Billionaires Are Different–We Need A Different Way to Tax Them

Most people make their money from their job in the form of paychecks. But billionaires make their money from their money.

By William Rice

“The rich are different from you and me,” F. Scott Fitzgerald perhaps needlessly observed almost a century ago. But the difference lies not just in how much money they have, but in how they make their money and how it’s taxed—or not taxed. That’s especially true with the ultimate class of rich people: billionaires.

Most people make their money from their job in the form of paychecks. But billionaires make their money from their money. That passive income comes in many varieties—stock dividends, bond interest, property rent—but when it comes to making our tax code fair, the increasing value of their assets is incredibly important. And it’s those investment gains that are most untouched by our current tax code. 

First of all, if a billionaire sells an investment that has increased in value since he bought it and makes a million-dollar profit off the sale, he’ll pay a capital gains tax (20%), but that capital gains tax rate is little more than half the rate (37%) he’d pay on the same amount of income if he had received it through a paycheck. Let’s say he doesn’t sell and instead, when he dies, still owns the asset that’s increased in value. Whoever inherits that asset will never have to pay tax on that gain because, for tax purposes, the asset’s value (“basis”) becomes set at the time of inheritance, instead of at its original purchase price (thanks to a loophole called “stepped-up basis”).

But that’s just the beginning of how our current tax code gives preferential treatment to the rich.  As we said, billionaires don’t tend to take home a paycheck like the rest of us do, and in fact, they often don’t sell many of their assets during their lifetime, even as those assets increase in value. That means they’re not paying much federal income tax on wage income and often paying little in capital-gains taxes either. If we want to create a fair tax code, where the richest contribute at the same rates as the rest of us, we have to look at the way billionaire’s live off of their unsold assets. 

A recent report from American for Tax Fairness found that the combined fortune of America’s roughly 750 billionaires topped $5 trillion last month, up $2.2 trillion (or 77%) since enactment of the Trump-GOP tax law in 2017 that increased the slant of the tax code towards the rich. At that scale of wealth and wealth increase, billionaires have an option not open to the rest of us: they can take out loans, borrowed at cheap rates secured against their rising fortunes, that allow them to live lavish lifestyles. The interest payments on those loans are a tiny fraction of what they’d pay in taxes if they sold their holdings. There’s even a catchy name for this tax-avoidance strategy of the super-rich: “Buy, Borrow, Die” (the dying part referring to the stepped-up basis rule that erases tax bills for lucky heirs).

It's the tax code’s failure to tax this central component of billionaire income that allows many of them to go income-tax free in certain years and pay ridiculously low rates in others—especially if you compare what they pay now to what they would owe if our taxes counted wealth gains as income.   

This scandal of low- and no-tax billionaires is not only unfair and damaging to the credibility of the tax code but also costs us billions of dollars in lost revenue every year. That’s money we could be using to make life a little easier for all of us non-rich folks through expanded and improved public services. 

Fortunately, President Biden and other Democrats, including the chair of the Senate tax-writing committee, have plans to address the problem. Details differ, but the common feature is that they would all under certain circumstances tax the annual increase in asset values of the super-wealthy whether or not those assets are sold. There is plenty of precedent in the tax code for taxing such “unrealized” gains. The tax code is not fixed and permanent, it’s been changed repeatedly throughout the history of the country. It’s time that those changes start moving us to a fairer tax code, where the wealthiest are not a protected elite, and where we all pay a fair share.