tax code that are great gifts to the ultra-wealthy.” – highlighting the “step-up in basis” which raises the cost base of appreciated assets when they’re inherited, and structures such as trusts that let recipients avoid paying inheritance tax.

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Warren Buffett is under fire for avoiding taxes. Give him a break.

warren buffett
Warren Buffett.

OPINION

  • Warren Buffett is getting roasted for avoiding taxes after ProPublica’s bombshell report.
  • The billionaire investor is donating almost all of his money to good causes.
  • Buffett lives modestly, supports higher taxes on the wealthy, and doesn’t use popular tax loopholes.
  • See more stories on Insider’s business page.

Warren Buffett is being cast as the face of billionaire greed after ProPublica reported this week that he pays very little in federal income taxes relative to his vast wealth.

However, the investor’s minimal tax bill seems far less outrageous when viewed in the context of his modest lifestyle, philanthropic efforts, the nature of his company and its shareholders, his calls to raise taxes on the wealthy, and his refusal to use popular tax loopholes.

The case against Buffett

ProPublica analyzed leaked copies of Buffett’s tax returns between 2014 and 2018, and found the Berkshire Hathaway CEO paid just $24 million in federal income taxes on $125 million of reported income. The non-profit publication emphasized how little tax he paid by pointing out that his net worth grew by an estimated $24 billion in that five-year period.

“No one among the 25 wealthiest avoided as much tax as Buffett, the grandfatherly centibillionaire,” ProPublica declared.

Read more: Warren Buffett is hoarding $80 billion of cash, cleaning up his stock portfolio, and declining to bash bitcoin. Veteran investor Thomas Russo says why that strategy will ultimately pay off.

Politicians including Sen. Chris Murphy, Sen. Bernie Sanders, Sen. Elizabeth Warren, and Rep. Pramila Jayapal rushed to condemn Buffett and his fellow billionaires, calling for heftier taxes on the super rich and the closure of loopholes in tax laws.

ProPublica highlighted Buffett’s two main strategies to minimize his income, and therefore his taxes. The investor keeps over 99% of his wealth in Berkshire stock – which isn’t taxed until sold – and his company doesn’t pay a dividend, which shareholders would have to pay taxes on.

Not a typical billionaire

ProPublica reported that billionaires such as Amazon CEO Jeff Bezos and Tesla CEO Elon Musk paid no federal income taxes in some years, partly by taking out loans and deducting the interest paid on them from their incomes. There’s no indication that Buffett uses the same tricks; the investor said in 2016 that he has paid taxes every year since 1944.

Bezos is reportedly building a yacht so large that it comes with a support yacht, while Musk previously boasted a real-estate portfolio valued at north of $100 million – although he appears to have sold most of it to fund his dream of colonizing Mars.

The 90-year-old Buffett lives far less extravagantly. He resides in the same house in Omaha, Nebraska that he bought for less than $32,000 in 1958 ($290,000 in today’s dollars). He grabs breakfast at McDonald’s on his daily drive to Berkshire headquarters, guzzles Coca-Cola, and snacks on See’s Candies. He treats himself with an occasional trip to Dairy Queen, and entertains himself by playing online bridge.

The investor doesn’t use a company car, belong to any clubs where Berkshire pays his dues, or commandeer company-owned aircraft for his personal use – even though Berkshire owns NetJets, which sells fractional ownership of private jets.

Buffett also buys damaged cars and has them repaired to save money, and drove the same Cadillac for eight years until his daughter told him it was embarrassing and badgered him into upgrading to a newer model in 2014.

Notably, the Berkshire chief has drawn a $100,000 annual salary for the past 40 years – a fraction of the $15 million average pay of S&P 500 CEOs in 2019 – and doesn’t receive bonuses or stock options. While some details might be embellished, it’s clear that he lives a modest lifestyle relative to other billionaires.

Giving it all away

Buffett defended his tiny tax bill in a detailed statement to ProPublica, explaining that he’s pledged to donate more than 99% of his fortune to good causes. He’s donated about half of his Berkshire stock – worth about $100 billion at the current stock price – to five foundations since 2006.

The Berkshire chief told ProPublica that he prefers to hand his money to charitable organizations such as the Bill and Melinda Gates Foundation instead of the government.

“I believe the money will be of more use to society if disbursed philanthropically than if it is used to slightly reduce an ever-increasing US debt,” he said.

Read more: Warren Buffett’s Berkshire Hathaway has $140 billion in cash, yet it pulled billions out of Apple, Costco, and Chevron. Veteran investor Chris Bloomstran explains why the cash pile isn’t excessive and the sales made sense.

Buffett, aware that skeptics would likely dismiss his charity as a tax write-off, added that he’s only garnered 50 cents in tax benefits for every $1,000 he’s donated over the past 15 years.

The investor made a similar point in 2016, after Donald Trump accused him of taking a massive tax deduction. Buffett shared the details of his 2015 tax return, highlighting that he paid $1.8 million in federal income tax on $11.6 million of gross income, and only deducted $3.5 million for charitable contributions despite giving almost $2.9 billion to charity that year.

Moreover, Buffett noted that only $36,000 of his $5.5 million in total deductions that year were unrelated to charity or state income taxes. He added that he’s never used a “carryforward,” which allows taxpayers to deduct losses or tax credits from previous years. He pegged his unused carryforward at north of $7 billion in 2010.

