The tax code’s Achilles heel is surprisingly popular – and it’s a problem to tax the rich
Jeff BezosJeffrey (Jeff) Preston Bezos The Case for Billionaire Income Tax Democrats seek to keep billionaire tax in spending bill Matt Stroller: Amazon’s Bezos likely lied under oath to Congress MOREWealth grew by $ 99 billion between 2014 and 2018. New ProPublica report shows it paid off less than 1 percent of that in income taxes. Our research shows that while people don’t like the rich paying so little in tax, the tax provision that allows this is extremely popular. It is a problem.
The key provision is the “rule of realization”. Bezos has not sold – and therefore “made” the phenomenal gains on – the vast majority of its Amazon stocks, so it is not taxed. This story is common among the wealthiest Americans, and when this effect is multiplied in the US economy, billions of dollars in capital income goes untaxed for years or escapes tax altogether. This makes it the The Achilles Heel of Income Tax. “
We could, on the other hand, tax the gains on stocks and bonds traded in the market every year as income, even without a sale. This would solve Bezos’ problem. Indeed, the chairman of the Senate finance committee has a proposal do just that for the wealthy taxpayers. As with any new proposal, there are some important details to work out, including how to deal with falling stock prices. Yet this tax is certainly practical. For publicly traded stocks like Amazon, it is easy to calculate the taxpayer’s gain each year, and if necessary to pay tax, it can sell a portion of its appreciated stocks inexpensively.
So why do we still – and all other countries – use the realization rule for these assets? Yes, the interests of the rich probably play a role. But part of the answer seems to be that the rule matches public hunches of how to tax so-called “paper gains.” We recently interviewed a demographically representative sample of 5,000 Americans on these issues. For a variety of assets, respondents overwhelmingly preferred to wait to tax gains until the sale, rather than every year. This point of view changes only modestly if the policy is limited to the very rich.
Our main question relates to publicly traded stocks. There, people preferred to wait to tax the winnings until the 75-25% sale. Surprisingly, even among those who do not own shares, almost half prefer to raise ordinary tax rates on everyone, including themselves, to an unsold capital gains tax that does not. would not affect. Likewise, even among our (fairly liberal) law students, most remain opposed to the taxation of unsold capital gains, even after enduring a semester explaining the many problems with the realization rule.
Where do these attitudes come from? To understand this, we asked people why they had their point of view and also asked for their reactions to a variety of alternative policies. There seem to be several explanations for favoring the realization rule. One is the “status quo effect”: some people are inclined to stick with what we are doing now. But for the most part, attitudes seem to stem from the view that, before a sale, earnings only exist on paper and therefore are simply not income. We tried to persuade people otherwise, but most did not budge.
So our tax code is in a tough spot. The realization rule is the main reason our wealthier citizens avoid paying taxes, but ending it is seen by most of the public as simply not compatible with income tax. Basically, these attitudes are basically just a limitation on the taxation of capital income (largely earned by the rich), not wages (what most ordinary people earn), as wages are earned every day. year. It gives capital – and the rich – a crucial head start.
However, one should not be too pessimistic. Attitudes can change, especially with significant public debate. It is therefore useful for the Senate Finance Committee to pursue its proposal – to at least spark a public debate.
Yet the public’s predisposition not to tax unsold earnings suggests examining other taxes that weigh on the capital income of the rich. One of the surprising results of the article is that we find strong support for many of these other taxes. (One exception: others find strong support for a wealth tax, although we don’t, perhaps because we point out that it would tax the gains on paper.) For example, in our survey, support is high to increase corporate taxes or capital gains, as well. than to tax unsold gains on assets in the event of death.
Indeed, the Biden administration is to chase all the elements of this last group. These are all things that would likely help make the tax system fairer and at least strengthen the Achilles heel of the tax code a bit more.
Edward Fox, economist and lawyer, is a professor at the University of Michigan Law School. Zachary Liscow, also an economist and lawyer, is a professor at Yale Law School and has served on the staff of the White House Council of Economic Advisors.