Yesterday was Tax Day, when most Americans ante up their fair share to, as Oliver Wendell Holmes, former Justice of the United States Supreme Court said, “pay for a civilized society.” Unfortunately one group of taxpayers–the rich–have figured out how to upend the long-established principle of taxation based on one’s ability to pay. We won’t know which income classes paid what percent of their income in 2020 for some time, but we can be certain that the trend will continue where the 0.1% pay a lower percentage of taxes than the bottom 50%.
How does this happen? Chalk it up to the two biggest tax “loopholes”–lower taxation of capital gains and the charitable deduction. Most of the income of the top 0.1% comes from capital gains (investment income). Capital gains (long-term) are taxed at a much lower rate (23.8%) than earned income (37%), and of course, the capital gains tax is only on those assets that are sold.
The charitable deduction is not generally thought of as a tax loophole, but it accounts for most of the difference between adjusted gross income (essentially total income) and taxable income, the amount on which the tax is calculated. IRS data for taxable year 2018–the latest statistics available–show the top 0.1% who report adjusted gross incomes (AGI) of over $2 million, had a collective total income of $1.3 trillion (imagine what the 2020 numbers will show)! These households are sitting on an estimated total of $12 trillion–that’s a “12” followed by 12 zeroes. It is generally estimated they give 1% of their wealth or $120 billion to charity.
If the average charitable deduction tax saving is, say 50% (could be as high as 74%), it means that we the public are taking $60 billion out of the Treasury and letting the wealthy decide what kind of public investments should be made. As Anand Giridharadas, author of “Winners Take All,” told Reuters in an interview, “…our society has made the colossal error of allowing wealth to purchase the chance to make quasi-governmental decisions as a private citizen.”
Perhaps a worse problem is that a large portion of those tax-deductible dollars is used to build up private foundations or donor-advised funds to hoard money and power tax-free. There is a debate among people who care about these things whether rich people are motivated by the charitable deduction. If not, why not cap the amount of charitable deduction? If so, shouldn’t we require that the money actually goes to nonprofits rather than to hoarding vehicles?
The sad truth is that even with the outrageous amount of money the 0.1% have earned during the pandemic, on top of the huge amount they already have, and with the push of an overly generous charitable tax deduction, the rich, with a few notable exceptions, still choose personal prosperity to shared prosperity.
Amazon founder Jeff Bezos, the poster child for personal prosperity and the world’s richest person (depending on the stock market), is soon to be captain of a $500 million yacht! Seriously, that’s legal? Sure, it’s legal, but there’s no tide that could lift that boat. A lot has been written about this extravagance: my favorite comment comes from Chris Hayes of MSNBC.
It’s hard to fathom such excess after seeing what the world has experienced this past year. Yesterday’s Tax Day, which was delayed a month beyond the usual April 15, was a reminder that we are coming through an unprecedented crisis, and its impact is far from over. It has required tremendous sacrifice of many, and a call on the donor class to sacrifice some as well. The signers of the Crisis Charitable Commitment have done that, but far too many with the capacity to give more have not. It raises the question of whether this should be the last Tax Day when the wealthy are not required to do more, such as payout requirements for donor-advised funds, increased payout requirements for foundations, and higher taxes on the top 0.1%. The Biden tax proposals are nibbling at the edges of that, but speaking about the rich he said, “All those folks are still going to have two homes or three homes and their jets.” He didn’t say anything about yachts or even the size of the homes. He also didn’t say anything about changing the charitable deduction so that the middle class and merely affluent have a greater role in philanthropy, and let the wealthy be philanthropic on their own nickel.
Here’s a thought: what if next Tax Day the wealthy voluntarily (or otherwise) gave 25% of their wealth back to the government–that’s $3 trillion to fund Biden’s entire program, including early childhood care and education, green jobs, improved infrastructure, and so on. Of course it would mean that Bezos could only spend $375 million on his toy boat, but heck, that’s the price we pay for a civilized society.
Thanks for reading, and a particular thanks to the CCC signers for digging deep.