Pro Publica’s Billionaires: Stories Behind the Story

Pro Publica’s recent story about the small amount of tax paid by many of the nation’s billionaires has focused new attention on what critics say is the unfairness of our tax system. It also raises important questions about how we use, misuse, and develop tax information for political and policy purposes. Here are some of those issues:  

The billionaires’ story in many ways is not new. For decades, tax researchers have highlighted the limited extent to which governments tax capital income. Over forty years ago, I showed that tax filers reported only about one-third of the net income from capital on individual income tax returns. Government taxes income only when assets are sold, so accrued capital gains avoid tax. And the US forgives tax on any increases in the value of assets held until death. Past research has also shown that the amount of capital income realized each year by wealthy individuals, who usually became wealthy by achieving very high rates of return on their assets, often is less than 1 percent and tends to average only about 2 percent of the value of the wealth.

Notoriety and Illegality gives the story buzz. So, if the story isn’t entirely new, why was it largely ignored for so long but getting so much attention now? In part, it’s because Pro Publica tapped into the fame of specific high-profile individuals. But that’s not entirely new either. When Warren Buffett made some of his tax returns available, it was easy to compare his declared income with changes in the value of his Berkshire-Hathaway stock, where he keeps most of his wealth.

IRS has never been focused on how to inform the public on these and other issues. Much of the IRS culture centers on collecting taxes, and on protecting confidential information. While it collects a trove of data that would help the public better understand who pays taxes and why, the IRS often does not put these efforts or researchers who do statistical analysis of compliance front and center.

Adequately funded and supported, IRS statisticians could provide a lot more information on which groups—though not specific individuals—pay taxes and which don’t. That can be invaluable for both tax policy and administration. For example, the 1986 tax reform was improved significantly after staff reviewed information about the abuse of tax shelters.

Policy is about related and complex stories. Even if the politics weren’t so wild and gyrating, designing policy to tax capital income is one of the most difficult of all tax issues. Raising tax rates doesn’t help for those taxpayers who largely accrue but don’t realize income; in fact, it encourages even fewer realizations. Taxing gains annually as they accrue raises difficult issues of how to assess market value of illiquid wealth such as closely-held businesses and what to do about inflationary gains that do not represent real income. Alternatively, Congress could focus on reforming estate and corporate taxes that have long been the main ways the federal government taxes capital income, but these ideally should be integrated with individual income taxes to promote fairness and efficiency through all tax mechanisms.

Taxing capital gains accrued at death. Imposing a tax in investment profits accrued by time of death, as proposed by President Biden, would serve one important purpose beyond raising revenues. Even if imposed at a low rate or offset in part or in whole, as the Canadians did by a reduction in the estate tax itself, it would provide the smoking gun sought in the Pro Public release about the extent to which the wealthy avoid individual income taxes during their lifetimes. Repeating the 1976 effort to tax heirs on gains accrued by decedents, but only when those heirs sell the assets—a law quickly rescinded in 1978—would fail to provide that information.

Tax research may be set back significantly. My fear is the Pro Publica leak will make gathering, analyzing, and releasing tax information by Treasury and IRS even more difficult. Access to data by outside researchers, including those of us at the Tax Policy Center, could also be further restricted. Some in Congress and at the IRS may limit access both inside and outside the agency because it risks additional leaks. After all, this illegal disclosure couldn’t have happened if someone somewhere hadn’t had access to the data. But the unfortunate price would be less informed tax policy, which won’t help anyone.

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