How do the super-rich get away with paying a 3.4% tax rate?

First published in the Daily Maverick 168 weekly newspaper.

What ProPublica obtained was a vast cache of US Internal Revenue Service data which showed that the 25 richest Americans paid tax over the past decade at a total rate of 3.4% of their wealth. This is big news because, like in SA, individual tax records are supposed to be very secret. 

How they got the records they are not telling, nobody is disputing the accuracy of the records, so one presumes the records were leaked by an IRS insider who was just pissed off, as we all are, about the ongoing highway robbery rich people get away with.

It should be noted that ProPublica is not suggesting any of the 25 richest people in the US necessarily broke the law or evaded tax. The problem, it turns out, is a simple one: stock market gains are not taxed until they are realised, which most often happens when they are sold. And very, very rich don’t typically need to realise their stock market gains. So they just sit there getting bigger and bigger. 

For at least some of the rich people involved, this is a little embarrassing. Investment icon Warren Buffett, CEO of Berkshire Hathaway, declared income of $125-million between 2014 and 2018, and paid tax of $23-million - a tax rate of 18.4%. That’s a little on the low side, but it doesn’t suggest aggressive tax planning. The problem is that his wealth has increased over the same period by $24-billion, which means the actual tax paid compared to the increase in his overall wealth was 0.1%

Apart from (famously) never selling any of his stock, Buffett also reduces his tax bill because Berkshire Hathaway doesn’t pay dividends which would have been taxed as income in his hands. This is kinda embarrassing for Buffett who openly advocated changes to the US tax system to close loopholes. But Buffett was one of the very few people who responded in detail to ProPublica’s scoop, saying he continued to believe that the tax code should be changed “substantially,” and that he thought “huge dynastic wealth is not desirable for our society.” Buffett also plans to give away almost all of his wealth.

This model of not paying dividends and holding almost all your wealth in shares has been emulated by the icons of tech investment. 

Which is partly why the world’s two richest men, Amazon CEO Jeff Bezos and Tesla founder Elon Musk are also among the world’s lowest taxpayers, at least by the ProPublica methodology. Bezos paid tax of just under a $1-billion over the four year period, but his wealth increased over that time by $99-billion, suggesting a wealth increase-to-taxation paid ratio of 0.98%. Musk paid more in tax but his wealth increased during 2014 to 2018 period by much less (these numbers would have changed massively by now) so he paid a higher rate, around 3.27%. Musk, in typical Musician-style, responded to ProPublica's inquiries with a single letter - a questionmark. 

 The crux of the problem, and South Africa and much of the rest of the world has followed this approach, goes back to a century-old US court case involving a woman named Myrtle Macomber who received a dividend for her Standard Oil shares. At the time, only about 15% of the population paid tax, and they paid a lot, about 80% of their income. The dividend was paid in the form of new shares, so she argued she had got richer but hadn’t got any money. Four years later, the US Supreme court agreed, and henceforth tax only becomes due when you sell an asset - including a bond, a building or equities - and reap the income. 

What should we make of all this? What has happened is that two important changes have taken place. First, the utility and ubiquity of stock markets has now overtaken the planet. For huge chunks of society, the stock market has become something akin to a bank. The consequence is that those able to take advantage of this fabulous resource are, literally, making out like bandits. 

The second change is the ethic of the master entrepreneur. Somehow policymakers have become convinced that master entrepreneurs are such an important species that they should be protected and mollycoddled. And here is the problem: they are.

But I also sense the winds are changing. It’s fabulous that great entrepreneurs get rich, in my opinion, but their wealth is just so ridiculously extreme, it's just outrageous. At the G7 meeting this weekend, the wheels are going to start spinning, to reverse this process, and the risk is ironically both that it won’t go far enough or that it will go too far. BM/DM

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for free to Pick n Pay Smart Shoppers at these Pick n Pay stores.