57: Do Billionaires Pay Income Tax? Unpacking that Viral Tax Leak from ProPublica

08/10/21 • 40 min

Earlier this month, ProPublica made waves when it published what it said was verified IRS information showing that billionaires, like Jeff Bezos and Warren Buffett, pay little in income tax compared to their massive wealth. ProPublica described the info as “an unprecedented look inside the financial lives of America’s titans.” The article caused quite a stir, both because of how they got the data and the larger discussion regarding wealth and taxes.

Recent discussions of taxing the rich or even proposing a wealth tax have sparked plenty of philosophical conversations-- but what would that realistically look like for America’s uber-wealthy?

On today’s episode of the Taxgirl podcast, Kelly is joined by Steve Rosenthal to chat about tax and wealth and how they intersect. Steve is a senior fellow in the Urban-Brookings Tax Policy Center at the Urban Institute, where he researches, speaks, and writes on a range of federal income tax issues, with a particular focus on business taxes. In 2013, he also was the staff director of the DC Tax Revision Commission.

Before joining Urban, Rosenthal practiced tax law in Washington, DC, for over 25 years, most recently as a partner at Ropes and Gray. He was a legislation counsel with the Joint Committee on Taxation, where he helped draft tax rules for financial institutions, financial products, capital gains, and related areas. He is the former chair of the Taxation Section of the District of Columbia Bar Association.

Listen to Kelly and Steve talk about billionaires and taxes:

The ProPublica piece mentioned has been criticized for supposedly conflating wealth with income. Steve shares the difference between earned income and unearned income, and why we tax them differently. Simply: income tax only taxes income, not wealth.
We often assume that billionaires and millionaires are in the highest tax bracket, but that’s not always the case. Income is the basis of tax liability in the American system, so wealth without income is not taxed as heavily.
In 2007, Jeff Bezos famously said he paid no income tax, even though Amazon stock more than doubled in the same year. Steve says about the 16th amendment, “We have an income tax, not a wealth tax.”
How do these tax principles apply to all taxpayers? Kelly and Steve discuss taxable events and how investments like stocks and real estate aren’t considered taxable income until those assets are sold.
What the Biden Proposal says about gains-at-death for the mega wealthy, and what the threshold really is.
As a W-2 earner, all income is reported to the IRS, and many of these folks are not reliant on investments or asset growth for their wealth. But the wealthy are usually not reliant on a wage or salary. How are investment sales taxed differently than income?
What are the arguments that the tax system isn’t “fair,” versus the arguments that it is fair? Should the wealthy be taxed more heavily?
Would changing the top tax rate alter how much the uber wealthy would realistically pay in overall taxes? In the philosophical discussion of whether billionaires should be taxed more, what would that even look like?
There is so much opportunity in the U.S. for financial success, although recently wealth inequality has been “exacerbated.” What would happen to dynastic wealth if assets were taxed upon death?
The 25 richest Americans are collectively worth over $1 Trillion. It would take over 14 million working class Americans to match that kind of wealth. Does taxing appreciated assets target small business and upper middle class more than it does the billionaires?
The top 1% of Americans own 50% of the stock market. Most Americans would identify themselves as middle class, and a lot of folks don’t have an abundance of assets. Addressing wealth inequality is complicated with the way the tax code sits right now.
Does Steve think the ProPublica story helped or harmed the odds of Biden’s proposal going through? What would the next steps potentially look like for the proposal?

More about Kelly Phillips Erb:

Kelly is the creator and host of the Taxgirl podcast series. Kelly is a practicing tax attorney with considerable experience and knowledge. She works with taxpayers like you every day. One of the things that she does is help folks out of tax jams, and hopefully, keep others from getting into them.

Links mentioned:

Kelly’s Website – TaxgirlSteve’s Twitter -- stevertax

Recent discussions of taxing the rich or even proposing a wealth tax have sparked plenty of philosophical conversations-- but what would that realistically look like for America’s uber-wealthy?

