As Tax Day looms (April 18 this year, thanks to the anniversary of the Emancipation Proclamation), several recent reports serve as reminders that the wealthiest Americans give up far less of their income in taxes than the rest of the country. Bloomberg Businessweek has published a guide on tax loopholes the top .0001 percent of American earners typically use.
“This is clearly far and away the most generous tax situation that’s existed,” says Gregory D. Singer, a national managing director of the wealth management group at AllianceBernstein (AB) in New York. “It’s a once-in-a-lifetime opportunity.”
The “opportunity” is a furthering of the tax loopholes that brought the tax rate for the top 400 Americans, who together control more wealth than the bottom 50 percent of American earners combined, down from 30 percent in 1997 to 17 percent in 2007. For the top 1 percent, the number dropped from 29 to 23 percent.
The strategies Bloomberg outlines include avoiding capital gains tax on investments by borrowing an equivalent value of stocks using the stocks as collateral, avoiding the estate tax with a special type of trust and establishing joint ownership of a property with a partner (who then buys the original owner out) instead of selling property outright in order to avoid taxes on the sale. Tactics like these, along with the fact that almost all super-wealthy Americans make the vast majority of their money on investments, taxed at 15 percent of earnings, rather than what the IRS strictly defines as income, have guaranteed that the very richest among us also contribute the smallest share of their income to state and federal tax revenue. Bloomberg reports, for example, that L.A. Dodgers owner Frank McCourt legally pays no income taxes whatsoever, and Warren Buffett likes to point out the lunacy of American tax code by way of the fact that he pays a lower tax rate than do the people who clean his office.
One voice railing against this disparity are people who, like Buffett, are tremendously wealthy and think they should actually be paying higher taxes. Millionaires like hedge fund manager Michael Steinhardt, Ben & Jerry’s Ben Cohen and “Sopranos” actress Edie Falco have banded together to form The Patriotic Millionaires for Fiscal Strength, and have sent an open letter to Congress imploring the House and Senate to revise the tax code and increase their taxes.
Meanwhile, a less altruistic proposal continues to be floated by some in government and the private sector. Last year, Democrats in the House and Senate proposed several bills (PDF) pertaining to the institution of a financial speculation tax (FST). The Center for Economic and Policy Research (CEPR) defines FST:
a modest set of taxes on Wall Street trading – e.g. 0.25% (1/4 of a percent) on a stock purchase or sale and 0.02% (1/50 of a percent) on the sale or purchase of a future, option, or credit default swap
Earlier CEPR research (PDF) indicates that a 0.5 percent FST could generate more than $350 billion in tax revenue if trading volume remained at 2008 levels. Such a tax wouldn’t come close to covering income lost through tax loopholes exploited by the super-rich.