In favor of the wealth tax: The tax code doesn't fully comprehend how the wealthiest Americans make their money, and it's hurting everyone else

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In favor of the wealth tax: The tax code doesn't fully comprehend how the wealthiest Americans make their money, and it's hurting everyone else

Jeff Bezos

Clodagh Kilcoyne/Reuters

Founder, Chairman, CEO, and President of Amazon Jeff Bezos gives a thumbs up as he speaks during an event about Blue Origin's space exploration plans in Washington, US on May 9, 2019.

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  • Paul Constant is a writer at Civic Ventures, a cofounder of the Seattle Review of Books, and a frequent cohost of the Pitchfork Economics podcast with Nick Hanauer.
  • In this opinion piece, he says that wealthy people have pushed against a wealth tax for years, arguing for a trickle-down theory. Instead, the opposite is true - "wealthy people have gotten so good at avoiding taxes that we're all hurting," he says.
  • He argues that we're seeing the effects of this "tax starvation," and it's time to figure out how to responsibly tax wealth.
  • For more on this topic, listen to the latest episode of Pitchfork Economics.
  • Visit Business Insider's homepage for more stories.

We're taught to perceive wealth as something physical that you can touch - think of Scrooge McDuck swimming around the gold doubloons in his money bin and you have an idea of what every child believes a rich person's fortune is like.

The truth, of course, is much more complex. Jeff Bezos doesn't have $106 billion in liquid assets ready to go at a moment's notice. It's tied up in Amazon stock and other investments around the world in a complicated and (intentionally) confusing network. Put simply, wealthy people don't make money the same way you or I do. So why should they be taxed in the same way that we are?

This week's episode of Pitchfork Economics directly addresses outsize wealth and taxes. Nick Hanauer and Zach Silk talk with Chye-Ching Huang, the director of federal fiscal policy at The Center on Budget and Policy Priorities. She examines the "economic and social effects of taxes and budget policies," which means she contextualizes how changes in tax policy impact the real world.

Huang joined Pitchfork Economics to discuss some groundbreaking new research from Emmanuel Saez and Gabriel Zucman which, according to Huang, "counts all of the sources of income of people at the very top of the income distribution when figuring out how much tax they pay as a share of their incomes."

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Paul Constant

Angela Ciccu

Paul Constant.

It's hard to know how to tax the wealthiest Americans because the tax code is set up to recognize traditional income. Bezos, for example, "takes a salary of about $80,000 a year. That's what's showing up on his tax return," Huang says. "He sold about $6 billion worth of stock over the last 10 years. Sometimes that will show up on a tax return, but in economic terms that's really not his income. His income is the hundred billion dollars' worth of gain in the value of his Amazon stock."

While you and I have taxes taken out of our paychecks in advance, Bezos's income isn't really recognized as income. It often doesn't even show up on tax returns at all, Huang says. Our system values assets over labor, meaning owners of extreme wealth are favored with a tiny tax rate while people who have to work for a living pay a "normal" rate.

And conditions are tipping even further in favor of the mega-wealthy. The tax cuts passed by President Trump and former Speaker Paul Ryan in 2017 famously handed one and a half trillion dollars to the top one percent. Now, America's 400 richest families pay a smaller tax rate than the American middle class. The $4,000 raise promised to American workers during the tax cut fight didn't materialize, and all that money leveraged to our wealthiest families and corporations hasn't trickled down to any of us. It just gets added to the money bin, where it sits forever.

The Trump tax cuts, Huang says, "really made everything worse. It's such a complicated law, and behind that complexity are a whole lot of new ways for high-income people and large corporations to game the rules to avoid tax."

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Rather than simply slashing the tax rate, as previous administrations have done, Huang explains, the Trump tax cuts are a "threat to the integrity of the tax code." Under the new rules, she says, huge chunks of wealth "just sort of disappear off tax returns."

This isn't a problem that can be solved by tweaking a few percentages on the existing tax code to rebalance the scale toward fairness. In this global age of wealth disparity, we're going to have to rethink the very idea of taxation and its goals.

This is why the concept of a wealth tax has flourished in the Democratic presidential primaries. But there's no single, monolithic method of taxing wealth that would guarantee success. Progressives are debating a variety of different ways of calculating and collecting taxes: You might tax a person's total assets every year, for example, or you could tax the value that their fortune has grown since the last tax period.

No matter which kind of wealth tax you choose, Huang says, "you could effectively come out with almost the same [total] over the lifetime of a person, whether you tax the income from their wealth or their wealth itself. But either way, you're getting at that problem, which is the fact that none of that currently faces tax, whereas the salaries and wages of people are subject to annual taxes."

There are those - primarily wealthy people and status-quo-preserving pundits - who complain that a wealth tax is too drastic a solution, that taking from "the makers" and giving it to "the takers" will inevitably backfire and hurt everyone. We've been hearing that trickle-down threat for decades.

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But it's now evident that the opposite is true: Wealthy people have gotten so good at avoiding taxes that we're all hurting. You can see symptoms of this tax starvation in the news every day - from the faulty electrical grid in California that's actively causing wildfires to the lack of mental health and drug addiction services for the most vulnerable Americans. We can't begin to repair our gaping income inequality until we have an honest conversation about the realities of wealth, and how to responsibly tax it.

Paul Constant is a writer at Civic Ventures, a public policy incubator based out of Seattle, and a cofounder of the Seattle Review of Books. His writing has been published in the Los Angeles Times, BuzzFeed News, the New York Observer, and the Seattle Times.

Listen to the podcast: In 2014, venture capitalist Nick Hanauer warned his fellow plutocrats that our growing crisis of economic inequality would lead to an uprising or a dictatorship. Two years later, angry voters elected Donald Trump. In Pitchfork Economics, Nick explores why the pitchforks are coming, who they're coming for, and how the stories we tell about the economy can change the economy itself.

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