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Report Shows that the Super Rich in the US Pay Less Tax than the Middle Class

A ProPublica investigation shows how little tax the richest people in the US, including Jeff Bezos of Amazon and Elon Musk of Tesla and Space X, allegedly paid between 2014 and 2018.

The 25 richest Americans, including Jeff Bezos, Warren Buffett and Elon Musk, paid an “effective income tax rate” of just 3.4 percent between 2014 and 2018, according to an investigation by ProPublica, despite their collective net worth increasing by more than $400 billion in the same period.

The report by the nonprofit news organization exposes the U.S. tax system as income and wealth inequality continues to skyrocket, especially after the Covid pandemic.

Source: Pixabay

ProPublica used IRS “Internal Revenue Service” data to dive into the tax returns of some of the wealthiest and most prominent people in the United States.

She found that in 2007 Bezos, the founder of Amazon and already a billionaire, paid no federal taxes. In 2011, when he had a net worth of $18 billion, he again failed to pay federal taxes – and even received a $4,000 tax credit for his children.

Last year, Bezos’ net worth reached $200 billion.

ProPublica created what it called a “real tax rate” for the 25 wealthiest Americans, comparing the federal income tax paid by them between 2014 and 2018 with the increase in their net worth over the same period.

“The results are glaring,” ProPublica wrote. “According to Forbes, these 25 people saw their value increase collectively by $401 billion from 2014 to 2018.

“They paid a total of $13.6 billion dollars in federal income taxes in those five years, IRS data shows. That’s an impressive sum, but it equates to a true tax rate of only 3.4 percent.”

In contrast, the average American family paid 14 percent in federal taxes, ProPublica reported. In the United States, the highest income tax rate is 37 percent on incomes above $523,600 for individual tax filers, having been reduced from 39.6 percent by former President Donald Trump.

To get an idea, in Brazil, anyone earning above R$1,903.99 pays a tax rate of 7.5%. This payroll tax rate can go up to 27.5% for those earning over R$4,664.68 Reais.

ProPublica found that Buffett, founder of investment firm Berkshire Hathaway, paid $23.7 million in taxes from 2014 to 2018, on a total reported income of $125 million. But Buffett’s wealth grew $24.3 billion, meaning he had an “actual” or “effective tax rate” of 0.1%.

Bezos’ wealth grew $99 billion over the four-year period, but he paid a true tax rate of 0.98%, according to ProPublica. Musk and Michael Bloomberg paid 3.27% and 1.3%, respectively.

The billionaires are not accused of illegal activities. But the fees expose the flaws and loopholes in U.S. tax laws in not collecting increases in wealth derived from increased assets, but in the form of taxation on wages – the main source of income for most Americans.

“America’s billionaires avail themselves of “aggressive tax optimization” strategies beyond the reach of ordinary people,” ProPublica reported. “Their wealth is derived from the exorbitant value of their assets, such as stocks and property. These gains are not defined by U.S. law as taxable income unless and until the billionaires sell.”

Remembering that many of these billionaires have an army of accountants and lawyers to optimize their taxes as much as possible, even when that optimization, even if legal, goes against the “spirit of the law” and common ethics.

ProPublica did not disclose how it obtained the information from the IRS. The agency said reporters spent months analyzing the data and would release more reports.

Bezos, the world’s richest person, “declined to take questions,” ProPublica said.

Musk, who Forbes estimates has a wealth of $151 billion, first responded to a question “with a single question mark:”?”, ProPublica said, adding that he did not answer other questions.

Bloomberg, who according to Forbes has a net worth of $59 billion, told ProPublica that he has paid the taxes due. A spokesman cited the billionaire’s philanthropic giving. “Added together, what Mike gives to charity and pays in taxes equals approximately 75 percent of his annual income,” the spokesperson said.

ProPublica said Buffett defended his practices by email.

“I continue to believe that the tax code should be changed substantially,” Buffett told ProPublica. He said that “enormous dynastic wealth (when passed from generations to generations through inheritance) is not desirable for our society.”

Buffett, who is worth $96 billion according to Forbes, said that 99% of his wealth will go to philanthropy “during my lifetime or at death.” In 2020, he donated about $2.9 billion in Berkshire Hathaway stock to five charities, CNBC reported.

“I believe the money will be more useful to society if it is disbursed philanthropically than if it is used to slightly reduce an ever-increasing U.S. debt,” Buffett said.

U.S. President Joe Biden has proposed raising the top income tax rate and increasing the capital gains tax, although this is likely to have little effect on the actual tax rate paid by billionaires.

