Rich Americans are losing no sleep over Joe Biden’s tax plans
Every now and then a bombshell drops that barely disturbs the grass. ProPublica’s leak this week that revealed how little America’s 25 wealthiest people pay in taxes was both dramatic and unsurprising.
In some years, the average American pays more in taxes than billionaires such as Michael Bloomberg and Tesla’s Elon Musk. But we sort of knew that already. If there is any American who still thinks their tax system is fair and transparent, they should book a seat on Jeff Bezos’s forthcoming space trip.
Yet this anonymous leak brings the story forward in two big ways. The first is to drive home that a rich person’s ideology is immaterial.
The left might adore George Soros and revile Musk. The accountants deliver a uniform outcome. It makes no difference whether a billionaire believes they should be paying higher taxes or not. They get away with what they can get away with.
Years ago Warren Buffett pointed out his secretary paid a higher income tax than he did. He has done nothing to change that reality. Nor should we be shocked when Bezos claims a US$4000 ($5561) tax credit for his children. That is what accountants are paid to do.
The second is to expose the modest scope of Joe Biden’s proposed tax increases. His plans would rearrange the mannequins in the shop window but do little to alter the business model.
The top rate of income tax would go back from 37 per cent to 39.6 per cent and corporate taxes would rise from 21 per cent to 28 per cent. Since the wealthiest Americans pay a fraction of today’s rate, the headline increase would make little difference.
The same applies to America’s largest companies, whose real effective tax rate is 11.7 per cent. This is less than the 12.5 per cent rate in Cyprus and Ireland, among the lowest corporate tax rates in the 27-nation EU.
In the absence of tax reform, as opposed to headline increases, Biden’s proposals offer an illusion of change. Eliminating tax breaks is far harder than lifting rates.
The one area where Biden’s plans would ruffle feathers is in his capital gains reform. He would not only double the current rate to more than 40 per cent but would tax unrealised capital gains at death.
Right now the Internal Revenue Service calculation resets capital gains to base when the benefactor dies. Their heirs begin the clock at zero. US inheritance taxes are one of the easiest forms of tax avoidance.
Yet Biden would avoid imposing a wealth tax on the unrealised gains that accumulate while the rich are still alive. For young billionaires such as Facebook’s Mark Zuckerberg and Alphabet’s Larry Page, Biden’s reform would make scant difference. They can still borrow against their paper wealth and offset the interest on income taxes. Under America’s byzantine tax code, such tax-minimising options are almost infinite.
So why is Biden avoiding genuine reform? Because it is politically so much harder to pull off. Today’s complex system is the friend of established money. Higher corporate taxes hit businesses that cannot afford large armies of lawyers and accountants. There is no lobby for entrepreneurs who have yet to make good.
The same applies to personal income taxes. Americans who are ordinarily rich — those earning a million or two a year who cannot afford yachts and prized works of art — are probably even more resentful of ProPublica’s list of super-rich avoiders than the median American.
Biden’s tax plans also please the left, which gets a psychic boost from higher headline rates. In reality, Biden would raise more cash by lowering tax rates while eliminating loopholes — merging the real rate with the headline one. Yet that would risk uniting left and right in rare bipartisan opposition.
The unanswered question about ProPublica’s leak is where it came from. The news site does not know its origin but has corroborated the data against other sources. A reasonable suspicion is that it was hacked by an entity that does not wish US democracy well. No single IRS officer would have access to all this information.
Whoever supplied the leak would know it would deepen public cynicism about America’s creed of playing fair and working hard. The lesson Biden should draw is that simplicity is democracy’s friend. Complexity is a rigged game. If the rules were clear enough for people to understand, there would be far less demand for such leaks.
Written by: Edward Luce
© Financial Times
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