In America, Why the Rich Get So Much Richer

There’s little doubt that if you are rich enough, you can avoid paying taxes and put tens of millions of dollars in your pocket every year to do with as you please. Since the proceeds of a loan are not deemed “taxable income,” you can borrow against your mega-assets (why you are rich in the first place), deduct the interest, and roll that debt over, adding more debt if you need cash, year-after-year, as your asset base continues to appreciate. Assets are generally not taxed unless they are sold or transferred or as part of an estate (where there are even more loopholes). So that loan is effectively cash without taxation.

It is also obvious to anyone who really looks at it that the richest country on earth has a federal budget deficit because it chooses to do so. Could the US have a fully balanced budget if it wanted… while still spending at the levels it does currently or expect to do in the future? Without borrowing? Of course!!! We bend over backwards to keep from taxing those who can most afford to pay taxes, allowing the deficit to rise and become the obligation of all American taxpayers. Sort of a reverse Robin Hood, where the rich get the benefits and everyone else gets the burden. Put another way, the American tax system, unlike many systems in other developed nations, does not tax wealth, more particularly, the mega-wealth of super millionaires and billionaires. The rich do not generate much of their cash flow from salaries.

So, in addition to the loan structure noted above, they are treated to all kinds of loopholes that their well-paid lobbyists, supported by politicians looking for campaign contributions, have arranged for them. Accelerated depreciation. Carried interest rule. Like kind exchanges. Special statutes to incentivize certain industries. Etc. Etc. Etc. To fix this anomaly and enable a federal or state true tax on our richest Americans would, therefore, require a wealth/asset tax, as Michael Hiltzik, writing for the October 18th Los Angeles Times describes:

“The anti-tax gang’s targets are proposals — by Sens. Bernie Sanders (I-Vt.) and Elizabeth Warren (D-Mass.), among others — to levy taxes on assets with accumulated value but undistributed gains, such as art, collectibles, real estate and stock and bond holdings that haven’t been sold… Warren’s proposal, which she aired in 2019 during a brief campaign for the presidential nomination, would have imposed a 2% tax on household net worth above $50 million and an additional 1% on fortunes of more than $1 billion. She estimated that it would bring in $2.75 trillion in revenue over 10 years.” Had we started such a tax years ago, there would be no or little federal deficit.

Ronald Reagan was the champion of tax cuts in the 1980s under a very flawed notion called “supply-side” or “trickle down” economics, summarized as “a rising tide floats all boats.” This concept is premised on the misguided notion that if you tax the rich (described as the “job creators”) less, they would immediately create tons of well-paying jobs that would put so much more money into the economy. But rich folks didn’t get that way by getting windfall and rushing out to hire new employees. Using that assumption, Donald Trump followed in 2017 with his GOP Congress passed a corporate tax cut, dropping the federal rate from 35% to 21% (quickly adding and expected $1.5 trillion and growing to the deficit). The rich bought and sold corporations, merged and acquired and announced dividends. What they did not do is create new good jobs. This GOP mantra never goes away, and it never works.

Obviously, those well-heeled rich and their lobbyists and their lawyers want to make sure that a wealth tax never happens, and they are using what seems to be a relatively minor case pending before the US Supreme Court to make sure that a wealth tax is deemed unconstitutional. Hiltzik continues: “It’s getting harder and harder to pretend that the U.S. Supreme Court is much more than an instrument to protect the wealth of America’s corporations and its richest citizens.

“[Specifically, the] latest signal is the court’s decision to take a once-obscure tax case known as Moore vs. United States. On its face, the case involves the objection by Charles and Kathleen Moore, Washington state residents who have objected to a $15,000 tax bill they received as investors in a small Indian corporation… But there’s much more at stake. The conservative anti-tax advocates backing the Moores are hoping to use the case to stifle the nascent movement in favor of a wealth tax on the richest Americans…

”‘The Moore litigation ... may be a stalking horse to block billionaire and wealth taxes, which have been proposed, but not yet enacted,’ wrote tax experts Reuven S. Avi-Yonah and Steven M. Rosenthal for the Tax Policy Center of the Urban Institute and Brookings Institution… The lawsuit doesn’t turn so much on whether income can be taxed, but on how to define ‘income.’ The specific issue is whether it must be ‘realized’ to become taxable. In other words, whether the definition applies only to income that has been paid out to recipients as something akin to cash.” The court could easily conclude that those living off their mega-assets, using the loan structure noted above, are “realizing” the relative value of those assets and thus making them taxable. But that only addresses the borrowings, not the entirety of the asset base.

Our massive income inequality and wealth split in the United States – where the richest 1% of Americans own over half the nation’s assets – is a direct result of this ability to own a lot but avoid taxes accordingly. Because the entirety of big wealth owned by individual taxpayers is left untaxed, income and wealth inequality can only get worse, and our deficit can only grow. And the law firms and lobbyists for the rich are out in force, as Hiltzik notes: “‘As efforts to design new federal tax systems with potentially troubling constitutional infirmities continue to pick up steam,’ the conservative Manhattan Institute warned in one of two friend-of-the-court briefs it has filed to support the Moores, it’s up to the court to ‘clarify the limits of Congress’ taxing power before the train has begun rolling unstoppably down the hill.’”

Indeed, there is sufficient precedent for broadening the meaning of “realization” of income in determining this issue. See Helvering v. Horst (a 1940 Supreme Court case, Justice Harlan Stone writing the majority opinion). But we have a very rightwing majority in the Supreme Court today, and their decisions decidedly favor property owners and those with accumulated wealth. They even have a proclivity to reverse earlier Supreme Court decisions they don’t like. But bottom line, if the Supreme wants to support a system that moves against income and wealth inequality that plagues our country, has killed upward mobility… it can. Or it can make a bad situation worse with fewer paths to fix it.

I’m Peter Dekom, and the Supreme Court is in a position to make our system more beneficial to more people… or simply continue to favor the elite as it is currently doing.