You might find this post at ProPublica interesting. They’ve obtained IRS information on the tax returns of some of the very richest people:
ProPublica has 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. The data provides an unprecedented look inside the financial lives of America’s titans, including Warren Buffett, Bill Gates, Rupert Murdoch and Mark Zuckerberg. It shows not just their income and taxes, but also their investments, stock trades, gambling winnings and even the results of audits.
To some degree the post is an exercise in sophistry since they keep switching back and forth between wealth and income which are two different things. Presently, we tax income but we do not tax wealth. Except in one case, of course. A tax is levied on my house based on its assessed value and it’s reassessed every three years. That is, in effect, a wealth tax. It isn’t done that way in all states. In California, for example, you pay real estate taxes based on the value of your house when you bought it. In other words we tax the wealth of the middle class, most of which is held in the form of their homes, but not that of the ultra-rich which is held in other forms.
They do provide a helpful explanation:
In 1916, a woman named Myrtle Macomber received a dividend for her Standard Oil of California shares. She owed taxes, thanks to the new law. The dividend had not come in cash, however. It came in the form of an additional share for every two shares she already held. She paid the taxes and then brought a court challenge: Yes, she’d gotten a bit richer, but she hadn’t received any money. Therefore, she argued, she’d received no “income.â€
Four years later, the Supreme Court agreed. In Eisner v. Macomber, the high court ruled that income derived only from proceeds. A person needed to sell an asset — stock, bond or building — and reap some money before it could be taxed.
Since then, the concept that income comes only from proceeds — when gains are “realized†— has been the bedrock of the U.S. tax system. Wages are taxed. Cash dividends are taxed. Gains from selling assets are taxed. But if a taxpayer hasn’t sold anything, there is no income and therefore no tax.
As I noted above there are major differences in the sources of wealth depending on just how wealthy you are:
Warren Buffett has quite publicly declaimed that the rich pay too little in taxes but he has also criticized taxing capital. If that’s not hypocrisy it is, at the very least cognitive dissonance.
Ultimately, the marginal tax rates don’t matter—especially for the very rich. Whether the highest tax rate is 34%, 38%, or 90%, if taxable income is zero the tax is still zero. What matters is how income is determined.
Two points.
The expose supports an argument I made. The proposal that the truly rich are illegally avoiding their taxes is incorrect. They are sheltering their income through legal vehicles. As such; proposals to raise revenues via stronger enforcement won’t effect them much.
How did this information leak from the IRS? I thought leaking tax returns is a crime. After the tax targeting controversy 10 years ago; this isn’t going to build confidence that the IRS respects the rules it operates under.
Indeed it is.
The release or leak and/or hack of the IRS data is the main story. This is supposed to be secure, confidential and disclosed for very specific reasons. However, since will delight the left wing of the D’s, expect this angle to disappear.
“Since then, the concept that income comes only from proceeds — when gains are “realized†— has been the bedrock of the U.S. tax system. Wages are taxed. Cash dividends are taxed. Gains from selling assets are taxed. But if a taxpayer hasn’t sold anything, there is no income and therefore no tax.”
This is the so called “phantom income” problem. If one doesn’t intuitively understand the problems with basing taxation on wealth, they have no standing in the argument. They truly are ignorant. What do we do when previously taxed asset values fall (they can go both ways, you know), perhaps even to zero? Who values the assets? Does anyone here have experience with valuations? I do. Comps? DCF’s? For illiquid assets????? They are pure crap. Let’s think about how valuation firms go about their business. Imagine 1040’s now littered with Black-Scholes model Schedules. (If anyone here actually understands that reference you probably just fell out of your chair at the notion of taxing wealth.) How often such valuations? At what cost? An investment banker’s wet dream…. Its utter nonsense for the uninformed.
“Except in one case, of course. A tax is levied on my house based on its assessed value and it’s reassessed every three years. That is, in effect, a wealth tax.”
Uh, not really. The history of property taxes is a rich one with lots of considerations. But for purposes here the historical notion is that they pay for, in a progressive manner based upon a presumed connection between income and property value, the burden of local services. Consumption taxes. Property taxes are deemed to be no different than the utility bills, the landscaping bills, maintenance, the schools etc etc. That’s the theory. Of course there’s also why do you rob banks………..because that’s where the money is.
In addition, true more intimately for income producing properties than residential properties, there is the notion that the property taxes are capitalized into the original price paid. So exactly what wealth based property taxes are you speaking of? But now we are into analysis of tax incidence.
Now, you may feel your property tax bill increase has not matched your receipt of services. Heh. Imagine how I feel when I file my taxes. You remind us frequently you are a Democrat. Well, Willie Sutton, enjoy the shit sandwich you have voted for all your life.
It’s not just that it hasn’t matched the increase in services. The services have actually declined while the taxes have quintupled. That’s because it’s based on the putative value of the house now rather than when it was purchased. That means it’s a tax on unrealized proceeds which may, in fact, never be realized.