Senators Elizabeth Warren and Bernie Sanders, are in favor of a “wealth tax” that would introduce a 3% tax on the net worth of the ultra-rich. There seems to be little hope that it will become law.

At least there are some of the wealthiest people in the United States who want to tax wealth better. Patriotic Millionaires, a group that campaigns to raise taxes on the rich, said that the ProPublica report demonstrated “how the richest 400 Americans end up with more wealth than the poorest 150 million Americans combined.”

“The ultra-rich can choose when and how they will be taxed,” Patriotic Millionaires said. “This is exactly why we need a strong estate tax now that is difficult to avoid and circumvent.”

Why is this report exposing how little tax the world’s richest people pay important?

It is important because it supposedly shows how unfair the tax system is in the United States where some of the richest people pay a much lower effective tax rate than the average middle class.

This explains in large part why inequality in the United States and other countries in the world has been skyrocketing since the late 1970s.

This gives society the perception that the “system is rigged” in favor of the rich. This perception is transformed into the anti-elitist sentiment that exists today in many rich countries. The growth of far right and far left politicians, or Brexit, can be seen as demonstrations of this anti-elitist sentiment.

Why should billionaires pay a higher tax rate since they have formed companies that employ so many people?

No doubt entrepreneurs contribute a lot to society by starting companies, creating value, launching desired products and services, and employing thousands of people.

But all this did not happen in a vacuum. They were only able to prosper because the state created the conditions for them to do so. If it wasn’t for the American state (or almost any state in the world) providing public goods such as roads, schools, hospitals, sanitation, a legal system to ensure private property and laws and contracts, etc. there would be no capitalism and these billionaires could never prosper.

More specifically in the case of Elon Musk, if it wasn’t for the subsidies that the American government and states give for people to buy electric cars, Tesla would never have succeeded since it almost went broke in the beginning.

Or Musk’s Space X. If it were not for scientists trained by NASA (an American public institution) and a billion-dollar contract paid in advance by the American government, Space X would never have prospered.

In Bezos’ case, Amazon is entirely based on the Internet. But who invented the Internet? The American Government through DARPA (Defense Advanced Research Projects Agency).

And who built and maintains the GPS, the Global Positioning System, that Amazon’s trucks (and us) use every day to guide us and find our destinations? The American Government through taxpayer taxes. In other words, GPS is a public good that the US government has invested billions of dollars in, but gives away for free for entrepreneurs to use, create their companies, and prosper.

In short, all these public goods and investments cost money, and are paid for with the very taxes that these billionaires are avoiding paying. So, since they are the biggest beneficiaries of the existence of the state that helped them prosper, it is only fair that they are also the biggest contributors to the existence of the state itself.

What are the possible consequences of this and other reports revealing how little tax some billionaires and multinationals pay?

The pressure on tax avoidance and “aggressive tax optimization” by the upper classes, using tax havens or not, is increasing.

Already last Saturday, June 5, 2021, there was a preliminary agreement among G7 members to create a global minimum tax for multinationals.

There are also proposals to create a wealth tax in the United States, which would affect the upper classes more, and not just income tax, which affects the middle class more.

But isn’t overtaxing the rich Communism or Socialism?

Few serious people today still believe that Communism or a totally egalitarian system is viable, fair, and even efficient. This is an idea that has been tried in many countries and places and has not been successful. The free market system has proven to be more efficient and with better results.

However, in a capitalist free market system, there are “market failures.” In neoclassical economics, market failures are situations in which the allocation of goods and services by a free market are not efficient, often leading to a net loss of economic value. They can be seen as scenarios in which individuals’ pursuit of pure self-interest leads to outcomes that are not efficient – that can be improved from a social point of view.

Some market failures are often associated with public goods that need to be provided by the state to give everyone the opportunity to prosper in the free market, information asymmetries, non-competitive markets (monopolies, oligopolies, cartels, etc…), externalities (pollution, goods harmful to health, etc…), among others.

This is where the role of the State comes in, to provide these public goods and regulate the market to avoid these failures. How much the market should intervene in the economy will always be open to debate. Some countries intervene more, others less. But all intervene in some way.

The fact is that in the world’s most prosperous countries, the state plays an essential role in ensuring that the majority of society benefits from the prosperity created by free-market Capitalism.

This is because it has long been understood that a society with too much economic inequality is extremely unstable and often violent. This can lead to protests, revolutions, and eventually, civil war.

To avoid this tragic end, an open and free system, where the state tries to guarantee as much as possible a chance for everyone to prosper, is the most desired.

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