Buffett clearly sees charitable donations as a reasonable way to pay fewer taxes, and has championed them in the past.

“If you want to give away all of your money, it’s a terrific tax dodge,” he quipped in response to an investor’s question at Berkshire’s annual shareholder meeting in 2010. “I welcome the questioner or anybody else following my tax dodge example and giving away their money. They will save a lot of taxes that way, and the money will probably do a lot of good.”

Buffett is also happy to keep his fortune in Berkshire stock. It signals to investors that he’s confident in his company and focused on generating long-term value, and means he has more skin in the game than anyone else. Moreover, he doesn’t feel guilty as his company’s success will ultimately benefit society.

“Many shareholders, including me, enjoy the long-term buildup in value, knowing that it is destined for philanthropy, not consumption or dynastic aspirations,” he told ProPublica.

Buffett also explained that Berkshire doesn’t pay a dividend because its shareholders overwhelmingly voted against one in 2014. They prefer Buffett to allocate Berkshire’s profits across the conglomerate and use them to buy quality stocks and businesses, instead of returning cash to them. Buffett also views buybacks as superior to dividends for several reasons, not just tax efficiency.

Buffett wants higher taxes

While some billionaires complain of excessive taxes on the wealthy, Buffett has called for higher taxes on the richest 1% of Americans, as well as changes to the tax code to prevent tax avoidance.

The investor highlighted more than a decade ago how ridiculous it was that his secretary paid a higher tax rate than him. The revelation spurred President Barack Obama to pursue the removal of tax breaks for the wealthy, and name his ultimately unsuccessful bill after Buffett. “If all the diseases have been taken, I’ll take a tax,” the investor joked at the time.

Buffett has also called for policies to reduce income inequality, such as expanding the earned-income tax credit to help workers get ahead. He once testified to Congress that estate taxes should be higher and better enforced, he told ProPublica, but his “persuasive powers proved to be limited.”

Overall, it’s not surprising that under the current tax rules, a 90-year-old who keeps his fortune in his company’s stock, and funds a simple lifestyle with a modest income, doesn’t pay a lot of tax.

It seems harsh to go after Buffett when he’s giving away virtually all of his money, calling for higher taxes on the wealthy, refusing to use several loopholes to pay less tax, and running a company where holding its stock for the long term and not paying a dividend makes perfect sense.

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ProPublica’s bombshell tax investigation reportedly has lawmakers eyeing policy changes. One senator who designed a key corporation tax cut says it wasn’t supposed to let ‘multibillionaires’ avoid tax.

EW   Photo by Tom Williams Pool:Getty Images
Democratic Senator Elizabeth Warren has proposed introducing a wealth tax.

A ProPublica investigation into the tax records of the richest people in the US, which showed that some avoided paying federal income tax even as their wealth grew, has renewed debate in Congress about tax reform, The New York Times reports.

The nonprofit news site ProPublica published a report on Tuesday showing how much the 25 richest Americans – including Jeff Bezos, Elon Musk, Warren Buffett, Bill Gates, and Mark Zuckerberg – paid in tax. The report highlighted how two key tax loopholes benefit billionaires.

Some billionaires had slashed their tax bill via deductions made possible by tax cuts passed during the Trump administration, the ProPublica report said.

Republican Sen. Patrick J. Toomey, of Pennsylvania, told The New York Times that a 2017 corporation tax cut that he helped author was not intended to let the super-rich avoid paying taxes.

“My intention as the author of the 2017 tax reform was not that multibillionaires ought to pay no taxes,” Toomey told the NYT. “I believe dividends and capital gains should be taxed at a lower rate, but certainly not zero.”

Read more: ProPublica’s billionaire tax data shows the importance of closing 2 key tax loopholes. Here’s how.

ProPublica reported that Musk’s wealth grew by $14 billion from 2014 to 2018, but that he only paid $455 million in taxes. Bezos did not pay any income taxes for at least two years between 2006 and 2018, the report said.

Buffett paid minimal tax by holding Berkshire Hathaway stock and not paying a dividend, according to ProPublica’s report. The investor defended himself in a statement to the news outlet, saying his shareholders didn’t want a dividend and that he gave nearly all of his money to good causes.

A Republican-led Congress cut the corporation tax rate from 35% to 21% in 2017 under former President Donald Trump, benefiting company shareholders. The 2017 Tax Cuts and Jobs Act also reduced the tax rate for the top income bracket from 39.6% to 37%.

Democratic Sen. Ron Wyden, chairman of the Senate finance committee, said he was considering new reforms following the report, but did not share details.

Democratic Sen. Elizabeth Warren has pushed for a wealth tax – a 2% tax on a person’s net worth between $50 million and $1 billion. In March, Warren introduced an Ultra-Millionaire Tax Act with Rep. Pramila Jayapal of Washington and Rep. Brendan Boyle of Pennsylvania.

“Raising multibillionaires’ income taxes isn’t enough when these guys don’t grow their fortunes from income,” Warren tweeted Wednesday. “We need a Wealth Tax in American to help fix a tax system that’s rigged for the rich and powerful.”

