Month: October 2019

A new study, “The Triumph of Injustice,” conducted by University of California at Berkeley economists Emmanuel Saez and Gabriel Zucman, presents its claims that for the first time in history, U.S. billionaires paid a lower tax rate than the working class in 2018.

The economists assert that the average effective tax rate paid by America’s wealthiest 400 families was 23%, whereas the bottom half of households paid 24.2%. To offer historical perspective, the study reports that the 400 richest had an effective tax rate of 47% in 1980. In 1960, that rate was as high as 56%.

The study, coincidentally or not, has tapped into a rising zeitgeist in America. Rising inequality has become a big issue as we approach the 2020 election. Senator Elizabeth Warren, one of the front-runners for the Democratic presidential race, called for a 2% annual tax on the wealth of individuals that have assets in excess of  $50 million and a 3% tax on the wealth of people with over $1 billion.

Senator Berrnie Sanders, a socialist-leaning, presidential contender (now in question due to his heart attack), previously offered his aggressive, antirich plan to ban billionaires.

According to Sanders, over the last 30 years, the top 1% of Americans have enjoyed a $21 trillion increase in their net worth. Meanwhile, the bottom half of families have lost $900 billion in wealth. To compensate, Sanders demands a wealth tax on those families with a net worth of over $32 million. Instead of plans to help the people, his agenda is to confiscate wealth from the rich and redistribute it to those with less money in the form of government programs. To enforce extricating capital from the wealthy, Sanders promises, if elected, to create a national wealth registry and significant additional third-party reporting requirements. Sanders will increase funding for the IRS, so it will have a war-chest to enforce audits and tax collections for those in the 1%t bracket.

Now, this is where things start to get scary. It’s a slippery slope. First, the billionaires are targeted, then the rich. Soon, it will be the middle class. After a while, there will be no one left to tax. It is frightening to have a politician with power weaponize government agencies to specifically target a group of Americans and closely scrutinize them just because they have more money than others.

The study has some fundamental flaws. The rich often pay lower tax rates—compared to others—due to their penchant for generating revenue through capital gains—and not from salaries. Money made in stocks, bonds and business ventures is treated differently by the IRS than salaries. The greater the risk, the higher the chance of success or failure. When you invest in the stock market, start businesses or purchase real estate, there is a chance for making a lot of money or losing it all. We read about those who succeed. However, for every success story, there are thousands of people who have tried to start a business venture or invested in the stock market and lost some—or all of their money.

Most ultra-wealthy people have their money tied up in illiquid investments, such as real estate or in companies. They also have money invested in the stock market, private equity and hedge funds. The money is not readily available. If they are forced to sell their holdings to raise money for taxes, it would take a long time to dispose of their assets and, most likely, will incur large losses due to the pressure to divest at inopportune times.

Missing from the study and political rhetoric is a plan to change the tax code for the top percentile. The rich have the financial resources to hire the best and brightest lawyers, accountants and tax experts. Rather than focus on the percentage they’re paying, the study and presidential candidates should look into closing the legal loopholes, clever accounting and legal maneuvering that the uber wealthy have access to—and the public at large does not.

There is a narrative that depicts wealthy people as just falling into their fortunes. Yes, some people inherit large inheritances from their families. The reality is that most multimillionaires and billionaires earned their money by taking risks and offering a product or service that people want or need.

What people don’t understand is that just because you have money now, doesn’t mean that you’ll always hold onto it. Think of all the great companies that no longer exist today and imagine the people who had their life savings tied up in it. Consider all the stories you hear—famous sports stars and celebrities who earn fortunes, but then lose it all to bad investments and poor advice from their managers.

We should also be leery of targeting certain groups because they’re unpopular. Instead of targeting the rich, some say that we should focus on the government reigning in their expenditures, which would lessen everyone’s taxes. There are billionaires, such as Microsoft founder Bill Gates, who has pledged his wealth to charity and spends his billions on improving the quality of life for everyone. The founders of Facebook, Amazon and Google are multi-billionaires who have created jobs for tens of thousands of people.

There are many self-made millionaires in business, music, sports, entertainment and other endeavors who have made sacrifices and worked hard to amass their money. Why should their efforts be punished by being forced to pay even higher taxes?

Instead of promoting class envy and antagonism, maybe our elected leaders should design a fair and equitable tax system and install checks and balances on how they waste our tax dollars.