Surprise!!! The Rich Don’t Pay Taxes Like You And Me

If you were surprised by the recent report that the richest billionaires in American do not pay high-income taxes – or any at all — you have not been paying attention for the past 100 years – about the time the early progressives instituted the income tax. 

Since that time, the tax rates have increased and lowered between appropriately named progressive (stick it to the rich) taxes and fair taxes.  But even then, the rich got benefits not available to the common worker.  Over time, Congress passed one loophole after another – until the tax code is thousands  of pages of complex computations that only high paid tax attorneys and accountants can decipher. 

I suppose it is part of human nature to resent the benefits enjoyed by those who have more.  Sometimes it is based on obvious unfairness and sometime just plain jealousy. 

Most of us recognize that rich people have advantages over us.  It is the one area in which racism, sexism, homophobia, xenophobia, etc. are not a factor.  Rich folks of every background have advantages.  President Obama has more in common with Jeff Bezos than he does with the black folks trapped in the urban segregated communities.

And why not?  Rich folks never worry about a mortgage or rent payment.  They get the best healthcare with or without insurance.  They have employees, aides and servants to handle life’s more mundane necessities.  And they get designated tables in a crowded restaurant and never have to go through the line at airports.

We might call it rich privilege.  But of all the advantages they enjoy, none angers the masses as much as the tax advantages. Some of that resentment is justified and some is just envy.

The issue is even more complicated because our political leaders who hate the rich – like Senators Bernie Sanders, Elizabeth Warren and others – lie to us about the reasons why the rich have extraordinary benefits.  Some of those tax policies are actually beneficial to society – others not so much.

If we are going to have a fairer tax system, we should understand the details.

The Income Tax

First there is the income tax, itself.  It is a progressive tax in that the more you make, the greater percentage you pay – theoretically.  We all use deductions to reduce the amount of our taxable income – child deductions, mortgage interest, medical expenses, charitable contributions, etc.

In a perfect world, everyone would get the same deductions and pay the same rate.  But this is not a perfect world – and our tax code is about as imperfect as anything can possibly be.

Small Business

If we run small businesses, we can set up as a C-Corp, an S-Corp, partnership or limited partnership. Each has different tax benefits, and even special benefits like capital depreciation deductions.  Many of those businesses are small – the mom-and-pop variety.  But they still get benefits not available to the working stiff. 

For example, I ran my very small business out of my home for more than 35 years.  I could deduct a portion of my mortgage and utility bills for my designated in-home office. Until the IRS limited those benefits.

Multinational Corporations

The big bamboozle we get from Democrats comes when they talk about taxing big corporations. The kind you patronize every day.  They claim that such businesses should “pay their fair share.”  Sounds good, but corporations rarely “pay” taxes at all.  They only collect them from the consumer – you and me –  when we pay for the goods and services. Then the money passes on to Uncle Sam.  Increase the gas tax and the price of gas goes up.  Get it?

The corporate tax is actually an indirect tax on your and my income. It is a regressive tax because it hits hardest on those with the least income, those who – above all – cannot afford even modest increase in the cost of goods and services.

For those who like to stick it to the rich corporate barons, you should notice that whenever a corporate tax is increased, you DO NOT see the salaries and benefits of the corporate officers being reduced.  If you think raising corporate taxes sticks it to the men and women in the oak-paneled offices, you are sorely mistaken.  You get stuck – not them.

Capital Gains

The theory of a capital gains tax is that the profits you derive from selling stock or real property should be taxed at a lower rate than your income tax.  The theory is that by taxing at a lower rate, it stimulates more investment – more business activity, more jobs and a growing economy. 

Obviously, the Capital Gains Tax works best for folks in higher tax brackets – but is beneficial to many homeowners and farmers.  Because so many Americans are retail stock purchasers these days, the capital gains tax rate can have increased importance for an increasing number of middle-income folks. 

Republicans and Democrats both agree that a capital gains tax rate lower than the income tax rate is a good idea.  They just argue about the rate.  It has fluctuated between 18 and 35 percent in modern times.

Wealth Tax

There is a lot of talk these days about a “wealth tax.”  It is NOT a tax on a person’s income, but a tax on what they own.  The Warren idea is to have a progressive tax essentially on a person’s net worth – starting at around $100,000.

This sort of tax would get no consideration if it were not for one fact.  The super rich are not paying.  Because of all the loopholes in the tax code, the richest people in America pay little to NO INCOME TAX.  A recent news report used illegally obtained tax returns to show that such mega-rich billionaires as Michael Bloomberg, Jeff Bezos, Warren Buffett, and Elon Musk – to name a few – paid no income tax.

That is because they had no reportable income.  That’s right … no income even though they had millions of dollars to spend on personal good and services.  How is that even possible?

There is only one way.  The tax code provides so many unique loopholes that they can literally deduct or shelter their entire income away.  No reportable personal income, no tax liability.

Many of our legislative leaders believe that what a person owns – and has already used post-tax dollars to acquire – should not be made to pay more taxes. At first blush, that seems reasonable.  And it would be if the millionaires and billionaires did not have all those accounting tricks to zero out their income. 

The rich are literally not paying their fair share of taxes.  It would not be unreasonable to believe that the big money folks are spending millions upon millions of dollars on personal items.  The fact that they can make all that personal income magically disappear for tax purposes is an obscenity.

On the other hand, a wealth tax has a lot of downside.  You get taxed based on what is an estimate of your wealth at a given time.  Think of it this way.  You own stock – and today the value is $1000 dollars.  You pay a tax based on that figure.  Next week your stock drops to $200 dollars.  You now have paid five times more tax than you should have. Such holdings only have a true value to you when you sell or liquidate them. And then you pay the capital gain tax on the amount you received.

The concept of a wealth tax is not new.  It has been around for years.  We call it a “property tax.”  If you own real property, your county assessor determines how much it is worth at any given time and taxes you accordingly.  Personally, I hate the property tax because it is an annual tax on the same property. It is also not likely to reflect the actual value when you sell the property. 

I think the proper course of action is not to impose a wealth tax, but to close the various loopholes that enable the rich to zero out their very, very, very large income and avoid paying taxes.

I have long been a proponent of abolishing the income tax in favor of a national sales tax.  Imagine no IRS to hassle people.  No audits. No loopholes.  I would make the tax slightly progressive – removing it from essentials, such as basic foods and medicines, and putting an excise tax on the top-level luxury items, such as Rolls Royces, designer clothes and Chivas Regal.   The rich would pay more than their fair share because they would do most of the big-time spending.  The economists who promote a national sales tax say it would be around 17 percent.

Tax policy is always a very complicated matter, but it does not have to be as complicated – and unfair – as it is today.

So, there ‘tis.