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ProPublica said that it doesn’t know the source of its secret tax information on the super-rich, and admitted that a hostile state could have sent it

propublica sign
  • ProPublica said it does not know the identity of the source who passed them a trove of IRS files.
  • The outlet published a bombshell investigation into the tax practices of the mega-rich.
  • ProPublica said it is confident of the material even if the source had hostile motives.
  • See more stories on Insider’s business page.

ProPublica says it does not know the identity – or motivations – of the source who passed it private tax documents for its recent bombshell investigation of the ultra-rich.

On Tuesday, the left-leaning outlet published its a flagship investigation based on the private IRS documents of billionaires such as Jeff Bezos, Elon Musk, Michael Bloomberg and Warren Buffett.

The federal government is now investigating the origins of the leak, which it says was illegal. In an accompanying article, ProPublica’s CEOs Stephen Engelberg and Richard Tofel revealed that they don’t know who sent the documents.

“We do not know the identity of our source,” they wrote. “We have considered the possibility that information we have received could have come from a state actor hostile to American interests.”

Engelberg and Tofel said the source told them they were motivated by ProPublica’s previous reporting on taxation, but, the CEOs said, “we do not know for certain that is true.”

Noting recent hacks on US servers from hostile states, they added: “We have long held that those motives are irrelevant if the information is reliable.”

They said that they had vetted the information extensively by comparing the documents to those they already had access to.

“In every instance we were able to check – involving tax filings by more than 50 separate people – the details provided to ProPublica matched the information from other sources,” they wrote.

The ProPublica story revealed the actual rates of tax the ultra-rich pay, as well as a wide array of details of their tax practices.

Explaining why they published the private information, Engelberg and Tofel argued that it is in the public interest to reveal the tax avoidance practices of the billionaires, who were often found to have paid proportionately much less than regular Americans.

Tactics highlighted by ProPublica include low-interest borrowing to keep tax bills down, and an allegation that Bezos claimed a tax credit designed for much lower-income households than his.

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The wealthiest Americans avoided billions in taxes by voluntarily doing something most only do out of necessity: borrowing money.

billionaires 03
  • America’s 25 wealthiest people got $401 billion richer from 2014 to 2018, according to Forbes.
  • ProPublica reported the income taxes they paid amounted to just 3.4% of that new net worth.
  • One way the ultra-rich avoid taxes: borrowing money at low-interest rates, according to ProPublica.
  • See more stories on Insider’s business page.

ProPublica reported Tuesday it had obtained a massive trove of IRS documents, revealing that America’s wealthiest individuals have avoided paying billions of dollars in taxes for years, resulting in income tax bills that amount to a fraction of their net worth.

One of the key strategies employed by the ultrawealthy to keep their tax bills low: borrowing money.

Many Americans borrow money only when they have to for large purchases like college tuition or a house, as interest can quickly add up, especially if they’re not able to pay back the loan right away.

But according to ProPublica and independent experts, America’s billionaires have often financed their lavish lifestyles by using their vast fortunes as collateral for loans, which can come with single-digit interest rates.

Borrowing money allows the ultrawealthy to earn minuscule salaries, avoiding the 37% federal tax on top incomes, as well as avoid selling stock to free up cash, bypassing the 20% top capital gains tax rate. Since loans aren’t considered taxable income, the wealthy need only pay back the principal and interest, rather than the higher taxes that would accompany multimillion-dollar incomes and investments.

America’s 25 wealthiest individuals saw their net worth grow by $401 billion from 2014 to 2018, according to Forbes. But they paid a total of $13.6 billion in federal income taxes in that same period, amounting to 3.4% of that newly acquired wealth, ProPublica found.

By contrast, a middle-class American in their 40s who had amassed a “typical amount of wealth for people their age,” saw their net worth grow by $65,000 from 2014 to 2018, but paid $62,000 in income taxes, or 95% of that new wealth, according to ProPublica.

The US does not directly tax individuals’ total wealth, unlike some European countries. Nor does it tax stock holdings until they are sold. And billionaires tend to have a lot of their net worth wrapped up in stocks.

However, ProPublica’s analysis revealed in new detail how America’s tax code allows the ultrawealthy to take advantage of a litany of tax loopholes and wealth-management strategies to increase their wealth without also increasing their tax bills substantially.

To illustrate the gap between wealth and taxes paid by the ultrawealthy, ProPublica created what it called a “true tax rate.” ProPublica defined this as the total federal income tax a person paid, in this case from 2014 to 2018, compared to how much new wealth they acquired in that same time period.

ProPublica did not publish its source data or disclose how it obtained IRS data.

According to ProPublica, the top 25 wealthiest Americans paid a “true tax rate” of 3.4% – a result of tax avoidance strategies that are out of reach for most Americans.

Borrowing, it turns out, is one of those strategies.

In 2014, for example, Oracle cofounder Larry Ellison disclosed he had used 250 million of his Oracle shares as collateral to secure a $9.7 billion personal line of credit.

Elon Musk has similarly put up a massive amount of his equity in Tesla and SpaceX as collateral for loans, rather than sell those shares and pay 20% in capital gains tax to free up the money. From 2014 to 2018, Musk paid $455 million in taxes on a reported income of $1.52 billion, resulting in an effective tax rate of 29.9%. But his wealth grew by $13.9 billion during that time, meaning his “true tax rate,” according to ProPublica’s methodology, was just 3.27%.

