Tax

Bloomberg Vows Hunt For Leakers Amid Row Over UHNW Tax

Tom Burroughes, Group Editor, June 10, 2021

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A row is brewing about leaks of tax information concerning America's 25 richest persons. It raises questions about data privacy, and will inevitably also drive debate about tax, fairness and attitudes toward the rich.

Michael Bloomberg, the media tycoon and former New York City Mayor, has reportedly (The Times, others) promised to use “all legal means” to find whoever leaked tax returns of the 25 richest US citizens.

The leaks add further fuel to fire about whether HNW individuals unfairly benefit from the tax code, or whether such complaints are “class war” politics. (It also highlights how HNW people are perceived in the US and other major industrialized nations today.)

The group ProPublica said Bloomberg paid no income tax in one recent year. The organization published masses of records about wealthy individuals, such as Jeff Bezos, George Soros and Elon Musk. The group said that none of these persons had done anything illegal – begging the question as to the main purpose of its report.

Such stories grab headlines because the finer points of tax policy can be drowned out in a general sense of outrage that “the one per cent” are getting an easy ride. The optics of such stories are certainly negative. US President Joe Biden has pledged more resources for the Internal Revenue Service so that its tax audits increase how much revenue is raised; he also proposes hikes to capital gains tax on high earners. Some politicians, such as Democrat Senator Elizabeth Warren, want to introduce a wealth tax.

ProPublica said on its website (June 8) that it had “obtained a vast trove of Internal Revenue Service data on the tax returns of thousands of the nation’s wealthiest people, covering more than 15 years.” It continued: “Taken together, it demolishes the cornerstone myth of the American tax system: that everyone pays their fair share and the richest Americans pay the most. The IRS records show that the wealthiest can - perfectly legally - pay income taxes that are only a tiny fraction of the hundreds of millions, if not billions, their fortunes grow each year.”

The group did not say how it obtained this information, a fact that will likely anger beneficial owners of companies and trusts. In recent years personal financial affairs have been leaked in the Panama Papers, Paradise Papers and other episodes. 

Tax treatment
The report said Bezos paid no income tax in 2007 and 2011, and Soros went three years in a row without paying the IRS.

“Many Americans live pay check to pay check, amassing little wealth and paying the federal government a percentage of their income that rises if they earn more. In recent years, the median American household earned about $70,000 annually and paid 14 per cent in federal taxes. The highest income tax rate, 37 per cent, kicked in this year, for couples, on earnings above $628,300. The confidential tax records obtained by ProPublica show that the ultra-rich effectively sidestep this system,” the group said. 

“We compared how much in taxes the 25 richest Americans paid each year to how much Forbes estimated their wealth grew in that same time period. We’re going to call this their true tax rate,” it continued. 

“The results are stark. According to Forbes, those 25 people saw their worth rise a collective $401 billion from 2014 to 2018. They paid a total of $13.6 billion in federal income taxes in those five years, the IRS data shows. That’s a staggering sum, but it amounts to a true tax rate of only 3.4 per cent. It’s a completely different picture for middle-class Americans, for example, wage earners in their early 40s who have amassed a typical amount of wealth for people their age. From 2014 to 2018, such households saw their net worth expand by about $65,000 after taxes on average, mostly due to the rise in value of their homes. But because the vast bulk of their earnings were salaries, their tax bills were almost as much, nearly $62,000, over that five-year period,” it said. 

The ProPublica assertions suggest that it is campaigning for changes to tax laws, particularly as it doesn’t directly accuse any of the persons mentioned of wrongdoing. 

It is arguably incorrect to say that these persons paid “effectively zero rates” because they pay the effective tax rates on their income, and that can be counted in billions. Also, as wealthy people tend not to spend much of this money, even at the most lavish levels, but invest it, the unfairness charge appears unclear. Critics say, however, that the income tax bite paid by the broad mass of the US population is proportionately far more onerous than what the super-wealthy incur, even if the absolute amounts are far less.

One tax and private client advisor told this news service that the juxtaposition of total accumulated wealth against the amount of income tax paid in a particular year was “disingenuous.”

Analysis
“The tax data was provided to ProPublica after we published a series of articles scrutinizing the IRS. The articles exposed how years of budget cuts have hobbled the agency’s ability to enforce the law and how the largest corporations and the rich have benefited from the IRS’ weakness. They also showed how people in poor regions are now more likely to be audited than those in affluent areas,” the group said. 

"ProPublica is not disclosing how it obtained the data, which was given to us in raw form, with no conditions or conclusions. ProPublica reporters spent months processing and analyzing the material to transform it into a usable database. We then verified the information by comparing elements of it with dozens of already public tax details (in court documents, politicians’ financial disclosures and news stories) as well as by vetting it with individuals whose tax information is contained in the trove,” it said.

“Every person whose tax information is described in this story was asked to comment. Those who responded, including Buffett, Bloomberg and Icahn, all said they had paid the taxes they owed,” it added.

Wealth tax pushback
The row about the tax burdens will add to debate about a case for a wealth tax. A number of European countries such as France and Sweden introduced such taxes, before abandoning them. 

In a comment published by the US free market think tank, the Manhattan Institute, authors Allison Schrager and Beth Akers said of such taxes: “Wealth taxes are inefficient and ineffective because wealth is inherently more difficult to measure. Privately held companies, for example, are not traded in public markets, which means that there are no stock prices by which one can objectively gauge their value.”

“Also, financial assets can be hidden or moved abroad with the click of a mouse or converted into other assets that are hard to value. A dozen European countries had a wealth tax in 1990, but most abandoned them because they were ineffective and expensive to administer. In part, the taxes failed to raise much revenue because wealthy individuals easily moved their assets across borders to avoid taxation. …Wealth taxes distort behavior in a way that is harmful to economic growth and national prosperity.

“By taking a fraction of people’s wealth each year, the tax reduces the return to investing and discourages saving. This can reduce growth because investing and capital accumulation are critical to innovation. …think of it as a tax on capital income. And when you put the tax in income terms, 2 per cent can be enormous. For example, if your assets return 4 per cent, a 2 per cent wealth tax is equivalent to a 50 per cent tax on capital income!”

(This news organization is supporting a forthcoming seminar on the “inequality emergency”.)

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