There has been a big fuss this week about a report from the ProPublica non-profit journalism organization, which obtained tax returns for a number of the wealthiest Americans and found that many of them paid a small percentage of tax in relation to the assets they own.
Maybe the super-rich should pay more income tax, but comparing their taxes to their assets is the wrong way to look at this issue. After all, the income tax is applied to money that is earned during a year. That is a far different concept than measuring the value of everything a taxpayer owns.
Actually, the underlying importance of the Pro Publica report has nothing to do with taxes. Instead, it emphasizes a lesson that many of us never learn: When you find a winning investment, stick with it.
In many cases, the wealth of the richest Americans comes from starting (or inheriting) a small business that became gigantic. A few examples are Sam Walton and Wal-Mart, Bill Gates and Microsoft, and Jeff Bezos and Amazon.
Of course Bezos’ wealth increased in 2020. He owns a lot of Amazon’s stock. Its price began the year at $2,008 per share and finished at $3,256 — an increase of 62%. It’s totally weird that while the pandemic threw 20 million people out of work and shut down great segments of the economy, the stock market thrived.
But you only pay income taxes on your assets when you sell them. If Bezos didn’t sell any Amazon stock during 2020, he didn’t owe any taxes even though their value went way up. Whenever he does sell any of his shares, he’ll pay a hefty tax.
Those of us who don’t run big companies can follow the strategies of the super-rich on a smaller scale. Find assets that require an investment — a small business, the stock market, timberland or a home — and hold on to the good ones. You pay the income tax on any profit only when you sell.
The same principle is at work in retirement vehicles like an IRA or a 401(k), which allow decades of investment before any taxes are due.
This requires patience, and especially resisting the impulse to play a market for quick money, as so many people love to do. Walton, Gates and Bezos became successful by having a transformative idea and sticking with it for years.
But rest assured that millions of ordinary Americans are sitting on huge gains today without paying any tax simply because they’ve held on to what they own for many years. The passage of time allowed their assets to increase in value. America’s long-term trend is upward.
The government certainly could change the rules one day. A number of Democrats favor a “wealth tax” on assets to go along with the current income tax. This might ensure that billionaires pay more, but it is a minefield of an idea that could easily backfire.
Before Congress even considers a wealth tax, it ought to redo the federal tax code to eliminate some of the loopholes that enable unfair income tax avoidance. It also ought to ramp up the Internal Revenue Service’s enforcement efforts in an effort to make sure that people who legally owe taxes pay them.
Jack Ryan, Enterprise-Journal