The Rich Need To Stop Dodging Taxes
It makes life much harder for the rest of us
Everyone loves to pay fewer taxes. There’s an entire industry that exists solely to help the wealthy minimize their taxes. According to the book, Davos Man (by Peter S. Goodman), the richest 400 Americans (with an aggregate wealth of almost $3 trillion) had their effective tax rate cut from 54% to 23% between 1962 and 2022. That means many rank and file workers like me pay a higher effective tax rate than the richest people in the world.
I get it. The wealthy own a lot of assets and capital gains taxes, which cap out at 20%, on those assets are lower than taxes on ordinary income. And the rich are paid primarily via assets such as equity or real estate — e.g. CEOs receiving many times their salary in equity bonuses. They also have a bevy of ways to shield their incomes using depreciation, LLCs, foundations, etc. so that after it’s all said and done, a person with millions in cashflow can show almost nothing in net income.
But all this tax dodging has broader consequences — it means regular people need to shoulder a heavier burden. It means more wealth inequality. It means less public spending and more public debt. It means that when too big to fail institutions blow up, normal taxpayers not only need to fund the rescue, but they also might lose their jobs (while wealthy bankers get to keep their bonuses). And it’s not like the rich don’t benefit from public infrastructure — after all, it’s the rich that have the most to lose if the current social order gets upended.
Housing inflation
One of the biggest consequences of tax dodging is inflated real estate prices. Houses are the perfect intersection of the two things rich people love most — long term assets and tax shields. I stumbled on this the other day on LinkedIn:
Read that last sentence — there are households making more than a million dollars who pay no taxes. What? Now these couples are a far cry from the super duper rich. But that’s already a lot of money and that’s also a ton of money to not pay taxes on.
If you’re curious about the specifics, power couples like the one referenced above get a real estate license (so one person is a full-time realtor), buy up multiple investment properties, and then use the depreciation on those properties to shield their tech income (e.g. a swanky job at Google) from federal and state income taxes. So not only is the property giving them price appreciation (i.e. an inflation hedge) and rental income, it’s also allowing them to pay little to no income taxes. No wonder home prices are so high — they’re basically being subsidized by the government via these massive tax shields.
That’s not good. When a few people do it, it’s a neat hack. When a lot of people do it, it creates a double whammy on the community — home prices go up (as home ownership gets monopolized by the rich forcing regular folks to rent) and become increasingly unaffordable while at the same time, those that earn the most get to pay the least taxes. And it’s not like the wealthy are opting out of public services — if the public school is highly rated, that’s where their kids go. When they get scared, they call the police (or when they need to evict a tenant).
The business of home ownership in America needs a rethink.