This post was guest authored by William Pierre-Louis, Jr.
Want to see a classic demonstration of the disparities in how American laws apply? Billionaires from Wall Street have been using weak laws to avoid paying their fair share, especially of state income taxes. They have been making money hand over fist but dodging billions in taxes. Of course, the rest of us obligated to pay ours.
A report from Americans for Tax Fairness (ATF), has revealed how billionaires like Michael Bloomberg, Stephen Shwarzman, and Jamie Dimon have been avoiding taxes through trust funds and the infamous financial practice among wealthy private equity executives: the carried interest loophole. Absent changes to the law, people with wealth and their heirs would avoid paying as much as $8.4 trillion in estate, gift, and generation-skipping transfer taxes between now and 2045, according to ATF.
Tax avoidance has been around for decades, but what makes it more alarming is that these folks know what it means for people in the U.S to pay their taxes. They know what taxes mean for this country. The U.S. government is designed around individuals’ willingness to pay their taxes, whether employees, business owners, or entrepreneurs, in return for a promise to deliver the services and infrastructure we all need. As USA Today’s Janna Herron put it, “your taxes go into the bigger pool contributed by everyone else and are allocated based on need and policy direction.” They also know individual income taxes have been the primary source of revenue for the U.S. federal government.
These individuals did not just wake up one day and decide they would outmaneuver the system. As founder and CEO of Unlimited Financial Services Sharif Muhammad said: “as long as you’re adhering to the law, everything’s fair game.” The law lets them use the tricks. No wonder that a 2019 study by The Pew Research Center showed most Americans (63%) say the economic system in the United States unfairly favors powerful interests.
A common way billionaires avoid paying their fair share is by financing their lifestyle with loans taken against assets–real estate or stocks. “Banks say their wealthy clients are borrowing more than ever before, often using loans backed by their portfolios of stocks and bonds,” according to The Wall Street Journal. “They often use these loans as part of a ‘buy, borrow, die’ as a way to avoid capital-gains taxes.” As Senate Finance Committee Chairman Ron Wyden explained to NBC News in June 2021, “the strategy focuses on making money off investments and capital, which are taxed only when the assets are sold, known as ‘realization’ or a ‘realized gain’.”
Wall Street billionaires also use investment losses to offset their income for tax purposes. They do that by using a section of tax law that allows them to accumulate investment earnings—such as interest, dividends, or capital gains—until the investor sells. Essentially, not only do wealthy folks get to earn benefits from the money they would’ve paid in tax, but they can also delay their declaration of income for as long as they want.
The New York Times reported that after claiming deductions, charitable donations, and foreign tax offsets, Michael Bloomberg paid $70.7 million in income tax in 2018, despite reporting $1.9 billion in net income. Bloomberg paid so little because tax loopholes allow him to.
If we want to change tax laws to shut down these practices, we can. The idea of pleading with billionaires through the media to pay higher taxes voluntarily isn’t sufficient. The Center on Budget and Policy Priorities (CBPP) proposes the following options to tax high incomes and large fortunes: expanding the types of income considered taxable; improving taxation of income already taxed under the current system; [and] policymakers should bolster IRS enforcement.
The wealthiest Americans often profit from others’ misery and struggle but hide behind a philanthropic mask; they oppose higher taxes, arguing they can spend their money better than the government. Journalist and author Anand Giridharadas argues that charitable giving is a smokescreen to disguise the fact that the richest humans in the history of the world “benefit from a near-monopoly on the fruits of the future” in which they have “essentially rigged the society to function as a casino in which the house — i.e., them — always wins.”