Why is it so hard to tax billionaires? (Part 2)

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2:33Welcome to Search Engine. I'm PJ Vogt. No question too big, no question too small. Today, if we've done our jobs correctly, and who knows, we've hopefully suckered you into paying attention to a story about 110 years of American tax policy. Let's find out. So September 2020, Jesse Eisinger, a senior editor and reporter at ProPublica, had gotten this leak of internal documents from an anonymous source. The tax returns of thousands of the wealthiest Americans dating back over 15 years. In those leaked tax returns, Jesse and the team at ProPublica could see proof of this maneuver, a maneuver that some academics and economists had suspected was now being deployed by the country's wealthiest.

3:19What did the documents help you understand that you hadn't understood before? Well, I mean, me, non-tax reporter, non-tax expert, it was all extraordinarily revelatory. But even tax experts didn't understand this fully. So, you know, I think there's a general lay understanding that the wealthy avoid taxes. And that's the kind of eye roll thing that you would hear in a bar if you were talking about these stories. Yeah. Someone drinking next to you. But they didn't know that Jeff Bezos and Musk and Bloomberg and Carl Icahn and George Soros literally could pay zero in federal income tax in recent years.

4:03They didn't know that Jeff Bezos got a child tax credit because his income was so low. Experts understood that in the abstract. and no one understood it in the specific until we proved it because we had the specific numbers and the names. So let's get into the actual specifics. In this episode, we're going to dig into how it is that some billionaires end up paying$0 in federal income tax.

4:34Chapter 1, One Weird Trick. I asked Jesse to walk me through, step by step, how the trick works. I gave him Jeff Bezos as my hypothetical billionaire who might want to not pay his federal income taxes. So let me tell you, like, my dum-dum's view of what Jeff Bezos' life looks like. My dum-dum view of Jeff Bezos is like... He's working out. Every time, he works out a lot. He takes a lot of pictures with his beautiful partner. And then every two weeks, his phone buses, and it's his Chase bank account. and it says that his payroll deposit is in and that Amazon.com pays him, I don't know, Jeff Bezos,$10 million a year.

5:16So he gets almost$200 ,000 a week. So every two weeks, he gets$400 ,000. They take out all the stuff the government takes out. So after taxes, he gets$200 ,000. It goes into his checking account. That's not what happens. What happens instead? No. So what happens instead is he gets a small paycheck. You know, a lot of these guys get$1 salaries. And, you know, Steve Jobs sort of popularized that. But the Google guys, Larry Page and Sergey Brin, they get$1. It's very popular. And if you got$1 divided by 52, you're not paying a lot in taxes. And so what's happening with those guys is they're not really getting that kind of weekly paycheck.

6:01or they're getting very modest amounts of money. So there's nothing to tax in terms of wages. There's nothing to tax in terms of wages. They're keeping their wages low. And the reason why you're keeping your wages low is that wages are relatively highly taxed. They're taxed at about 40%. The top marginal tax rate of 37 % plus about 3 % for payroll taxes. And so you don't want wages. It's stupid if you're a really wealthy person to get wages. So instead what you're doing is you're getting money through gains on your asset. So obviously, anyone who is not taking income is not going to pay income tax.

6:39But most people need some form of income to live. What sets ultra-rich people apart is that they typically own at least one very expensive asset. For instance, a business they made or inherited. And there's actually a way to make money off of that asset without that money being taxed as income. And so what Bezos, it's very easy to think about what Bezos is doing, which is that most of his wealth is tied up in Amazon stock. And so Amazon stock goes up several billion dollars a year, typically, or has for a long time. And then if Bezos needed cash, he could sell some of that stock, and then he would get cash.

7:24But then he would have to pay taxes on selling the stock. Right. And then if he sold that stock, then he would have to pay taxes on it. You're not paying 37%. You're only paying 20 % on that because that's what capital gains tax is. But why pay 20 %? So what you want to do instead is borrow against that money. So he goes to the bank and he says like, hi, Jeff Bezos, you may have heard of me. I only make$1 a year, but I do happen to own a lot of Amazon stock. I want you to just give me a loan and the collateral will be my Amazon stock. Yeah, so I don't actually know if Bezos specifically does this, but Larry Ellison, we know, does this.