Listen to Kelly and Steve talk about billionaires and taxes:

The ProPublica piece mentioned has been criticized for supposedly conflating wealth with income. Steve shares the difference between earned income and unearned income, and why we tax them differently. Simply: income tax only taxes income, not wealth.
We often assume that billionaires and millionaires are in the highest tax bracket, but that’s not always the case. Income is the basis of tax liability in the American system, so wealth without income is not taxed as heavily.
In 2007, Jeff Bezos famously said he paid no income tax, even though Amazon stock more than doubled in the same year. Steve says about the 16th amendment, “We have an income tax, not a wealth tax.”
How do these tax principles apply to all taxpayers? Kelly and Steve discuss taxable events and how investments like stocks and real estate aren’t considered taxable income until those assets are sold.
What the Biden Proposal says about gains-at-death for the mega wealthy, and what the threshold really is.
As a W-2 earner, all income is reported to the IRS, and many of these folks are not reliant on investments or asset growth for their wealth. But the wealthy are usually not reliant on a wage or salary. How are investment sales taxed differently than income?
What are the arguments that the tax system isn’t “fair,” versus the arguments that it is fair? Should the wealthy be taxed more heavily?
Would changing the top tax rate alter how much the uber wealthy would realistically pay in overall taxes? In the philosophical discussion of whether billionaires should be taxed more, what would that even look like?
There is so much opportunity in the U.S. for financial success, although recently wealth inequality has been “exacerbated.” What would happen to dynastic wealth if assets were taxed upon death?
The 25 richest Americans are collectively worth over $1 Trillion. It would take over 14 million working class Americans to match that kind of wealth. Does taxing appreciated assets target small business and upper middle class more than it does the billionaires?
The top 1% of Americans own 50% of the stock market. Most Americans would identify themselves as middle class, and a lot of folks don’t have an abundance of assets. Addressing wealth inequality is complicated with the way the tax code sits right now.
Does Steve think the ProPublica story helped or harmed the odds of Biden’s proposal going through? What would the next steps potentially look like for the proposal?

More about Kelly Phillips Erb:

Links mentioned:

Kelly’s Website – TaxgirlSteve’s Twitter -- stevertax

Previous Episode

56: Diversity and Inclusion in Finance & How to Boost the Momentum

What did you do in 2020 to make a change for the better? Last year, companies were asked to be accountable and actionable about their diversity and inclusion efforts. The results have been mixed. As Derrick Coleman of Creative Financial Staffing has written, “Improving diversity at an organization does not happen overnight. It will take time and effort for companies to make progress and begin building a more diverse workplace.”

Young professionals and recent grads are eager to see themselves represented in a company’s leadership. Diversity and inclusion initiatives are helping to reshape representation across the accounting world.

On today’s episode of the Taxgirl podcast, Kelly is joined by Derrick Coleman to talk about how a diverse workforce is good for both the culture and the bottom line of an organization. Derrick is the Managing Director for Creative Financial Staffing of Los Angeles, where he serves as a practiced leader of GHJ’s recruiting division. CFS specializes in the placement of accounting and finance professionals into temporary and permanent positions across a broad range of industries.

Listen to Kelly and Derrick talk about companies’ diversity and inclusion efforts in a post-pandemic world:

Why is it important to have diversity in the workplace, especially in the world of tax and finance?
Research shows that a diverse workforce is more profitable at the end of the day, why don’t we see more companies making more of an effort to improve right now?
The tax and accounting fields are notoriously resistant to change. Derrick says education is key; companies need to start having open dialogues about these topics, and really listen to their staff.
As a young professional new to the workforce, there’s such an advantage to seeing yourself and your identity represented in your field. Derrick shares how companies can begin to make representation more of a priority.
When hiring, how can professionals learn to look beyond their internal biases, from sharing an alma mater with an applicant, to tackling race and gender biases?
Search engines, technology, and online recruiting software have already widened the field and can help companies cast a broader net when seeking to hire. But how can firms teach their staff to overcome their biases when it comes to interviews and offers of employment?
Derrick encourages teams to go through mandatory unconscious bias training, with an emphasis on retention just as much as recruitment. He says firms have to make the effort to mentor and develop diverse professionals on a daily basis, long after they’ve recruited them to the team.
The demographics numbers regarding who is graduating versus who is managing teams do not match up at all. In other words, it can be hard for new grads to find an influential mentor in their field that looks like them.
Diversity and inclusion commitments start with the leadership of the company, Derrick says. And it’s up to the leadership teams to keep the DEI strategy at high priority, and to assign mentors and sponsors throughout their ranks and across all demographics.
How can staff members practice being supportive allies once new diverse employees are in place, without putting the pressure onto that new staff member to educate the rest of the team?
What are Derrick’s recommended resources for companies just getting started with putting diversity and inclusion initiatives into place?
How can staff members work on speaking up on behalf of creating more diversity equity and inclusion efforts, without causing accidental harm or offense in the meantime? Derrick says that everyone will make mistakes along the way; it’s important to create a safe space and stay dedicated to your own further education into the subject.
Where does Derrick see diversity and inclusion initiatives going in the future, and how can companies keep expanding upon them for a more diverse and inclusive workplace environment?

