How to Tax Billionaires

The campaign for a tax on billionaire wealth is heating up. An early test will be the California ballot initiative for a one-time tax of 5 percent on California residents with assets in excess of a billion dollars. If proponents can collect the requisite 875,000 signatures, the measure will be on the November ballot. Last week, Sen. Bernie Sanders was in L.A. to help kick off the campaign.

Sponsors have tied 90 percent of the anticipated revenue to make up the losses in federal cuts in California health care, an astute way of dramatizing the connection between President Trump’s budget, untaxed billionaire wealth, and threadbare social benefits for the non-rich. A poll conducted in January by the Mellman Group showed the measure with 48 percent support and 38 percent opposed.

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But the attacks on it have just begun. The main argument is that a wealth tax will cause entrepreneurs to leave the state and will be bad for the economy. Gov. Gavin Newsom, usually a progressive (sort of), opposes the tax.

A couple of weeks ago, there were dueling demonstrations. There was actually a march supporting billionaires, with signs like “Property Rights are Human Rights.” This proved irresistible for practitioners of guerrilla theater, led by our friend Chuck Collins, who created Trillionaires for Trump. One sign read: “Your Social Security Will Buy My Birkin Bag.” Some passersby had trouble distinguishing the real march from the parody.

Apart from the pure class interest on the part of the very rich in defeating this proposal, there are some legitimate and tricky policy questions. For one thing, why do this as a one-time emergency tax? Why not make wealth taxation, either directly or through higher taxes on inheritances and capital gains, a permanent part of the system?

There are also questions about whether a tax on wealth is constitutional. And why do it at the state level, when the problem of oligarchy is national and billionaires can threaten to move?

THERE IS WIDESPREAD PUBLIC MISUNDERSTANDING of both the degree of extreme wealth concentration and how little the very rich actually pay. The public has been peppered with arguments such as this opening paragraph in the lead story in the current Economist magazine on wealth and wealth taxes: “America’s top 1% enjoy a fifth of the economy’s income and pay nearly a third of its federal taxes.”

This is a big lie. In fact, the very rich hardly pay any tax.

The statistic refers to taxes on wage and salary income, but America’s wealthiest have almost none of that. Virtually all of their income comes from investments and capital gains. And capital gains are taxed only when “realized”—that is, when a stock or other property is sold.

According to Ray Madoff, a professor of tax law at Boston College, Mark Zuckerberg is paid the lowest salary at Meta—a dollar a year. Jeff Bezos has a salary of just under $82,000 a year, low enough for him to claim the Child Tax Credit, which he did in 2011, according to reporting from ProPublica.

Even Warren Buffett, who won praise for complaining that he pays a lower rate of income tax than his secretary, takes a salary of only $100,000. The tax rate on his total income is next to nothing. His secretary pays a higher percentage than he does in her payroll taxes alone. He could, if he wished, greatly increase his tax burden by increasing how much he is paid in formal wages.

The top 1 percent hold total wealth of over $55 trillion. That’s more than ten times the amount of total annual taxation on everyone else.

If they don’t sell stock, how do the mega-rich extract the billions they need to live on? They borrow against their stock holdings, and to add insult to injury, the interest on that borrowing is tax-deductible. And then when they bestow that wealth to their progeny, their children get to restart the appreciation clock from zero, through the “stepped-up basis” loophole—wiping out all capital gains tax liability. Thus has America created a theoretically permanent hereditary aristocracy.

All of this and more is contained in Madoff’s splendid short book, titled The Second Estate, named for the aristocracy in pre-revolutionary France. One of the privileges of that aristocracy was that the second estate paid no taxes. Taxes were for the common people, just as in today’s America.

As Madoff explains, until the 1980s, the stock market bounced up and down and people who owned stock obtained income mainly through dividends, which were taxed. But in the 1980s, two things happened. The Securities and Exchange Commission changed its ruling that corporate stock buybacks were illegal price manipulation. And the government stopped enforcing the antitrust laws. Monopolies thrived and stock prices soared.

What about that supposed top 1 percent that pays one-third of all income taxes? They are the professional class, who have wage and salary earnings of maybe half a million or a million a year, and the occasional CEO with a hefty salary—but not the super-rich.

Madoff would tax the billionaire class in two key respects. First, get rid of the estate tax, which is riddled with loopholes, and replace it with an inheritance tax. After a generous exemption, all inherited money would be taxed as ordinary income. Second, get rid of the loophole that washes out capital gains in inherited stocks and tax the gain.

This is fine as far as it goes, but it doesn’t address the main way that billionaires amass huge wealth, which is increments in the value of stocks that are not sold. As Madoff herself points out, of the Forbes 400 wealthiest persons, 121 got rich mainly through inheritances. But that means that tough inheritance taxes would not touch the other 279.

To Avoid a Tax Hike, Billionaires Decide to Take Over California

My other favorite scourge of the filthy rich, Chuck Collins, in his recent book Burned by Billionaires, would levy taxes on annual increments to wealth whether realized (sold) or not. Madoff objects that when it comes to investments other than stocks, such as complex partnerships, they are simply too hard to value. Collins counters that the taxpayer could be required to make an annual declaration of net worth, which could be accepted or challenged by the IRS. And Collins would also tax wealth directly.

It’s a friendly debate. The point is to get the need to tax extreme concentrations of wealth into the public conversation.

The proposed California wealth tax, even if flawed in its details, achieves that. If it passed and were declared unconstitutional, advocates of taxation of wealth would have demonstrated public support and would seek other approaches. And if some California billionaires, as threatened, actually fled the state, that would demonstrate the case for national wealth taxation.

Collins suggests another useful strategy. Since some ordinary Americans sympathize with very rich people who have earned their wealth by inventing something new and useful, it’s worth pointing out that there is often a life cycle of entrepreneurship. An entrepreneur gets rich by inventing something useful. The entrepreneur then protects his wealth by using monopoly tactics. In the third phase, the entrepreneur gouges his customers as well as his rivals. Jeff Bezos and Mark Zuckerberg fit this pattern perfectly. The writer Cory Doctorow referred to this sequence as “enshittification.”

It’s worth putting a face on extractive wealth. As Madoff reminds us, Steve Schwarzman, the CEO of Blackstone, compared President Obama’s proposal to end the tax preference for carried interest (part of hedge fund earnings) with Hitler’s invasion of Poland. There’s a good reason why these people are called the filthy rich.