Musk replied to ProPublica’s request for comment with: “?”

Investor Carl Icahn also took advantage of borrowing money, paying $0 in federal income taxes despite reporting an adjusted gross income of $544 million, as he had an outstanding loan with Bank of America worth $1.2 billion, ProPublica reported.

“I didn’t make money because, unfortunately for me, my interest was higher than my whole adjusted income,” Icahn told ProPublica, adding that while he does borrow a lot of money, it’s “not at all” meant to lower his tax bill, but rather that he borrows “to win. I enjoy the competition. I enjoy winning.”

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It’s perfectly legal for billionaires to pay so little in taxes. Democrats say they could finally change that after the bombshell ProPublica report.

Felipe Castro holds a sign advertising a tax-preparation office for people who still need help completing their taxes before the IRS deadline on April 14, 2010, in Miami.
Felipe Castro holds a sign advertising a tax-preparation office for people who still need help completing their taxes before the IRS deadline on April 14, 2010, in Miami.

  • A ProPublica report based on secret IRS files showed billionaires pay relatively little tax.
  • Inequality experts have been warning for years that the wealthy pay relatively low taxes.
  • The details added impetus to a push by Democrats to ramp up taxes on the country’s highest earners.
  • See more stories on Insider’s business page.

On Tuesday morning, ProPublica published a bombshell report showing how little America’s wealthiest pay in taxes, based on leaked documents from the Internal Revenue Service (IRS).

The report shows in detail how billionaires like Jeff Bezos and Warren Buffett have seen billions added to their net worth with little impact on their tax bill. It’s totally legal, and for many, not all that surprising.

“It’s not surprising at all, I think,” Chuck Collins, who works at the left-leaning Institute for Policy Studies, an organization dedicated to highlighting wealth inequality, told Insider.

Collins recently wrote a book on the ways the ultrawealthy hide their money and avoid taxation. In it, he uses the term “wealth defense industry” for the cottage industry that’s grown around helping the rich hold onto their money.

“It’s going to be very hard for ordinary people to decipher these tax transactions because they’re purposefully complex,” Collins said. “The wealth defense industry, their bread and butter is complexity, and opaqueness.”

Chuck Marr, the director of federal tax policy at the liberal-leaning Center on Budget and Progressive Priorities, said “we’ve been making this case for a long time.” He pointed to a paper from 2019 that outlines many findings similar to those in Tuesday’s report.

Still, it’s one thing to know something is likely happening, and another to see the details laid bare, and the figures involved. For example, ProPublica found that Warren Buffett paid 0.1% in “true tax rate,” which compares how much he paid each year in taxes to how much his wealth grew.

ProPublica’s report could draw widespread attention – and scrutiny – to certain intricacies of the tax code just as President Joe Biden moves to reform taxes to pay for his infrastructure proposals.

Already, Democratic lawmakers are seizing on the public report as a way to kickstart tax reform.

The report “should make it very hard for the Congress to not address it,” Marr said. “I think it really underscores, again, that very wealthy people do not pay tax on much of their income. And so this tax bill is a clear opening to address that.”

Jeff Bezos
Amazon CEO Jeff Bezos, the world’s wealthiest man.

America’s wealthiest make most of their money from assets, not income

As the 2019 CBPP paper lays out, a good amount of the income that the wealthiest bring in isn’t technically income – or at least it’s not taxed that way.

If you work a job where you receive wages in a paycheck, you’re probably familiar with the income tax, which taxes the money you get for going to work. Those wages would be income, and you’d be taxed under the income tax.

But, as both the CBPP and ProPublica note, the wealthiest Americans get most of their wealth from assets like stocks, and therefore pay taxes on capital gains.

As Marr and coauthors Samantha Jacoby and Kathleen Bryant write, capital-gains taxes are “effectively voluntary to a substantial extent: High-wealth filers may accumulate capital gains every year as their investments appreciate, but they don’t owe tax on those gains until – or unless – they ‘realize’ the gain, usually by selling the appreciated asset.”

So if you hold onto your stock assets, you’re not seeing that capital gains rate. Goldman Sachs estimated last month that the wealthiest Americans possessed between $1 trillion to $1.5 trillion in unrealized capital gains at that time. Some argue that those unrealized gains should be taxed, since the wealthiest could be sitting on valuable stocks, making money, and not paying taxes. Meanwhile, researchers at the right-leaning Tax Foundation argue that a progressive consumption tax would be a better way to tax the rich.

ProPublica reported that the ultrawealthy can also borrow hefty sums of money to pay off their bills as they sit on stocks and take in little income. “They’ll borrow money and they’ll use the stock as collateral,” Marr said. That means the wealthy are essentially using these loans as a form of income, but aren’t taxed as such.

As Marr, Jacoby, and Bryant write, “this is often a much cheaper strategy than selling stock and paying capital gains taxes, particularly when interest rates are low.”

Joe Biden
President Joe Biden.

The report could add flame to the fire for tax reform

Even before the ProPublica report, tax debate had been brewing. In particular, a provision called the “step-up basis” had been facing scrutiny.