8:01He's the billionaire from Oracle, one of the richest people in the world, and a guy named Elon Musk. We've talked about it on this very podcast. He's literally borrowed against his stock to the tune of tens of billions of dollars. Every person whose tax information was described in ProPublica's reporting was asked to comment. Jeff Bezos' reps declined, as did Larry Ellison's reps. Musk responded to ProPublica's email with a loan question mark. After ProPublica responded with detailed questions, he did not reply. Okay, so Elon Musk pays himself something like a dollar a year. Yeah. Even though he works at like eight companies.

8:38So he gets$8 a year. Yeah, very little. Yeah. And when he wants money, he goes to the bank and he says, Hi, Elon Musk, I've ruined Twitter. You guys are going to give me a loan. And the collateral for the loan is going to be my Tesla stock, presumably. Yeah. Exactly. And then you don't get taxed on a loan. You don't get taxed on borrowings. But so then he, they give him like a bunch of money. He like buys a bunch of social media companies. Larry Ellison bought a Hawaiian island. But then what do you do? You have to pay loans back. No. No. Wrong. Why? You're so naive. I am. Yeah. In a lot of ways.

9:17Yeah. So you basically borrow at almost no cost. Yeah. Because they know that the stock is there and they can call it at any time. And you essentially never really have to pay it back. The estate's going to pay it back when you die. What Jesse's saying is that billionaires, instead of funding their lifestyles with salaries or by selling some of their valuable assets, billionaires can just borrow money against their assets at extremely low interest rates available only to them. Those rates fluctuate with the market. but according to Bloomberg, billionaires have in the past been able to borrow money at less than 1 % interest.

9:57Money that is completely untaxed. And they can then use that money to buy whatever they want. Islands, basketball teams, social media companies. The government will tax billionaire assets when the billionaire dies through estate taxes. Although you won't be shocked to know that the ultra wealthy are pretty good at working around the estate tax as well. A USC professor named Ed McCaffrey coined the phrase for this, buy, borrow, die, which sounds like a confusing bumper sticker. But buy, borrow, die is the tactic that people like Elon Musk are employing. Avoiding paychecks. Living off of borrowed money.

10:33Do you think his credit score then is high or low? Because he has a lot of debt. He's got a lot of debt. And they were a little worried about it at some point. The reason we know this is that his lawyers forced him to disclose it in the SEC filings. That's why we also know about Larry Ellison. So you can't see everybody's borrowing. So you don't know how much Jeff Bezos is actually borrowing, if he's borrowing at all. But this is an extremely common technique for ultra-wealthy people. So that is the one weird trick billionaires have come up with, to not pay income taxes. Don't have income. Or have as little income as possible.

11:13It won't really work for me, and it won't really work for you. unless you're a billionaire. If you are a millionaire and you're listening to Search Engine, I do want to say, we could actually use help funding the show. And I'm really sorry that Jesse was so rude about you and your friends. I actually barely know him. I happen to think you guys are great. I'm very proud of your ability to allocate capital efficiently. Anyway, where was I? Right, the loophole. What if we wanted to close it? What if instead of relying so much on the largesse of the middle class and the merely rich, What if we asked the ultra-wealthy to get taxed like the rest of us?

11:51After the break, new ideas from unexpected quarters.

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14:31Welcome back to the show. When ProPublica published a series about the secret IRS files, Jesse initially felt like their reporting hadn't really had the impact he would have hoped for. But this past spring, he realized they'd reached at least one influential American. Mr. Speaker, Madam Vice President, members of Congress, my fellow Americans. Chapter two, Joe Biden. Listening back now, it's a little strange that this clip is only from March. Biden, back then, still the Democratic candidate. And also, sounding at the time, fairly energetic as he addressed the nation. Not since President Lincoln and the Civil War have freedom and democracy been under assault at home, as they are today.

15:15He stood at the lectern, Kamala Harris behind him, applauding his better lines. And later in the speech, he began to talk about taxes. As the crowd started to respond, you kind of felt like you were at a youth crew hardcore show. Folks at home, does anybody really think the tax code is fair? No! Do you really think the wealthy and big corporations need another$2 trillion tax break? No! I sure don't. But then Biden went from this very standard fare, you know, the rich pay taxes, blah, blah, blah, and slipped in a way more radical idea. I'm going to play you the moment he does this, although I will warn you, the radicalness of it is somewhat well-concealed.

