The Daily - Why Billionaires Pay So Little Tax

Episode Date: June 15, 2021

Jeff Bezos, Michael Bloomberg, Elon Musk and George Soros are household names. They are among the wealthiest people in the United States.But a recent report by ProPublica has found another thing that separates them from regular Americans citizens: They have paid almost nothing in taxes.Why does the U.S. tax system let that happen?Guest: Jonathan Weisman, a congressional correspondent for The New York Times. Sign up here to get The Daily in your inbox each morning. And for an exclusive look at how the biggest stories on our show come together, subscribe to our newsletter. Background reading: An analysis by ProPublica showed that from 2014 to 2018, the nation’s richest executives paid just a fraction of their wealth in taxes — $13.6 billion in federal income taxes during a time when their collective net worth reportedly increased by $401 billion.The exposé has refocused attention on the tax code and how it applies to the superrich.For more information on today’s episode, visit nytimes.com/thedaily. Transcripts of each episode will be made available by the next workday.

From The New York Times, I'm Michael Barbaro. This is The Daily. Today. An explosive new story shedding light on the taxes paid by the ultra-wealthy. They're the biggest billionaires in America behind brands like Amazon and Tesla. They're paying little in income taxes compared to their fortunes, sometimes nothing at all. Secret documents obtained by ProPublica from inside the IRS.

Newsflash, John, the super rich, they're not like us. Are reigniting a long simmering debate about why the ultra wealthy are taxed so differently than those who earn far less. Now the scandal is what they're doing is perfectly legal. Sabrina Tavernisi spoke with our colleague Jonathan Weissman

about how that came to be and what it would take to change it. It's Tuesday, June 15th. Okay, Jonathan, talk me through exactly what we learned from this report last week. It was a shocker because what we saw were household names. People like Jeff Bezos, Michael Bloomberg, Elon Musk, George Soros paid virtually nothing in taxes. And in some years, they paid zero taxes. And what is remarkable is that they weren't breaking the law. They were using the tax code as Congress wrote it and as the Internal Revenue Service interpreted it.

Everything they did was perfectly legal. How is that possible? Well, Jeff Bezos is not like you and I. He doesn't make his money the way we do. Let's take a firefighter. A firefighter maybe makes $40,000, $50,000 a year, and all of that money is coming in the form of a paycheck. And before that paycheck even lands in the firefighter's bank account, the federal government and the state government has already extracted its taxes.

He's been taxed on his income, and that firefighter's tax rate should be about 22%, according to the current tax code. Bezos also has an income. His salary is $81,840 a year. Pretty modest. Okay, that is very, very low number for the CEO of Amazon. That's right. And it's on purpose, right? So Jonathan, obviously Bezos' real income is a lot bigger than $81,000. So where does his income come from if it's not a paycheck? And what does that have to do with how he gets taxed? So Jeff Bezos's vast, vast fortune, most of that is in assets. And most of those assets are stocks. Remember, when he first started Amazon, he would have gotten a lot of stocks right up front. And those stocks are part of his pay. Now, he is given certain stock options every year. So those stocks

accumulate worth as the value of Amazon rises and the stock market rises. And they're just sitting there gaining wealth, getting fatter, more expensive. Now, for ordinary wealthy people, for the merely wealthy, people like doctors or lawyers, people like doctors or lawyers, they also have a lot of money in stocks. And when they need a big chunk of change, let's say they want to go buy a car or put down money for a house, they need to go into those stocks, those assets, and sell a big chunk of them. And when they sell, they actually do pay a tax. It is called the capital gains tax. Right now, the capital gains

tax is less than an income tax for most people. For a really, really rich person, it's about 20%. So let's say you bought a stock for $20. You sold it for $30. You have to pay tax on the $10 gain. So you'd pay $2 if your tax bracket is 20% of capital gains. Now, Bezos is different because he has so much money, he doesn't have to sell anything to come up with a big chunk of change that he might need to purchase something like his eighth house. And that's why the ProPublica article was so interesting, because we learned from that how he can be buying all the things we see him buying and still paying zero in taxes.

