The unfairness of our tax system: who is and isn’t paying up, how legal loopholes are leading to tax giveaways, and why more isn’t being done to hold accountable those who can and should be paying the most

Great links from The Lever on renewed calls to “tax the rich!” and the unfairness of our tax system: who is and isn’t paying up, how legal loopholes are leading to tax giveaways, and why more isn’t being done to hold accountable those who can and should be paying the most.

WHAT YOU NEED TO KNOW

NUTS AND BOLTS: While the COVID-19 pandemic left the country’s richest men even richer and the other 99 percent struggling even more to make ends meet, our tax code isn’t helping to address this growing wealth inequality. In truth, the ultra-rich effectively pay a lower tax rate than the middle class — if they pay federal income tax at all. The richest earners have even gotten away with paying lower rates than the merely rich.

ProPublica’s bombshell reporting has shed light on how the current system has helped facilitate the mega-wealthy’s tax avoidance, mainly thanks to U.S. laws that do not define the financial gains from assets like stock and property — which is how billionaires have amassed much of their wealth — as taxable income until they are sold. As ProPublica wrote, “the concept that income comes only from proceeds — when gains are ‘realized’ — has been the bedrock of the U.S. tax system.” In other words, most billionaires keep a tight grasp on unrealized gains so that they can avoid transforming their wealth into income. It’s also why there’s nothing noble about CEOs’ PR stunts of setting low salaries for themselves.

The ultra-wealthy also borrow money, which, as ProPublica reports, “can be a way to access billions without producing income, and thus, income tax.” Many wealthy individuals and their businesses also lower their tax burden by making large tax-deductible charitable contributions and launching philanthropic initiatives, in the process burnishing their reputations, as Anand Giridharadas writes in Winners Take All.

U.S. corporate taxes, meanwhile, have significantly declined because many corporations avoid paying them by sending their profits to tax havens abroad that have a zero percent corporate tax rate. Moreover, according to the Institute On Taxation And Economic Policy, many companies reduce their tax burden by taking advantage of tax breaks, such as the federal research and experimentation credit, which provides companies cash savings for developments they undertake; renewable energy tax credits, which help subsidize renewable energy production; and a provision of President Donald Trump’s 2017 Tax Cuts and Jobs Act that lets companies quickly write off capital investments to substantially lower their income taxes. Trump’s tax law also cut the statutory corporate income tax rate from 35 to 21 percent, which proved to be a boon to big business but unlike Trump’s claims, did not translate to higher earnings for workers.

Naturally, those in power didn’t think twice before letting an expanded child tax credit that brought millions out of poverty permanently expire, while instead prioritizing a fattened defense budget.

ENDING A PRIVATE EQUITY TAX GIVEAWAY: There are several ways to make our tax code more equitable, and one solution in particular, which could raise $180 billion over a decade, merits greater attention: closing the “carried interest” loophole.

This loophole has allowed hedge fund, private equity, and venture capital managers to count the compensation they receive from clients as capital gains, which are taxed at the lower 20 percent rate instead of the usual top federal income tax rate of 37 percent. According to the economic policy research and advocacy firm 20/20 Vision, the loophole “allows fund managers to benefit from profits made by putting other people’s money at risk as if it were their own… a grossly unfair loophole that costs American taxpayers billions each year, while benefiting a few thousand financiers.”

Trump criticized the carried interest loophole during the 2016 campaign, but did not do so as president. A proposal from Senate Finance Committee chairman Ron Wyden (D-Ore.) and Sen. Sheldon Whitehouse (D-R.I.) would scrap the carried interest loophole and in doing so, go after private equity executives who pay a lower tax rate than most Americans. Versions of the proposal have been introduced in the past, and have earned support across the aisle — though private equity industry lobbying and congressional campaign donations have prevented passage of the measure, and it was stripped out of President Joe Biden’s stalled social spending package, the Build Back Better Act.

KEY QUOTE

“Whether such extreme inequality is or is not sustainable depends not only on the effectiveness of the repressive apparatus but also, and perhaps primarily, on the effectiveness of the apparatus of justification.”

— Thomas Piketty, Capital in the Twenty-First Century

VITAL STAT

The Internal Revenue Service’s (IRS) audit rate has decreased over time, but the agency has increased scrutiny on low-income wage earners. According to a Transactional Records Access Clearinghouse (TRAC) report in February, “Last year at this same time, 51.6% of all correspondence were targeted at this lowest income group, which represents only a small proportion of all taxpayers. The concentration of correspondence audits on this single small group of taxpayers during this filing season has increased to 58.1%.” TRAC also found that wage earners with less than $25,000 in total gross receipts were audited at a rate five times more than everyone else last year.

This is particularly noteworthy in the context of the IRS’ ever-shrinking budget as a percentage of the U.S. economy. As The Lever noted last May, “The agency policing tax crime has significantly shrunk in comparison to the economy it is supposed to be patrolling.”

Meanwhile, the tax payments of the very wealthy are less likely than ever to be scrutinized. Between 2010 and 2018, the audit rate of people making more than $1 million declined by a third more than the audit rate did among the general population. And as of 2018, the IRS was auditing people making less than $16,000 a year at nearly twice the rate it was auditing corporations.

FLASHBACK

A month ago, as part of his 2023 fiscal-year budget, Biden released a proposal to tax the wealth of America’s richest citizens. Under his plan, American households with a net worth of more than $100 million would have to pay a federal tax rate of at least 20 percent of their annual taxable incomes. Critically, the “Billionaire Minimum Income Tax” measure would also redefine taxable income to include unrealized capital gains, stocks, bonds, and other liquid assets — a move that would make billionaires a bigger target for IRS attention.

Less than 24 hours after the proposal’s release, Sen. Joe Manchin (D-W.Va.) expressed his opposition, arguing incorrectly and ahistorically that: “You can’t tax something that’s not earned. Earned income is what we’re based on.”

It wasn’t the first time the West Virginia coal baron has voiced his opposition to a wealth tax.

Despite having often spouted the party line of the richest needing to “pay their fair share,” last fall the yacht-owning Manchin halted efforts by progressive Democrats to pay for Biden’s Build Back Better legislation with an annual investment gains tax on the wealthiest Americans. “I don’t like it. I don’t like the connotation that we’re targeting different people,” said Manchin in defense of billionaires.

Manchin also spearheaded an effort, fueled by classist lies, to water down Biden’s enhanced child tax credit by demanding it be predicated on a strict work requirement and a family income cap — a proposal that would have kicked more than 37 million children off the now-expired expanded benefit, including 190,000 in his home state alone. He ultimately said last December that he would not vote for Biden’s Build Back Better legislation, leading to the expanded child tax credit’s expiration