The Tax Code for the Ultra-Rich vs. the One for Everyone Else

It’s as though there’s a separate set of laws for people with extreme amounts of wealth.

Bryan Woolston / Reuters

The revelation of details from Donald Trump’s 1995 state tax returns created exactly the political firestorm that it merited. Before they came to light, the Republican presidential candidate’s flimsy excuses for not releasing his returns produced two lines of speculation: Either he wasn’t as rich as he claimed, or he wasn’t paying any taxes. Trump’s colossal $916 million loss in 1995 partially confirmed both theories, with opponents portraying him as a bumbling businessman who exploits tax loopholes to shift his losses onto ordinary taxpayers.

When it comes to tax policy, however, Trump’s tax returns are a distraction that crowds out more important issues. In The New York Times, the columnist James Stewart outlined how to prevent Trump’s particular form of tax avoidance: Shorten the period in which losses can be used to offset income, limit the deduction for depreciation, and so on. These are perfectly good solutions—to a minor issue. The poster child for the problems of the tax code isn’t Donald Trump; it’s Warren Buffett.

Buffett is in many ways the anti-Trump. He really is a vastly successful businessman, really is donating the vast majority of his fortune to charity, and really does have ideas about how to make the tax code fairer. What he and Trump have in common is that both take advantage of the tax code where they can. Buffett’s tax benefits, however, dwarf Trump’s.

In 2015, Buffett’s adjusted gross income was about $11 million (on which he paid roughly $2 million in income taxes); that’s certainly a lot of money, but more than 10,000 households reported more income than he did. In an economic sense, however, Buffett’s annual income is actually measured in the billions. His net worth rises and falls based on the price of the stock he owns in his company, Berkshire Hathaway, but in the past five years its value has increased from $39 billion to $65.5 billion, according to Forbes. That’s more than $5 billion per year, even as Buffett was giving away billions of dollars.

According to the tax code, however, that $5 billion per year might as well not exist: When stock goes up in value, the increase does not count as income until the stock is sold. This allows Buffett and other extremely rich investors to defer paying taxes on stock appreciation, effectively reducing their tax rates. In addition, they can donate stock to charity and claim a tax deduction for the full amount of the gift without ever having to pay taxes on the stock’s increased value. And, if they die without selling the stock, its cost basis—the amount originally paid for the stock, for the purposes of computing taxes—is “stepped up” to its value at the time of death, allowing their heirs to likewise avoid paying taxes on the stock’s appreciation.

By continually deferring capital-gains taxes, ultra-wealthy families can pay virtually no income tax for generation after generation. (They may have to pay estate tax, depending on how creative their lawyers are, but that’s another story.) And when they do decide to sell stock, their capital gains are taxed at a much lower rate than income from working—about 24 percent instead of 43 percent—which on its own costs the federal government about $90 billion per year. Unsurprisingly, of the four largest family fortunes in America today, three—the Waltons, the Kochs, and the Marses—were inherited from earlier generations (although the Kochs did significantly increase the size of their empire).

Warren Buffett is giving away most of his fortune to charity. But for some wealthy people, this can be another way of keeping money in the family. Since it’s difficult, if not impossible, to consume billions of dollars of wealth in one lifetime, someone with $10 billion can leave $500 million to his or her kids and “donate” the rest to a family foundation that they will control. The children will then enjoy all the comfort, status, and influence of a $10 billion fortune while paying essentially nothing in income taxes. (To his credit, Buffett is giving his money to someone else’s foundation—but, that’s a choice that not all billionaires make.)

In a world of extreme and increasing inequality, the biggest problem with the tax system is the ease with which extremely large accumulations of wealth can be passed down through the generations. Though Trump claims that his use of the tax code uniquely qualifies him to fix it, the nonpartisan Tax Policy Center found that almost one-quarter of his tax cuts would flow to the richest 0.1 percent of families. (Hillary Clinton’s tax plan, by contrast, would significantly raise taxes on the top 0.1 percent, although its only meaningful impact on the very richest families would be through higher estate taxes.) The scandal of Donald Trump, then, isn’t that he aggressively sought paper losses to minimize his tax burden. It’s that his tax proposals would tilt the playing field even more steeply in favor of the ultra-rich.