Okay, so why don't you walk me through that? How is Bezos actually doing it? So let's say Jeff Bezos needs $100 million to buy his next big house. You know, he could easily sell $100 million in stocks or bonds to come up with that, but he doesn't want to pay taxes on the sale of any of those assets. So what a Jeff Bezos gets to do is go down to his bank and say, hey, you know me, I'm good for this money. Could you give me a low interest $100 million loan? I have the collateral. Here it is. Give me $100 million. And the banks are perfectly happy to give Jeff Bezos $100 million, no problem. And not only do you not have to pay

a tax because you didn't sell anything to get that $100 million, you actually get to write some of that loan off your taxes. That's the way the tax code works. Okay, so let me get this straight. So when Bezos wants to buy something expensive, to buy something expensive, he doesn't just sell some stocks. He takes out a loan backed by all of his rising assets, his enormous wealth, and banks happily give it to him because they know he's good for it. And that's his spending money. That's right. That seems like a pretty big loophole in the tax system. It is. And not only by not selling is he avoiding capital gains tax on the sale, he also gets to keep his assets intact. And those assets keep growing in value over a year, over a year, over a year. And his wealth grows and grows and grows and is never

taxed as long as he doesn't sell it. Under the U.S. tax code, you only pay taxes when you sell something. So just don't sell anything. But he does have to pay off that loan, right, for his $100 million house. So how does he get the money to do that? Does he have to liquidate some assets to do that? And then wouldn't he need to pay taxes on whatever money he gets from that? Remember, he does have some income coming in. He's got that $81,000 salary. So he can pay off, you know, on monthly installments, some of these loans. The other thing he does, which is what a lot of rich people do, is you take out loans to pay loans. So you keep rolling over debt. So let's say your big loan bill comes due, you go to a different bank and say, can I take another loan out? And in fact,

every time you do that, you're actually decreasing your tax burden that much more because all of these lending transactions are, many of them are tax deductible. So is Bezos in an immense amount of debt? Now, we don't really have a perfect picture of his balance sheet, but he probably holds a lot of debt because rich people tend to hold a lot of debt. It's actually part of tax management. And I wouldn't be surprised if his debt is, by human standards, probably fairly large. But by Jeff Bezos' standards against his assets, against what he's worth, it's still probably a small sum. Right, but how common is this?

I mean, is your average wealthy finance guy doing this, or is this just Jeff Bezos? I think it really applies to the really mega rich. A doctor might be worth tens of millions of dollars, but for that doctor, a lot of these transactions would be quite expensive. You know, every time you go down to the bank, it's not free. And you're also paying lawyers who really know how to do this. Now, that legal bill for Jeff Bezos is nothing.

But that legal bill for a doctor would be probably prohibitive. And I don't think you see this as widely as one might think. Right. So for Bezos, he's thinking to himself, okay, I need all this money to live. I can either pay myself a big salary from Amazon, my company, and pay income taxes on that. Or I can sell off a bunch of stock that I own

and pay capital gains taxes on that. Or I can ask a bank to give me the money untaxed based on the fact that I have all of these growing assets. Kind of a no-brainer. Yep, that's the U.S. tax code. And it goes way back. It goes way back. There is a long history, year after year, law after law, that has created a tax system that lets the super rich off the hook while you and I pay our taxes week in, week out, out of our paycheck.

We'll be right back. Okay, Jonathan, where does that long history of letting the super rich off the hook start? Well, to understand how we got to Jeff Bezos paying no income tax at all some years. You have to understand how taxation of investment broke off from the taxation of income and paychecks. And to do that, you really have to go back to the beginning of the federal income tax in 1913. And from the very beginning, the United States was not afraid to soak the rich. That first income tax included a 6% surtax on incomes over $500,000. I mean, that is a very high tax rate on rich people, considering today the highest income tax rate is 37%. Right. I'm thinking of Vanderbilt's, Carnegie's, Rockefeller. Right. And those guys were traditional moneymakers, right? They had companies that made things. So

the Vanderbilts and the Rockefellers, they sold oil, they sold steel, and the sales of those things came back to them as income, and that income was taxed at very high rates at the highest levels. That's amazing in today's context. I mean, did everybody basically agree that that made sense to tax the wealthy at a much higher rate? Yeah, they basically did. You know, the United States had a different attitude towards the rich than they do today. Remember, we called them robber barons.

We had a president, Teddy Roosevelt, who campaigned on trust busting. It was politically popular to go after the rich. You know, in 1944, during World War II, the highest marginal tax rate was 91%. Wow. Yeah. And in fact, when John Kennedy came in, he talked about a rising tide lifting all boats

and that we need to do something to encourage wealth. Well, you know what he did? He cut the highest tax rate from 92% to 77%. Oh my God, that is still extremely high by today's standards. Extremely. And it stayed that way, basically, until Ronald Reagan. I'd like to say a few words about where this country's been and where we'll be going from here. The last time I visited the New York Stock Exchange was in 1980, and the mood sure was different then. But in the last five years, we've moved from malaise to hope, confidence, and opportunity.

