From left to right: Jeff Bezos, Warren Buffett, and Elon Musk.
Photo Illustration by Nicole Fara Silver; Getty Images (3), Dreamstime (1)Rocket fuel was poured into the debate over how much tax a billionaire should pay with a report on Tuesday by ProPublica on the leaked federal tax returns of the 25 richest Americans. The news nonprofit said that more than 15 years’ worth of tax records showed that in some recent years, no federal income tax was paid by wealthy filers like Amazon.com ‘s Jeff Bezos and Tesla chief Elon Musk.
As a percentage of their reported incomes, the 25 billionaires paid an average of 15.8% in taxes, ProPublica said, compared with the top individual tax rate of 37%. A variety of perfectly legal methods allowed these wealthy folks to pay lower rates, said the report, including taking income as capital gains and dividends—rather than salary—deducting for charitable donations and borrowing against their assets. Others whose returns ProPublica said it received include Berkshire Hathaway ‘s Warren Buffett, Microsoft founder Bill Gates, Facebook ‘s Mark Zuckerberg, investors Carl Icahn and George Soros, and the executive chairman of our parent company News Corp, Rupert Murdoch.
A main point of ProPublica’s report, however, was the size of these citizens’ tax payments in relation to the steep rise in their wealth. It’s small. In the five years ended 2018, ProPublica estimated that these 25 rich people paid federal taxes worth 3.4% of the $400 billion increase in their wealth during that period (taking the tax payments from the leaked returns and using estimates of their wealth from the Forbes “rich list”).
That $400 billion in increased wealth is mostly what’s called unrealized capital gains. ProPublica’s writers note that since 1920 it has been federal law that such increase isn’t taxable income until it’s cashed in. That could change, of course, if Congress saw fit to increase taxation of capital gains—whether realized or not. So far, it hasn’t.
By dubbing its ratio of taxes-to-capital gains the “true tax rate,” ProPublica’s journalists hint that they sympathize with the idea of taxing capital gains—even unrealized–in the same way as our paychecks. The tax leak’s details were greeted warmly by many who agree that those gains should be taxed. By contrast, more conservative voices dismissed the report as old news: the wealthy reduce their taxes in the legal ways that we’d all like to use, said a Wall Street Journal editorial. A wealth tax would discourage entrepreneurs, according to libertarians, who believe society is better served by the enterprise and philanthropy of wealthy individuals like Buffett and Gates than by the government’s spending of its tax receipts.
ProPublica’s notion of taxes as a percentage of increased wealth leads them to finger one of the wealthiest proponents of tax reform: Warren Buffett. He paid taxes worth less than 1% of what ProPublica estimates was a $24.3 billion increase in his wealth from 2014 to 2018. Politicians like senators Bernie Sanders (D., Vt.) and Elizabeth Warren (D., Mass.) have proposed direct taxes on wealth. President Joe Biden has sought to raise the top income-tax rate to 39.6% from 37%, and to nearly double the capital-gains tax rate to 39.6% for Americans earning more than $1 million a year.
Buffett has famously lamented the tax system that lets him pay a lower annual rate than many Americans. In a June 2 letter responding to ProPublica’s questions, he said that he has let his wealth rise untapped, with the increase in Berkshire’s share price, in expectation of dispersing 99.5% of his wealth to charity and taxes after he dies. “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 U.S. debt,” he wrote to the news group. “But that is for Congress to determine.”
ProPublica said that it queried representatives for Bezos, with no response, while Musk replied with just “?”. Buffett, Bezos and Musk did not immediately respond to questions from Barron’s about the ProPublica report.
America has debated for a century about some of the arcane ways that rich Americans can enjoy their wealth at lower tax rates than the tax code stipulates for ordinary income. The carried-interest tax break allows partners in real estate, private equity, and hedge funds to defer paying capital-gains tax. Wherever one stands on these questions, ProPublica’s details on what these wealthy folks actually paid are sure to inform the debate.
The release of federal tax returns by anyone but the taxpayer is, under statute, a criminal offense. A note by ProPublica’s leaders said that the organization received the tax records unsolicited from a source unknown to the group. Spokespeople at the White House and the Treasury Department said Tuesday that the leak will be investigated by federal law enforcement agencies. A spokesman for Michael Bloomberg also said that the former New York City mayor would “use all legal means” to determine who leaked his tax returns to ProPublica.
“Our publication of this tax data comes at a possibly pivotal moment in America’s long, often contentious debate about the fairness of our tax system,” wrote ProPublica editor in chief Stephen Engelberg and president Richard Tofel. “In the coming months, we plan to use this material to explore how the nation’s wealthiest people—roughly the .001%—exploit the structure of our tax code to avoid the tax burdens borne by ordinary citizens.”
Tofel tweeted that the tax story may be the most important story that ProPublica has ever published.
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