15:54But listen, maybe you'll catch it. You know, there are 1 ,000 billionaires in America. You know what the average federal tax is for those billionaires? No. They're making great sacrifices, 8.2%. That's far less than the vast majority of Americans pay. No billionaire should pay a lower federal tax rate than a teacher, a sanitation worker, or a nurse.

16:23So the radical part is the number that Biden just used. He said the billionaire tax rate is 8.2%. To be clear, the federal income tax rate for a billionaire is actually almost 40%. And Biden got a lot of pushback for saying 8.2. From the Wall Street Journal, the Washington Post, the New York Times fact-checker accused him of bending the truth. But let me just explain to you how he got that number. The logic Biden is using here is the exact same logic that you would find in the ProPublica series. Remember the buy, borrow, die technique? We know a billionaire like Elon Musk does not get a real salary.

17:02Instead, he pays himself a dollar and then owns a lot of Tesla stock. In most years, the stock gains value. A stock, anything that gains value, that you then don't sell, we call that gain an unrealized gain. An unrealized gain is anytime something you own becomes more valuable, but you hold on to it. My unsold Eric Lindros rookie card that is somewhere in my parents' house is an unrealized gain. In theory, it's worth more money than when I bought it, but I'm not benefiting from that gain right now. I'm not, but we now know someone like Elon Musk can. Billionaires like him are constantly borrowing against their unrealized gains.

17:43Joe Biden is saying when it comes to these billionaires, we should treat that gain in value as if it's real money. In their pocket, it should be taxed. And that, believe it or not, is an extremely, extremely controversial idea. It's a religious tenet among tax accountants and lawyers that you cannot tax unrealized gains. And so people are very offended by the notion. People are offended by the notion. Like, of all the third rails in American culture, taxing unrealized gains was like a spicy topic that ProPublica was afraid to poke? It's a very, very spicy topic. In tax circles, this is as spicy as you get.

18:26Jesse's quick to point out that tax textbooks across the country do consider unrealized gains income. But the idea of taxing that income is a lot spicier. Jesse and ProPublica got very similar flack to the flack that Joe Biden received. People responded to us by saying, you idiots, we don't tax unrealized gains in this country. And we had to say, you know, I responded to 150 emails from readers saying, yeah, that's the point of the article, is that we have a choice about what to tax, and we're not taxing this, and that's why billionaires are able to live outside of our tax system. Our government, since its inception, has been in this push and pull with the very wealthy.

19:12The government typically tries to get them to pay more. They mostly try to pay less. Sometimes this push and pull is so strong, it actually changes the nature of wealth, changes in some ways the structure of our economy. So what if right now you wanted to bring more billionaires more firmly into our tax system? There's a few possible solutions. Solution one, the one Jesse is getting so much crap for pointing to, is to just make a law that would let the government tax unrealized gains. There's a bill that would do this. It's based on Biden's proposal. It's called the Billionaire Minimum Income Tax Act.

19:44Here's Biden laying it out. If you make a billion bucks, great. Just pay your fair share. Pay a little bit. A firefighter and a teacher pay more than double, double the tax rate that a billionaire pays. That's not right. That's not fair. It's like he's trying to whisper directly into the troubled mind of Elon Musk. This billionaire minimum income tax, it would actually apply not just to billionaires, but to any American whose net worth exceeds$100 million. dollars, meaning 99.99 % of Americans would be unaffected by it. Minimum tax, it applies only to the top one-hundredth of one percent. One-hundredth of one percent of the Americans will pay this tax.

20:28The billionaire minimum tax is fair, and it raises$360 billion that can be used at a lower cost for families and cut the deficit. After Joe Biden left the race, Kamala Harris adopted his same plan. Here she is on 60 Minutes, an hour-long television show, discussing it. I'm going to make sure that the richest among us who can afford it pay their fair share in taxes. It is not right that teachers and nurses and firefighters are paying a higher tax rate than billionaires and the biggest corporations. And I plan on making that fair. It's very easy for most of us to get on board with a plan like this.