Let’s say you’ve held onto stock for your whole life, and it’s only grown in value. If you die and leave it to someone else, the stock takes on the value at which the recipient gets it, meaning neither the original owner nor the inheritor are taxed on those gains.

For very wealthy people, Marr said, that “wipes out a lifetime of tax liability.”

Biden wants to do away with the step-up basis and he wants to tax capital gains for those making over $1 million at a rate equivalent to income.

“Broadly speaking, we know that there is more to be done to ensure that corporations, individuals who are at the highest income are paying more of their fair share,” White House Press Secretary Jen Psaki told The Washington Post in response to the ProPublica report. “Hence, it’s in the president’s proposals. His budget and part of how he’s proposing to pay for his ideas will go ahead.”

“The principle here is to equalize the treatment of ordinary income and capital gains, and that is a principle that’s neither new or particularly novel,” Brian Deese, the director of the National Economic Council, said in an April briefing. “In fact, the last president to enact a reform to equalize the treatment of ordinary income and capital gains was President Reagan, who did so while raising capital-gains taxes as part of the 1986 tax reform.”

The White House did not respond to Insider’s request for comment.

There’s been GOP resistance to further alterations to the tax code following their 2017 tax cut, especially any increase in rates. But the new reporting already ramped up the tax debate within Congress on Tuesday.

Sen. Bernie Sanders, who chairs the Senate Budget Committee, told reporters on Capitol Hill, “To the surprise of nobody I know, the rich and powerful aren’t paying their fair share, what else is new?” He urged lawmakers to approve Biden’s tax proposals.

“I do want people to understand the bottom line,” Sen. Ron Wyden, chair of the Senate Finance Committee, told reporters. “What ProPublica is revealing is, again, some of the country’s wealthiest taxpayers [that] profited handsomely during the pandemic are not paying their fair share.”

He said he’s in the process of crafting a proposal to change that. Asked by Insider about the timeline of its introduction, Wyden responded: “I’ll have it ready to go shortly.”

“Often solutions to this are portrayed as radical, but what’s radical is the current situation,” Marr said. “What’s radical is that wealthy people, a lot of their income never gets taxed. That’s radical.”

Read the original article on Business Insider

ProPublica’s billionaire tax data shows the importance of closing 2 key tax loopholes. Here’s how.

taxes
  • Too much of billionaires’ true economic income is not getting counted on their tax returns.
  • We can count more capital gains as income, to make them report more income and pay more tax.
  • To do this, eliminate “stepped-up basis” rules and prevent double deduction of charitable giving.
  • See more stories on Insider’s business page.

ProPublica has obtained years of federal income tax information for the 25 wealthiest Americans, and has released an analysis comparing their federal income tax bills to the rise of their net worth over the period from 2014 to 2018, showing their federal income tax bills added up to just 3.4% of their wealth gains.

ProPublica calls this their “true tax rate.” While I have some quibbles with their analysis, the investigation does demonstrate a real problem: The wealthiest Americans are paying less income tax than our tax policies are supposed to collect from them, and less than is fair.

But I also have a hopeful message. There are solutions available to this problem, and they don’t need to involve a wealth tax, which is appealing as a political soundbite but faces enormous political, constitutional and administrative challenges.

Our income tax is not defining “income” correctly. Adopting a more comprehensive definition of income would make it possible to collect more tax from the likes of Jeff Bezos and Elon Musk. In fact, closing just two major loopholes would get us a long way toward that goal.

What is income?

If you ask an economist what “income” is, they’re likely to point to a concept called “Haig-Simons income,” which says your income for a given period is equal to your expenses plus the change in your net worth. This makes intuitive sense: your income either gets spent or saved, so if you add up your spending and your savings, that’s your income. But unrealized gains create issues for this definition in relation both to the tax code and to popular conceptions of income.

Suppose your house was worth $300,000 a year ago, but is worth $350,000 today. Did your house produce $50,000 of income to you over the last year? Haig-Simons would say so, but few people think about things that way. Your home’s appreciation doesn’t actually feel like income until you sell it. And this is also how the tax code works: Asset appreciation isn’t counted as income until the asset is sold.

This is the main tax “avoidance” strategy demonstrated in the ProPublica article. The wealthiest Americans owned interests in major companies whose stocks rose. They didn’t sell their shares, and therefore didn’t report any income related to that appreciation.

Of course, that’s not cheating – it’s just how the law works. And it would be fine so long as the gains got taxed eventually: if the tax liability is building up and sure to be paid in a future year when the gain actually gets realized, that’s fine. The problem is that our tax code too often allows rich people to never pay taxes on those gains.

Joe Biden wants to close the “step-up in basis” loophole

One of the biggest problems with the way our tax code treats unrealized gains is that you get a big bonus for holding on to your assets until you die.

If you buy an asset for $200,000 and it’s worth $800,000 when you die, the IRS then readjusts the value and your heirs only pay taxes on realized gains above the new $800,000 value. The $600,000 in gains accrued during your lifetime never get treated as taxable income. This creates a huge incentive for wealthy people to hold assets instead of selling them, and is a major way their true economic income gets excluded from tax.

Joe Biden
US President Joe Biden speaks on the economy at Cuyahoga Community College Manufacturing Technology Center, on May 27, 2021, in Cleveland, Ohio.

