How an unfair tax system fuels our broader divides
Achild’s sense of fairness begins to develop by age 1, when they start to prefer people they view as fair over those who are not. When fairness is lacking, children get angry — as any parent or classroom teacher can attest.
As we approach adulthood, we begin to view fairness with more sophistication than the typical 6-year-old, furious his brother received a “better” piece of chocolate cake. We come to accept that outcomes will not be equal but still want assurances that processes and systems themselves are fair.
But much about American life is not fair. We live with the greatest wealth divide since the Gilded Age. CEOs are getting record-breaking multimillion-dollar paydays, while unemployment benefits are getting reduced or cut off for millions of Americans. These divisions lead to inequality of opportunity, with children’s educational and earnings outcomes dependent on their parents’ net worth.
And then there is our tax system. Recent weeks brought not one but two exposés detailing how the tax system works for the rich and wealthy and how it works differently for everyone else.
First up, ProPublica. The investigative news outlet obtained access to the tax returns of some of the wealthiest Americans, including Jeff Bezos, the Amazon founder who personally owns The Washington Post. The returns revealed that many of the world’s richest men and women paid a lower effective tax rate — much, much lower — on their income than the typical American.
No extralegal shenanigans were necessary. They utilized an array of on-thebooks maneuvers to bring their federal tab down to the low single digits. (If that. There are reportedly years when Elon Musk and other billionaires didn’t owe the federal government a single cent.)
One neat trick: Some billionaires borrowed against their portfolios. This gave them a twofold advantage. They didn’t need to sell stocks and other assets to maintain their lifestyle but could leave their wealth invested, where it would continue to grow, further increasing their net worth.
But that’s not all. Income and capital gains are taxed, but loaned money isn’t. While the rest of us are arguing about whether capital gains should be taxed like regular income, as opposed to the current rate of 15 percent to 20 percent, the richest among us figured out a way to avoid paying even that.
Then the New York Times published a blockbuster piece on how private-equity giants used their might and wealth, and high-priced lawyers, against the Internal Revenue Service, so much so that the understaffed and outgunned agency all but stopped conducting audits on the private-equity industry, even when whistleblowers alleged wrongdoing.
Meantime, ProPublica reports that people living in poverty who take advantage of the earned-income tax credit are more likely to be audited by the IRS than a household with $400,000 in income.
Those who dismissed as old news reports of these financial contortions — especially efforts by billionaires to legally do away with their federal tax bill — are missing the forest for the trees. Of course this isn’t new information. Warren Buffett, revealed by ProPublica to be paying less than 1 percent of his earnings and wealth to the federal government, told the world a decade ago that the IRS took a higher percentage of his secretary’s earnings than his own.
But no one wants their face rubbed in the unfairness pervading American life. Poll after poll shows that Americans want to see the rich pay more in taxes. A majority of us want to even the scales. But almost all attempts at the federal level to increase taxes on the wealthy founder in political gridlock. It’s quite possible that President Biden’s proposals to increase taxes on the richest Americans will meet the same fate.
Almost certainly, Americans’ desire to make the wealthiest citizens pay up is not simply a desire to stick it to someone else. This interest goes back to that earliest quest for fairness. “We’re taxed from one end to the other, and it just seems the rich don’t pay their share,” a Donald Trump supporter told Reuters last year.
Behavioral psychologists say that people seek equal treatment not because we are nursing childhood grudges or are forever small children at heart but because human beings crave respect from others. Without respect, it’s hard to maintain successful cooperative relations between people.
It’s often hard to draw direct lines to the roots of polarization in our fractious society. The wealth gap, pay inequities and other inequalities have long been apparent, yet how they triggered other outcomes hasn’t always been clear. But these billionaire tax shenanigans point up what sometimes feels like a rot at the core of our society. It’s just not fair.