So, you know, Ronald Reagan comes in at a time when the Cold War is raging. It's the go-go 80s. We're bullish on the American economy. This is the trading floor of the New York Stock Exchange, the nerve center of American capitalism. Finance is king. The point is, ladies and gentlemen, that greed is good. Gordon Gekko is proclaiming that greed is good. And the Dow Jones closing index went from 759 to a high of 2791. The image of the rich has changed. Business news and business schools were in. The NBA was the degree of the decade.

CEOs and corporate writers became celebrities. And there was a point where Ronald Reagan is trying to reform the tax code. And he's talking to Bill Bradley, the senator from New Jersey who had been a professional basketball player. And Reagan tells Bradley, you know, the income tax is so high, I didn't want to make another movie.

It didn't make any sense economically to make another movie. And Bradley says, yeah, you know, I didn't want to play for the NBA anymore. What's the point? I was just going to be taxed away. And they come up with the 1986 tax reform that lowers the highest income tax rate all the way down to 28%. I feel like we've just played the world series of tax reform and the American people won. Virtually a century of soaking the rich goes down to the rich paying not a whole lot more in income tax than anyone else.

So instead of this pervasive feeling that the rich should be taxed and should be taxed heavily to pay for things the government needs, now it's shifted to rich guys are actually good for the country and for the economy. And they shouldn't be punished with a bunch of taxes because, after all, we're Americans. This is our capitalist spirit. That's right. So by the 1990s, the economy is really transforming. America makes its money off money. Finance is spinning off all sorts of wealth. The stock market begins to boom. of wealth, the stock market begins to boom, there are day traders, and we had the beginning of the internet. The economy is turning into something completely different, and it's being driven by investment and risk. Okay, so it's no longer rich people like the Vandervelts making things. It's people involved in finance on a mass scale. That's right. Remember, along comes Newt Gingrich in the Republican Revolution of 1994.

We're here because we are taking the first steps and we're taking them in a contract with the American people. And Gingrich begins a mantra that we need to treat income from investment differently from income from work. We want to make sure that people who create jobs by saving and by investing have a tax break to increase economic growth. And I think there's a broad agreement now on that. That, in fact, we need to favor income from investment. You know, as Gingrich was actually trying to balance the budget with Bill Clinton, he said, we favor abolishing the tax on savings and job creation. I favor zero tax on savings and job creation. That was 1997, which meant he didn't want to tax investment income at all.

Explain the idea behind that. Why would Gingrich say something like that? Because, well, first of all, of course, he did have a lot of rich benefactors, but there was a sense that if people invest money in the stock market, if they're giving companies their money, those companies would use it to innovate, to make new companies, to find new products, to find new services, and that would grow the economy as well. There was an idea that we don't want people to just sit on their money. We want them to invest it. We love the stock market. And in order to do that, we don't want to tax the gains that they're seeing the same way we tax the money coming from their paycheck.

We want to favor investment. And this gave rise to a push for special treatments of capital gains taxes, those taxes that you pay off of the sale of stocks mainly, but also other assets. So Jonathan, was that the moment that was really the beginning of this thing we've been talking about, which is effectively the separation of investment and income? Right, yes. You know, at this point, investment income is considered better than regular income. It's taxed at a lower rate. The people with the most investments, the rich, are raking in money off the stock market. It's not being taxed very heavily. They're getting richer and richer and richer. The gap between rich and poor is getting wider and wider

until it's a chasm. Democrats are arguing over capital gains rates that keep going up or down or up and down, considering whatever the political winds are. And meantime, nobody is talking about how to tax this growing wealth, how to capture the value of these huge piles of assets. Nobody is talking about what the ProPublica article was talking about. That is, nobody until Elizabeth Warren in 2019. It's time for a wealth tax in America. 2019. It's time for a wealth tax in America. Elizabeth Warren says we need to rethink the way we tax in America and we need to begin taxing wealth. Your first 50 million dollars is free and clear. I see some folks going, phew, okay. But your 50 millionth and first dollar, you got to pitch in two cents.

