FINANCE Bloomberg Businessweek November 11, 2019
27“What is surprising is the pace at which the debate
is changing,” says Jonathan Traub, managing prin-
cipal of Deloitte Tax LLP’s national tax practice in
Washington. “It is a theoretical rethinking of our
bases of tax.”
If Democrats take power next year, they could
of course just raise income tax rates on the rich. In
an interview in January, New York Representative
Alexandria Ocasio-Cortez suggested putting a 70%
top rate on income over $10 million. Without chang-
ing other aspects of the tax code, though, higher
rates will neither hit most of the top 0.1% nor raise
much revenue, according to an influential paper
released by Lily Batchelder and David Kamin, for-
mer advisers to the Obama administration who are
now law professors at New York University. A 70%
top rate would raise only $260 billion to $320 billion
over a decade, they estimate.
If you’re overhauling the Internal Revenue
Code, Batchelder and Kamin argue, you can pull
in more money—trillions of dollars, not billions—if
you target the many ways the very rich avoid taxes
altogether: The estate tax is full of gaping loop-
holes; multinational corporations owned by bil-
lionaires skip corporate levies by moving profits to
offshore havens; and the IRS, starved for resources,
struggles to keep up with the top 0.1%’s legal and
illegal tax dodges.
The wealthiest business owners and chief
executive officers have one especially versatile
tool: They control when, and in what form, they
receive income. That’s where a new approach to
capital-gains taxes from Oregon Senator Ron Wyden,
in line to chair the Senate Finance Committee if
Democrats win back the chamber, comes in. “My
proposal is simple,” he says. “It would treat income
from wealth like income from wages.”
Right now, income is only taxed when it’s
realized—when, for example, a person receives a
paycheck, sells a stock or piece of property, or gets
a dividend. The richer you are, the more flexibility
you have on when to sell and trigger a tax bill or a tax
loss. The wealthy can borrow against investments
rather than sell assets and pay taxes. Billions of dol-
lars in capital gains can get deferred for decades or,
if held until death, forever. According to a few recent
studies, the top 0.1% end up reporting to the IRS just
half, or even less, of their total earnings.
Wyden’s plan would raise today’s lower rates
on capital gains while forcing the superwealthy—
those with at least $10 million in assets or $1 mil-
lion in annual income for three years—to pay taxes
on their gains every year, whether they were real-
ized or not. In this “mark-to-market” system, the
rich would report all gains and losses on stocks and
other publicly traded assets to the IRS every year.
Gains become taxable income, while losses can be
deducted. For private assets, the rich would pay an
extra tax when they realize gains, based on a for-
mula that shrinks the benefit they receive by defer-
ring the sale.
The 10 wealthiest Americans got $163 billion
richer over the past three years, according to the
Bloomberg Billionaires Index. But it’s likely they
paid taxes on less than a quarter of those gains.
Jeff Bezos’ net worth jumped $65 billion from the
beginning of 2016 to the end of 2018, making him
the richest man in the world. But a Bloomberg analy-
sis estimates he received only $3.5 billion, or about
5% of his gains, as taxable income. Warren Buffett
got $21.5 billion richer in the past three years, while
selling only $13 million in Berkshire Hathaway Inc.
stock—less than 0.1% of his paper gains.
Another way to tax built-up wealth, which for-
mer Vice President Joe Biden and many other
Democrats support, would be to repeal the pro-
vision that wipes out the taxable capital gains on
assets passed to children and grandchildren after
death. Then there’s the estate tax, which has
become increasingly easy to avoid. Batchelder has
suggested revamping what critics call the “death
tax” into a more politically palatable “inheritance
tax” that’s technically paid by heirs rather than the
estate. Bernie Sanders has floated the idea of hik-
ing rates on billionaires’ estates from 40% to 77%.
What about a direct wealth tax, as both Sanders
and Elizabeth Warren propose? Roughly speaking,
a wealth tax works like this: You calculate a house-
hold’s net worth, then charge an annual levy on
the amount above a certain level. In Warren’s plan,
households would pay 2% on net worth of $50 mil-
lion to $1 billion. Above $1 billion, they’d pay 6%.
A wealth tax is popular with voters, but it
wouldn’t be easy to implement. Many conserva-
tives say it’s unconstitutional, and the IRS would
face an administrative headache valuing the for-
tunes of tens of thousands of rich families every
year. “At the end of the day, people don’t think this
is going to get passed,” says Eric Hananel, a prin-
cipal at UHY Advisors in New York who consults
for high-net-worth clients. Wyden’s mark-to-market
capital-gains tax could be just as complicated to put
into law. For one thing, as markets fluctuate, the
IRS could end up collecting huge sums from billion-
aires one year, only to hand them back the next in
the form of deductions for investment losses.
These potential swings are a problem for
University of California at Berkeley’s Emmanuel Saez
and Gabriel Zucman, advocates of the wealth tax and
advisers to Warren and Sanders. The economists○ Wyden○ One-yearchangein
JeffBezos’wealth
Increasein networth
Taxable income
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