More about Kelly Phillips Erb:

Links mentioned:

Kelly’s Website – TaxgirlDerrick’s Website -- CF StaffingDerrick’s Team -- GHJ Advisors

Next Episode

58: Financial Psychology: How the Mind Influences Money Management

As we come out of the pandemic, many taxpayers find that they are not in the same financial situation as they were before. Some lost jobs or businesses, while others took on extra debt. Many of the expenses, from healthcare to mortgage payments, remained on the table, even if they were delayed or deferred. Now that we seem to be turning a corner, it’s time to talk about paying down debt, saving money, and planning next steps.

In the wake of a global pandemic, changing your money management strategy can feel daunting. Today’s guest is an expert in financial psychology and teaches financial literacy.

On today’s episode of the Taxgirl podcast, Kelly is joined by Jacquette Timmons to chat about how we can change our mindset and decision-making around money. Jacquette focuses on the “human side” of money in the field of financial psychology. As a financial behaviorist, she believes “you don’t manage money, you manage your choices around money.” On top of being an author and frequent blogger, Jacquette is also the creator of Pricing Made Human, and The Comfort Circle, a dinner series where she hosts sessions about money, business, psychology, and life, over food and wine. She is also the host of the podcast More Than Money.

Listen to Kelly and Jacquette talk about money management and financial literacy:

Debt, child tax credit, and financial obligations in the wake of the pandemic: how can families have confidence in their money management during the rest of 2021 and beyond? What should people think about when they’re getting an additional check this year with the child tax credit?
There’s a lot of judgmental attitudes out there based on how folks talk about their money or spend their money. How can tax and finance professionals work to further understand financial psychology, without placing judgment on those families for the way they spend?
What keeps people from talking about money when there’s sometimes a stigma around certain spending patterns? Jacquette talks about how financial literacy and decision making are like muscles, and it takes practice and openness to find a healthy balance.
Jacquette says it’s important to have “a willingness to experiment” with the way you handle your money and finances, but that can be difficult when you’re deeply overwhelmed by your financial circumstances. How can you work on shifting your mindset toward money management during times of financial stress?
Small and consistent changes can have a “profound” impact on both results and the new habits you’re creating around your finances. It doesn’t happen overnight, and a lot of the changes happen in the mind; practice working on small, incremental changes and focus on the long term to flex your financial psychology knowledge.
What is the harm with the popularized “coffee” analogy around saving money? Kelly and Jacquette discuss how restrictive examples like this can be, and what some more useful examples would be for making many small investments over time.
What’s the best strategy for paying off debt? Jacquette says to work on paying down a little at a time with consistency, and paying off the smallest sum first, even if it sounds counterintuitive. At the same time, she suggests investing or saving a small amount every month at the same time to see a bit of growth while you’re paying off debt.
Something that comes up often in talks of financial literacy is the idea of prioritizing debt. If you owe five different creditors, where do you start if, hypothetically, every sum was equal? Jacquette says to list everything out by category: loans, tax debt, mortgage or car, credit debt, etc. And then, she explains how to sort those debts into her “debt matrix.”
In the lives of families or the health of small businesses, in many cases finances are tighter than they were before the pandemic. Kelly and Jacquette discuss how this can have an impact psychologically, and how to encourage people to seek out help to talk about money in a more healthy way.
Hopefully the events and conflation of 2020 won’t come back any time soon, but Jacquette reminds listeners that there will be another crisis eventually. How can folks prepare and learn as much as they can to be better equipped down the road?
What’s the difference between financial intimacy and financial transparency? How do they both fit into financial psychology and money management? Jacquette explains what they both are, why they’re important, and how to bring both into your daily life.
As a culture, we crave these financial conversations to be comfortable and “easeful.” However, Jacquette suggests that’s something we should work on as a community, and instead embrace any discomfort in exchange for financial transparency and intimacy.
What are Jacquette’s tips for listeners for becoming more transparent and intimate about these financial literacy conversat...