And her plan has been through a bunch of iterations, but essentially it comes down to something like this. If you're worth at least $50 million, you need to pay a 2% surtax on the value of your wealth above that threshold each year, whether you sold any of it or not. You've been paying wealth tax forever. They just call it a property tax. I'm just saying for the bazillionaires, the top one-tenth of one percent, how about we include,

in addition to the real estate, the stock portfolio, the diamonds, the Rembrandts, and the yachts? That's all. Now, her plan would start with stocks, but eventually it would encompass all kinds of wealth taxed at 2% above that $50 million threshold. And then there'd be an additional 1% tax on wealth above a billion dollars. I mean, we all do in some ways pay taxes on our assets because we pay property taxes, right? Every year, somebody comes around from my city and tells me my house has gained a certain amount of value and my property tax goes up some amount because of that rise in value. That's what she's saying we should do for everything.

So when she proposes this, that's kind of a radically new way of thinking about what we tax in our country. But clearly it wasn't persuasive enough because we don't have a wealth tax now, right? Yes, you're right. It did not have the political firepower to win her the nomination

for the presidency, and it has not gotten through Congress. But Democratic lawmakers that I've talked to in the last week, especially since that ProPublica article came out, are saying they really want to do this. The tax writing committees, the Finance Committee and the Ways and Means Committee, are tasked to pay for all of these things that Democrats, especially Joe Biden, want to do. They want to spend a lot more money on infrastructure. They want universal pre-K. They want universal access to community colleges. All these things cost money. And while Republicans are trying to avoid raising taxes, Democrats suddenly see a real reason to do something about wealth, to tax wealth, because they see it as a big political winner, especially now that we know that the richest of the rich don't pay taxes. In your mind, is there any reason to think that this might

actually happen? You know, I think it really might. The biggest impediment to it happening might be, ironically, the Democratic desire to work with the Republicans on a bipartisan bill, because Republicans are never going to go along with anything like a wealth tax. If the Democrats decide to forget about bipartisanship and pass, say, a grand infrastructure bill on their own, they'll use some kind of wealth tax to help pay for that. So in the end, partisanship is the thing that will push this issue forward. Bipartisanship will be the thing that kills it. Interesting, huh? I mean, if they can get Joe Manchin to vote for it, you know, they can do it with 50 votes in the Senate and they certainly will be able to get it through the House. So it's still a long shot,

but it's not a pipe dream because they can do it with just Democratic votes as long as they have the presidency and both houses of Congress. So this idea of a wealth tax, it's political, of course, but it's also, it seems to me, very foundational to how we think about wealth in this country and our economy and how our economy grows. You can make the argument that a tax code that favors investment, that doesn't tax wealth, leads to more innovation, more risk-taking. There is enormous reward in our tax code for the risks that an Elon Musk have made. And, you know, Elon Musk is in the United States for a reason. That's why we have Tesla. Jeff Bezos created Amazon and the rewards were enormous. On the other hand, you

could say, look, how much incentive does an Elon Musk need? If Jeff Bezos was going to make $100 billion off of Amazon instead of $140 billion, would he have not bothered? Would Elon Musk really not have invented Tesla if he had to pay a 2% surtax on some of the wealth gains he does? And I think that you could also have to look at what's happening in the broader society. As we see fabulous gains in wealth of the super rich, the vast majority of American workers are pretty stagnant. We are not seeing the kind of class mobility that we once did. And as the gap grows between the very super rich and the middle class, there's a real risk here of political instability, of societal instability. And those are the kind of things that policymakers need to look at from right and from the left.

policymakers need to look at from right and from the left. And you know, this ProPublica article has just come out. We don't know where this is heading. We need to watch it. But honestly, I think we're just at the beginning of this chapter. Thank you, Jonathan. You're welcome. We'll be right back. Here's what else you need to know today. The drugmaker Novavax said that its vaccine

against COVID-19 is highly effective in clinical trials, potentially giving Americans a fourth choice for fighting the virus. The company said that the two-dose vaccine offers overall efficacy of 90.4%, on par with the vaccines made by Pfizer-BioNTech and Moderna, and higher than the vaccine made from Johnson & Johnson. But because the U.S. vaccine supply is high, regulators may encourage Novavax to first distribute its doses to other countries where it's more needed. And on Monday, a day after ousting Benjamin Netanyahu as prime minister, Israel's new government sought to change its image overseas and mend relations with the Biden administration.

In a speech, Foreign Minister Yair Lapid said it had been, quote, reckless and dangerous of Netanyahu to build alliances with Republicans while alienating Democrats, who he noted, now control the U.S. government. noted, now control the U.S. government. Today's episode was produced by Aastha Chaturvedi, Nina Patak, Annie Brown, and Robert Jimison. It was edited by Paige Cowett and Dave Shaw, engineered by Chris Wood,

and contains original music by Dan Powell. That's it for The Daily. I'm Michael Barbaro. See you tomorrow.