America’s tax system is rigged to protect the rich and powerful

Opinion by Jeffrey Sachs

The US tax system is rigged, and it is breaking the country in more ways than one. Much of the Republican Party lives and breathes to protect the rich and powerful from paying taxes, and Democrats like Sen. Joe Manchin of West Virginia too often side with them. Meanwhile, public opinion — strongly supporting higher taxes on wealthy Americans and corporations — counts for little because the rich have undue influence over the political class.

But the severity of the problem cannot be overstated. Between 2014 and 2018, Jeff Bezos, founder of Amazon, saw his wealth grow $99 billion (to the level of $191 billion today) while paying a pittance in income taxes, according to an investigation published by ProPublica, which revealed several of America’s best-known billionaires paid similarly little in taxes. (Bezos’ personal and corporate representatives declined to receive detailed questions on the ProPublica story.)

Not only is our tax system not collecting taxes from America’s richest individuals — it’s designed not to do so. Suppose that in a given year Bezos’ shares rise by $20 billion and, instead of selling those shares, he borrows $1 billion against them to fund his luxurious consumption. He won’t owe or pay a penny of income tax.

At a conceptual level, Bezos’ income in this example is $20 billion, measured by the change of wealth. Yet according to the tax code, his taxable income is $0, because his rise of wealth is counted as taxable income only when he sells the shares. But why should he sell them when he can pay for his $500 million superyacht and other toys by borrowing — and thereby escape income taxes altogether?

By the way, if Bezos actually sells some shares after owning them for more than one year, he would pay a “long-term capital gains tax” of 20%, below the 22% marginal tax rate on wage income paid by an individual earning $41,000!

There are actually four interconnected ways that the tax code is designed by and for the rich. The first is the case just noted, by which the richest Americans amass and spend great wealth while paying little or no tax. The applicable rules are that “unrealized capital gains” (that is, price increases on unsold assets) are generally not taxable income, and that long-term capital gains are taxed at a low rate.

The second problem is when companies park their assets and international profits in tax havens. As of 2018, according to the US Bureau of Economic Analysis, American multinational companies held an astonishing $1.3 trillion of corporate assets in Bermuda and another $1 trillion in a few tiny British islands in the Caribbean, including the British Virgin Islands and the Cayman Islands. Notably, these tiny places have a 0% corporate tax rate.

How can more than $2 trillion of corporate assets and some $159 billion of net income end up in these British islands when US companies hardly operate, produce, manufacture or export from them?

A company, which parks its money offshore, simply declares that its hugely valuable intangible assets (such as trademarks, patents and other intellectual property) are actually located in the tax haven. How they got there, don’t ask. When the company — that is, the real company — earns international profits on its actual production and sales, the real company “pays” the shell company, based in some Caribbean island, for the use of its own intellectual property.

In short, the international profits are magically assigned for tax purposes to a place with 0% corporate taxes. Lawyers actually earn high fees for facilitating this absurd tax dodge. In 2017, a leak of secretive records from a Bermuda-based law firm showed that several major tech companies were engaged in that kind of aggressive tax avoidance scheme. Though the legality of it is in question, the immorality of a tax system that allows it to happen so easily is not.

This trick feeds the first kind of tax dodge. Because of the tax havens, corporate share prices soar, and Bezos and friends enjoy their mega-incomes as “unrealized capital gains” without the need to pay any taxes.

The third problem is outright unaffordable tax cuts, such as the 2017 Trump-led tax law that cut the statutory corporate income tax rate from 35% to 21%. That was ridiculous and unfair then — and it remains so now. But Republicans have made crystal clear that they won’t touch that cruel tax cut, which was voted on in the middle of the night against the will of the American people.

The fourth and final problem is good old-fashioned tax evasion, which now amounts to nearly $600 billion per year. I don’t suppose that many Americans are “shocked, shocked” that tax evasion at a massive scale, especially by the rich, is taking place in our hallowed democracy. According to recent estimates, the top 1% of earners account for more than a third of unpaid federal taxes. The International Revenue Service budget to audit companies and wealthy Americans was slashed over the past decade, further enabling this bad behavior.

President Joe Biden and Treasury Secretary Janet Yellen are intent on addressing these four problems. But Senate Minority Leader Mitch McConnell, Democratic Sen. Joe Manchin of West Virginia and the 49 other Republican senators stand in their way.

When Yellen recently negotiated with the other G-7 countries (Canada, France, Germany, Italy, Japan and the UK) a minimum corporate tax of at least 15%, thereby blunting the role of tax havens, the Republicans declared that it was “crazy” and “anti-US.”

In addition, Biden and Yellen want to raise the statutory corporate tax rate back to 28%, halfway to the pre-2017 rate, though they don’t propose to tax unrealized capital gains. And they want to fund the IRS properly so that it can resume audits and crack down on tax cheats. Overall, their plan for economic growth could raise the share of government revenues in GDP from 16.3% in 2021 to 19.9% in 2032.

The response from 50 Republican senators has been a relentless no to any tax increase on the wealthy, while Manchin has continued to advocate for a bipartisan jobs package. And you wonder about that smirk on McConnell’s face.

So here we are, fellow Americans, with potholed streets, broken highways and bridges, poisoned urban water systems, poor connectivity, trains that crawl along, hungry Americans — and superyachts.

Long live the Republic!