Stock Market Records Bring to Mind All the Costly Tax Breaks Enjoyed by Rich Investors

Rich investors are celebrating twice: once for the profits and a second time for the special breaks that reduce and even eliminate taxes on their increased wealth.

By William Rice

Several stock-market indexes hit record highs this year and rich investors are celebrating twice: once for the profits and a second time for the special breaks that reduce and even eliminate taxes on their increased wealth. Loopholes for idle Wall Street players drain away trillions of dollars in tax revenue that could be used to lower costs and expand opportunities for working families that live off paychecks, not stock-market portfolios. If we want to unrig the tax code to help create an economy that works for everyone, not just those at the top, closing investor loopholes would be a great place to start. 

And make no mistake: the beneficiaries of those loopholes are almost exclusively rich. The wealthiest 10% of Americans own over 90% of all stock, the top 1%, over half. So whatever you may hear about the recent “democratization” of the stock market, the lion’s share and more of Wall Street riches still goes to the folks on top. 

The most expensive tax handout to Wall Street is the discounted tax rate on shareholder payouts. The highest-income investors pay a tax rate that is only a little over half as much on their capital gains and dividends (a base rate of 20%) as high-salaried workers pay on the top part of their wages (37%). (Capital gains are the profit from selling an asset like stock for more than its purchase price; dividends are regular cash payments to stockholders.) 

That discount means an emergency room nurse or power-line worker can pay a higher marginal tax rate than a Wall Street fat cat whose only job is watching the stock ticker all day. This entirely unwarranted gift to the wealthiest people in our country costs us an estimated $1.2 trillion in lost tax revenue (p. 31) over just five years—or roughly $2.4 trillion over 10 years, the standard time interval used for budgeting. 

If we ended the Wall Street tax discount and collected that staggering $2.4 trillion—which, again, would come almost entirely from our nation’s richest households—we could pay for nearly all the investments in working families proposed by President Biden last year. Those investments include: nearly doubling the Child Tax Credit to $3,600 per child for 35 million low-income households for two years; reducing the cost of childcare for 16 million kids; providing up to 12 weeks of paid leave for workers attending to medical and family emergencies; guaranteeing high-quality preschool to every 4-year-old in America; and extending Medicaid to four million families now denied it. 

The next most expensive tax-cut giveaway to the titans of Wall Street is the curiously named loophole “stepped-up basis.” This special handout to rich inheritors of big stock portfolios makes all the runup in prices of those securities before inheritance simply disappear for tax purposes. Here’s how it works: if an investor buys a stock for, say, $100 and then some years later sells it for $500, he owes capital gains tax on that $400 ($500-$100) profit. But if he dies before selling, his adult children (or whoever inherits the stock) could immediately sell that stock for the same $500 yet owe nothing in taxes—it’s as if that big capital gain never happened. 

The families of billionaires and other hyper-rich investors exploit this magic trick of tax accounting to avoid taxes on trillions of dollars in gains. Wall Street even has a catchy name for the dodge: “Buy, Borrow, Die”. The borrow part refers to the low-interest loans made against rising fortunes that the original stockholders can live off quite cheaply instead of selling their winning investments and paying taxes on the gain.  

A sweet deal for them, but it costs the rest of us around $600 billion in lost tax revenue (p. 31) over a decade. That would be enough money to entirely fund other Biden priorities: triple the Earned Income Tax Credit for 17 million childless workers in low-paying jobs; cut Affordable Care Act health-insurance premiums by an average of $800 a year for nine million enrollees; lower the huge costs households pay for homecare for their senior and disabled family members; and make two years of community college tuition-free. 

Nearly three years ago, the president proposed closing the stepped-up basis loophole on gains of over $2 million per couple ($2.5 million when you include the existing $500,000 tax exemption on gains from the sale of a primary residence). Conservatives in Congress have blocked this reform. 

Another benefit for wealthy investors that’s denied to workers but is hard to quantify: Wall Street types largely get to decide when and if to pay taxes. That’s because no matter how much their stock holdings shoot up in value, they don’t owe a penny in tax on those gains unless and until they sell the underlying shares. This is a power denied to employees who pay taxes with every paycheck. 

Plans from both President Biden and Senate Finance Committee Chairman Ron Wyden would remove the choice of if and when to pay taxes from the billionaires. Their proposals would tax the runup in asset values of the nation’s handful of plutocrats each year, whether they sold the assets or not. These reforms would each raise about half a trillion dollars over 10 years. 

We’ve all been conditioned to cheer when new highs are reached on Wall Street stock indexes—even though the benefit from those records goes almost completely to an elite club of the nation’s wealthiest households. The development we should really cheer for is the future enactment of tax reforms that tap some of that swelling stock-market income to make life a little easier for working families.