21:07More money for roads, no skin off our backs. But I wanted to run it by a more skeptical expert. Okay. Are you all settled? Are you good? Yeah, I'm good. Okay. First of all, can you just say your name and what you do? Alison Schrager. I'm a senior fellow at the Manhattan Institute and columnist at Bloomberg Opinion. And is Manhattan Institute technically a think tank? Yes. I like how you put think tank in quotes. Think tank always feels like a weird, I'm like, it always makes me think of Star Wars and the Bacta tanks. Like everyone's put in like sort of amniotic fluid all day and forced to come up with policy ideas.

21:41Yeah, you know, I do spend a lot of time thinking, which makes me feel like I don't work that hard because the amount of hours in a day I'm actually doing something like writing or doing things like this is actually minimal. But I do think a lot. Honestly, that sounds completely lovely. That sounds like a great way to spend your entire life.

22:03Maybe I should have said this earlier, but ProPublica, where Jesse works, is a nonpartisan investigative journalism organization. But the thrust of their reporting, to me, leans left. The Manhattan Institute, where Allison sits in a tank and thinks. Their thrust, generally conservative. I would say Romney, not Trump. But that means, in a sense, yeah, maybe it's not surprising that this person from this place is skeptical about an innovative new tax on the rich. But the thing is, Allison does believe that billionaires need to pay more than they're paying. I agree they should be paying more in taxes.

22:39Okay. I'm not against that idea. I just, how you structure your tax system is important to me. In a perfect world, I wouldn't think anyone should pay any tax, but the fact is we do need a functioning government, and we've committed to a lot of things that people are counting on, and we need money. And everyone's going to have to pay more taxes, and they have more money, so they should pay more. So Allison agrees on the problem, but she doesn't like the fix that the Democrats are suggesting. I don't agree with taxing unrealized gains. There are credible economists who think differently. This is a conversation we should have, but like, I think it's just impractical.

23:16And the ability to collect a tax-you levy is actually very important and it's important consideration. First of all, it's very hard to tax wealth because it's really hard to put a value on wealth. When you tax a capital gain, I mean, there's a financial transaction you can observe and you can tax that. Meaning like you can actually say like the stock was worth this on the day you bought it. It was worth this on the day you sold it. And so it's really easy to say what the value was and you just take the tax rate and you're out of there. Exactly. It's like taxing income. You know, you observe your income and then you pay a tax on it.

23:48And this makes collecting it easier. But how do you measure an unrealized gain? So is it just like December 31st, the value of your portfolio and then what you pay the tax on April 15th? What do you do if there's a loss? Do they get a tax credit? After this call with Allison, we looked through the Biden-Harris proposal. All 256 pages of it. Not me, we. It does actually have pretty specific answers to many of these questions. There's a specific date where you'd measure the unrealized gain, and if there's a loss, there'd be a credit. Jesse Eisinger told me that he's spoken to tax experts who say the details in this proposal actually seem quite thought through.

24:31I do take Allison's point that the ease of collecting a tax matters. And I'm also moved by this idea she has that a new tax could be distortive, meaning taxing something we've never taxed before could have social consequences beyond what we imagine, some of which we might not like. Allison does have some other competing ideas for ways to get more tax revenue from the wealthy, which brings us to solution two. Get rid of step-up in basis. Which is when you buy an asset, when you sell it, you pay tax based on what the price was when you bought it versus what you were when you sold it. But if you die and leave it to your heirs, it's not based on when you bought it.

25:10Step up in basis. God, when did this podcast get so in the weeds? Step up in basis basically is another way that a wealthy person can give an asset to their kids and in doing so, avoid a lot of taxes. Allison explained how that tax maneuver works right now. So suppose you start a company. Suppose you're Jeff Bezos and you kept Amazon private. And he died tomorrow. Yeah. And he left this private company to his children, or even if it was public, and they sold all their shares. They wouldn't pay a capital gains tax on it. So rather than paying the difference between what Amazon was worth when Jeff Bezos started it and what it was worth the day that they sold it, they would pay the difference between what Amazon was worth the day they inherited it from Jeff Bezos and the day that they sold it, which would be a much, much smaller taxable windfall for the government.