But the tax code doesn’t have to work this way. In fact, President Biden has proposed to change the law so that death is a “realization event.” If a person has more than $1 million of unrealized gains when they die, those gains over $1 million would be subject to capital gains tax as though they sold them on their death bed. Not only would this generate more tax, it would eliminate much of the incentive for rich people to cling to specific assets, so it would encourage more capital gain realizations (and more tax payments) even before they die.

Of course, there is political resistance to this idea, partly because it would also raise taxes on people who are rich but much less rich than Jeff Bezos.

Still, if the goal is to get these ultra-wealthy to pay more, you could offer an exemption much larger than $1 million per decedent, reducing collections from the merely rich while still capturing much more of billionaires’ true income as taxable income.

Defining income better makes higher tax rates possible

Capital-gain income, income made from selling investments like stocks, bonds, etc., has almost always been taxed at a lower rate than wage income. There are several policy justifications for this, but a major reason capital gains tax rates need to be lower than wage tax rates is that capital gains taxes are relatively easy to avoid.

You can jack taxes on high earners’ wages and salaries up very high – likely 70% or higher – before you have to worry that the higher rate is going to cause them to report so much less income that they pay less tax overall. But economists typically estimate that the “revenue-maximizing” tax rate on capital gains is much lower, closer to 30%, mostly because there are better strategies to avoid capital gain taxes.

But if you eliminate the stepped-up basis loophole, the government can collect more tax in three ways. First, taxes will be imposed directly on appreciated assets at death. Second, the impossibility of avoiding tax entirely through delay will encourage more wealthy people to go ahead and realize taxable gains before they die. Third, with a key avoidance avenue eliminated, the government can impose a higher capital gains tax rate and still expect that high earners will grimace and pay it.

This is why Biden has paired his plan to raise capital gains tax rates to as much as 43.4% on the highest earners with his plan to abolish stepped-up basis at death. The former policy does not work well without the latter one.

Charitable deductions are calculated in a way that is too favorable to the rich

Besides unrealized gains, one of the obvious ways the wealthy people discussed in the ProPublica investigation avoid tax is by giving their wealth to charity.

I am not one of those people who is grumpy about billionaire philanthropy. I think the tax code should reward charitable donations. But the way we hand out tax benefits for charitable giving now is excessively generous to the wealthy, while ordinary people get little or no tax benefit for their own charitable donations. The rules need to change.

Felipe Castro holds a sign advertising a tax-preparation office for people who still need help completing their taxes before the IRS deadline on April 14, 2010, in Miami.
Felipe Castro holds a sign advertising a tax-preparation office for people who still need help completing their taxes before the IRS deadline on April 14, 2010, in Miami.

Suppose you are an affluent person and you donate $10,000 to charity. Your marginal federal income tax rate is 24% and you itemize deductions, so this donation reduces your tax bill by $2,400, or 24% of the amount you donated.

Now suppose you’re rich and you donate $100,000 worth of appreciated stock to charity. You bought this stock many years ago for just $20,000. Donating an appreciated asset is not a gain realization event, so not only do you get to reduce your taxable income by $100,000 – the value of the donation – you also never have to pay the capital gains tax on the $80,000 in value the stock gained. Plus, your income tax rate is higher – 40.8% on ordinary income, though just 23.8% on capital gains – which means your $100,000 deduction reduces your federal income tax liability by $59,840, or 59.8% of the amount donated, compared to if you had simply sold the appreciated stock.

Now suppose you donate $1,000 to charity. Your income is more towards the median for an American family, and you take the standard deduction instead of itemizing. In most years, a charitable donation doesn’t reduce your income tax liability at all. But for 2020 and 2021, there’s a special provision allowing people who take the standard deduction to additionally deduct $300 in charitable contributions. Your marginal income tax rate is 12%, so this deduction reduces your tax bill by $36, or 3.6% of the amount donated.

That all doesn’t seem fair, does it?

We can make charitable deductions more fair while still encouraging charity

There are ways to improve how we use the tax code to reward charity.

One is to close the loophole about appreciated assets – when you donate an appreciated asset, you should be able to deduct only what you paid for it. That still provides extensive tax savings, but does not allow the rise in asset value to be deducted twice. Essentially, it would mean any donation of $100,000 would shield only $100,000 of income from tax, not more.

Additionally, you could cap the value of charitable deductions, as the Biden administration has proposed to do. Regardless of the actual tax rate paid, Biden has proposed that taxpayers should only be able to reduce their tax liability by 28% of the amount of a donation. This rule would reduce the incentive to give to charity among the wealthiest. But it would also generate revenue that could be used to enhance the charitable deduction for a broader swath of the public, for example by converting the deduction into a more generous and more widely available tax credit.

A more democratized approach to tax incentives for charity could ideally maintain the overall level of charitable giving in society while tilting tax liabilities toward the wealthiest Americans and reducing the influence of billionaires on the priorities of charitable institutions.

If we do these two things, we don’t need to do other, harder things

There are other ideas about how to get the wealthiest Americans’ reported income for tax purposes closer to their true economic income about which I am much less eager.

