This is Warren Buffett. One of the richest people in the world, thanks to the company he runs, Berkshire Hathaway. Basically, it’s a holding company that just owns a bunch of other companies, GEICO, Dairy Queen, a huge railroad, as well as a lot of stock in other companies like Apple and Coca-Cola. So, when those companies do well and their stock goes up, Berkshire Hathaway’s stock goes up.
When Buffett took over the company in 1965, a single share was worth $19. Today it’s worth nearly half a million dollars. Buffett owns nearly 240,000 of these shares. This is where his wealth is. But as he’s been known for pointing out, Warren Buffett still pays a lower tax rate than his secretary.
“She pays twice the rate I pay. I think that’s outrageous.”
That’s because they pay different types of taxes. His secretary pays income taxes on her salary, but Buffett mainly pays capital gains taxes on his sold stock, and that’s taxed at nearly half the rate.
“The wealthy are definitely undertaxed”
In the US, the disparity between the richest Americans and everyone else has been growing, and in the last 40 years, the after-tax income of the richest has risen more than 400%. While middle class income has only risen 50. The way these people make money is very different than the way these people make money. And they’re not taxed the same. This is how billionaire avoid paying taxes in California.
“I pay less in taxes than people that work for a living and make as much money as I do”.
This is Morris. He used to work on Wall Street. Now he’s retired and lives off his many stock market investments. “I own stock in companies, I mean Berkshire Hathaway, and Amazon, and Apple”. He’s a pretty typical one percenter. Except that he spends his money advocating for rich people like him to be taxed more. “I want to live in a country filled with a middle class of people who can all afford to shop in our businesses”.
Most people have a normal job. They get a pay check and pay income tax ranging from 10 to 37%. But people like Morris, they make a lot of their income from investments, generally stocks and real estate. These investments are taxed as capital gains and things like long term stock have a maximum tax rate of just 20%.
“I sold some stock recently for $400,000 and my taxes on that was around $50,000, but that $50,000 is far less tax than anyone who has a job making $400,000 a year would pay”.
And most of his wealth, well isn’t even taxable. People like Morris or Buffett are worth so much money because of the stock that they hold, but it’s not tangible, spendable, taxable money.
“I can look at my stock portfolio and I can say, Oh, you know, I made a million dollars this year, but it doesn’t have to be anything in taxes, because our system is based on only paying taxes when you actually sell something”.
Amazon’s Jeff Bezos, the richest man in America, thinks mostly to his Amazon stock, pays almost nothing in taxes. We value his worth here, but it’s never taxed unless it’s turned into real money when he sells the stock, and it’s taxed as a capital gain. This is one-way billionaires are able to be technically worth so much money, but pay so little in taxes. Some billionaires, like Elon Musk are able to get loans against their stocks and live off of that. They don’t even need to sell the stock to turn it into spendable money. No sale, no taxes.
“The fact is, if you’re a billionaire, you don’t need any income”.
There’s also a big loophole in capital gains taxes that the rich exploit called the stepped-up basis. If hypothetically, Warren Buffett was to sell his stock, he’d have to pay capital gains taxes based on his profit. So, the cost of the stock minus the original investment. But if he holds off selling his entire life, when he dies, whoever inherits the stock and then sells it would only have to pay taxes on what they earned after they inherited it, leaving all those original gains untaxed.
It’s part of what’s called buy, borrow, die, and it’s one way the richest families avoid paying taxes. It’s this system and the fact that most taxable capital gains are going to the top 1%, that lawmakers see changing the capital gains tax as an easy way to tax the rich. President Biden has proposed closing that stepped-up loophole and increasing the maximum tax rate from 20% to 39.6%, but just for people making more than a million dollars a year.
Critics argue that it may discourage people from investing in the stock market or that current millionaires would just sell less stock, but it would bring in more tax revenue from more conservative estimates of 200 billion over 10 years, to double that. It would also mean Buffett would pay a closer tax rate to his secretary. But this pile of unrealized money still goes untaxed.
“There’s a lot of things we could do to make the system more fair. We could have taxes on wealth. We could have taxes on gains in the stock market”.
Most Americans are bothered that wealthy people don’t pay their fair share. And changing capital gains taxes wouldn’t be the whole solution, but advocates argue it would be an easy place to start in United States.
“Our system is making the rich get richer and richer and richer, and everyone else just is not.