One, discussed briefly in ProPublica’s story, is to switch from taxing capital gains only upon realization to taxing them every year. If your stock portfolio appreciates by $100,000, you’re taxed on that $100,000 this year. If it declines by $50,000, you get a $50,000 tax deduction.

Just because your assets went up in value doesn’t mean you have lots of cash to pay new taxes, but because this system would eliminate the tax implications associated with selling appreciated stock, there would be an easy way for taxpayers to finance their tax bills: by selling stock.

But there are problems.

One is that other assets, like real estate, art, and interests in private firms, are not so liquid as stocks. It’s also harder to figure out what these assets are worth in years when they don’t get sold. So some taxpayers would have good reason to contend their asset appreciation hasn’t made them liquid enough to pay more tax today, and they’d also have more ability to argue with the IRS about what their true “income” really was.

The IRS is already strapped for enforcement resources, and while I favor increasing the agency’s budget, I am wary of new tax rules that would make enforcement much more complicated and therefore spread even expanded enforcement resources thinly.

IRS
The IRS.

Abolition of stepped-up basis would only require tedious arguments about the true value of illiquid assets when a taxpayer dies – a time when we already have to have those tedious arguments in order to calculate estate tax. Taxing unrealized gains would require having these tedious arguments every year, with the IRS facing off against expensive lawyers retained by wealthy people fighting to keep their tax bills down. It would just be much more costly and difficult to implement.

Other proposals to better capture the income of the very wealthy involve taxing unrealized gains only on easy-to-value liquid assets like stocks. We would keep the old method for assets like private companies and art.

This approach would be relatively easy to administer. But it would also create economic distortions. Wealthy taxpayers would prefer illiquid assets to liquid ones, and might make economically inefficient choices, like taking companies private to avoid the new rules. This could have negative effects on the economy.

There is hope for taxing the rich

Back in 2015, when I was at The New York Times, the paper ran an exposé on how the top 400 taxpayers in the country were paying lower tax rates than they had been two decades earlier. Their effective federal income tax rate had fallen from the 26.4% in the mid-1990s to 16.7% in 2012. The story attributed this to increased use of creative strategies to shield their income from tax.

Hours after the article was published, the Obama Administration responded by publishing data from 2013, showing that in just one year, these taxpayers’ effective tax rate had zoomed back up to 22.9%, closing more than half the gap.

What happened here? Well, tax rates for high earners were cut in 1997, 2001, and 2003. And then, in 2013, parts of the Bush Tax Cuts expired and tax increases on high earners included in the Affordable Care Act came into effect. So the story seems pretty straightforward: cut rich people’s taxes and they pay less in taxes; raise their taxes and they pay more in taxes.

Much of the typical response to stories like the one from ProPublica is unproductive: conservatives pointing out that this is just how and liberals dreaming up extremely complex approaches like wealth taxes that will never be imposed. The experience in 2013 suggests these approaches are both wrong.

Look to 2025

The experience from 2012 to 2013 shows that very rich people’s income tax bills are responsive to changes in income tax policy. We don’t need entirely new taxes to get them to pay their fair share. We just need to define income more comprehensively, make deductions more rational and equitable, raise rates where economically appropriate, and properly fund enforcement at the IRS.

There is a reason the Biden administration is focusing its tax policy efforts in the areas I am describing: These reforms work within our existing tax system and are administrable. And while I do not see major tax increases passing in the current congress, many provisions of the Trump tax cuts are set to expire in 2025. If Democrats control the presidency or either house of Congress then, Republicans will be forced to work with them on a bipartisan deal to set new tax policy terms.

That’s a reason Democrats need to focus on getting Joe Biden reelected in 2024. Just as Barack Obama’s reelection in 2012 paved the way for the tax increases on the wealthy that became effective in 2013, a Biden win in 2024 should set the stage for a tax bill in 2025 that makes billionaires pay their fair share – within the existing income tax system.

Read the original article on Business Insider

Warren Buffett defends himself after ProPublica says he avoids taxes

warren buffett
Warren Buffett

  • ProPublica reported this week that Warren Buffett pays relatively little income tax, despite huge gains in his wealth.
  • The investor pays minimal tax by holding Berkshire Hathaway stock and not paying a dividend.
  • Buffett pointed out that shareholders don’t want a dividend and he’s giving his fortune away.
  • See more stories on Insider’s business page.

Warren Buffett minimizes his personal tax bill by keeping his fortune in Berkshire Hathaway stock and not paying a dividend, ProPublica said in an investigative report published on Tuesday.

The billionaire investor and Berkshire CEO defended himself in a detailed statement to the news outlet, explaining that his shareholders don’t want a dividend, and saying he’s on track to give virtually all of his money to good causes.

ProPublica analyzed Buffett’s income-tax returns between 2014 and 2018 and determined that even though his wealth grew by $24 billion in that period, he only reported $125 million of income and paid just $24 million in taxes.

“No one among the 25 wealthiest avoided as much tax as Buffett, the grandfatherly centibillionaire,” ProPublica declared. It added that Buffett’s annual income of $12 million to $25 million between 2015 and 2018 was tiny; more than 14,000 US taxpayers reported a higher income than he did in 2015.

Buffett responded to ProPublica’s main assertions – that he squirrels away his money in Berkshire stock and eschews a dividend to keep his tax bill low – with 23 pages of documents. They included a written statement, as well as excerpts from several of Berkshire’s annual reports, news releases, and photocopies of newspaper and magazine stories.

The investor pointed out that Berkshire shareholders overwhelmingly prefer the company to reinvest its profits instead of paying a dividend, as they know a big chunk of the funds will ultimately go towards good causes.

“Many large shareholders, including me, enjoy the long-term buildup in value, knowing that it is destined for philanthropy, not consumption or dynastic aspirations,” Buffett said.

The investor highlighted that holders of Berkshire’s “A” shares voted 87-1 against a dividend in 2014, and “B” shareholders voted 47-1. He likely wanted to show that Berkshire doesn’t pay a dividend because the vast majority of its shareholders don’t want one, not because he wants to lower his personal tax bill.

Buffett defended his decision to keep virtually all of his fortune in Berkshire stock. The 90-year-old billionaire has pledged to give over 99% of his net worth to philanthropic causes, and has already donated about half of his nearly 475,000 “A” shares since 2006, he said.

Moreover, Buffett calculated the tax benefits from his donations to date at less than 50 cents for every $1,000 he’s given away. He also prefers to hand his cash to charities, instead of giving it to the federal government to pay off the national debt.

“I believe the money will be of more use to society if disbursed philanthropically than if it is used to slightly reduce an ever-increasing US debt,” he said.

Buffett reiterated his support for changes to the tax code that would reduce wealth inequality.

“I hope that the earned-income tax credit is greatly expanded and additionally believe that huge dynastic wealth is not desirable for our society,” he said.

Buffett attached photocopies of a Fortune cover story from 1986 to his statement. It was titled, “Should you leave it all to the children?” and included his advice on how much to pass down: “Enough money so that they would feel they could do anything, but not so much that they could do nothing.”

Read the original article on Business Insider

Warren Buffett defends himself after ProPublica says he avoids taxes and pegs his ‘true tax rate’ at 0.1%

warren buffett
Warren Buffett

  • Warren Buffett’s “true tax rate” is 0.1%, ProPublica reported this week.
  • The investor pays minimal tax by holding Berkshire Hathaway stock and not paying a dividend.
  • Buffett pointed out that shareholders don’t want a dividend and he’s giving his fortune away.
  • See more stories on Insider’s business page.

Warren Buffett’s real income-tax rate is 0.1%, and he minimizes his personal tax bill by keeping his fortune in Berkshire Hathaway stock and not paying a dividend, ProPublica said in an investigative report published on Tuesday.

The billionaire investor and Berkshire CEO defended himself in a detailed statement to the news outlet, explaining that his shareholders don’t want a dividend, and saying he’s on track to give virtually all of his money to good causes.

ProPublica analyzed Buffett’s income-tax returns between 2014 and 2018 and determined that even though his wealth grew by $24 billion in that period, he only reported $125 million of income and paid just $24 million in taxes. That put his “true tax rate” below the almost 1% paid by Amazon CEO Jeff Bezos and well below Tesla CEO Elon Musk’s 3.3%.

“No one among the 25 wealthiest avoided as much tax as Buffett, the grandfatherly centibillionaire,” ProPublica declared. It added that Buffett’s annual income of $12 million to $25 million between 2015 and 2018 was tiny; more than 14,000 US taxpayers reported a higher income than he did in 2015.

Buffett responded to ProPublica’s main assertions – that he squirrels away his money in Berkshire stock and eschews a dividend to keep his tax bill low – with 23 pages of documents. They included a written statement, as well as excerpts from several of Berkshire’s annual reports, news releases, and photocopies of newspaper and magazine stories.

The investor pointed out that Berkshire shareholders overwhelming prefer the company to reinvest its profits instead of paying a dividend, as they know a big chunk of the funds will ultimately go towards good causes.

“Many large shareholders, including me, enjoy the long-term buildup in value, knowing that it is destined for philanthropy, not consumption or dynastic aspirations,” Buffett said.

The investor highlighted that holders of Berkshire’s “A” shares voted 87-1 against a dividend in 2014, and “B” shareholders voted 47-1. He likely wanted to show that Berkshire doesn’t pay a dividend because the vast majority of its shareholders don’t want one, not because he wants to lower his personal tax bill.

Buffett defended his decision to keep virtually all of his fortune in Berkshire stock. The 90-year-old billionaire has pledged to give over 99% of his net worth to philanthropic causes, and has already donated about half of his nearly 475,000 “A” shares since 2006, he said.

Moreover, Buffett calculated the tax benefits from his donations to date at less than 50 cents for every $1,000 he’s given away. He also prefers to hand his cash to charities, instead of giving it to the federal government to pay off the national debt.

“I believe the money will be of more use to society if disbursed philanthropically than if it is used to slightly reduce an ever-increasing US debt,” he said.

Buffett reiterated his support for changes to the tax code that would reduce wealth inequality.

“I hope that the earned-income tax credit is greatly expanded and additionally believe that huge dynastic wealth is not desirable for our society,” he said.

Buffett attached photocopies of a Fortune cover story from 1986 to his statement. It was titled, “Should you leave it all to the children?” and included his advice on how much to pass down: “Enough money so that they would feel they could do anything, but not so much that they could do nothing.”

Read the original article on Business Insider