Yahoo Movies Making sure the ‘big people’ pay their taxes would be a boost to democracy
In June 2016, while researching an article for Vanity Fair, I asked Donald Trump if he was using tax havens to escape tax. “I know a lot about tax havens, but I don’t use them,” he told me. “There is greater incentive in many ways to keep your money in the United States.”
Fellow billionaires may chuckle, because they know this too, following decades of attacks by special interests on the US tax system. Their goal, as the Texas Republican congressman Bill Archer once said, has been to pull it “out by its roots and throw it away so it can never grow back”.
Last week, the investigative journalism body ProPublica released shocking new evidence of how easy it is for US billionaires to escape paying tax. Using leaked tax records, it reported that Amazon’s Jeff Bezos, the publisher Michael Bloomberg, the “corporate raider” Carl Icahn, Tesla’s founder, Elon Musk, and the financial investor George Soros all paid zero federal income taxes in some years. From 2014-2018 the richest 25 Americans, many of them monopolists, saw their wealth surge by more than $400bn, while paying taxes worth just 3.4% of that. Meanwhile, average American wage earners in their 40s saw their wealth rise by $65,000 – and paid $62,000 in tax.
How do the billionaires get away with it?
Loopholes, is one answer. Trump’s tax advisers used copious gaps in real-estate tax laws and stunts such as putting goats on a golf course in New Jersey to qualify for farmland tax reliefs. Another trick is to take a carefully primed asset currently worth almost nothing, push it into a tax-free retirement account just under the contribution limit on the account – like putting it “through the eye of a needle”, in the words of the South Dakota Trust Company owner, Pierce McDowell – then flick a financial switch and watch its value explode, tax-free, once safely inside the account.
There are many others. But the really big loophole is this. Lesser mortals pay tax on salaries. Billionaires avoid grubby salaries or even income. Instead, they own assets that rise in value – and the rise, those “unrealised gains”, escape tax. Those richest 25 Americans owned $1.1tn in wealth in 2018 – equivalent to the wealth of 14.3 million average Americans – yet paid only $1.9bn in personal federal taxes. The 14.3 million “little people” paid $143bn, or 75 times as much.
In Britain, the situation is similar. Billionaires own assets instead of earning income, and generally don’t pay tax when those assets rise in value.
We have many other loopholes. Here, UK billionaires can outdo their American counterparts in some ways. The weirdest is surely the archaic “non-dom” rule, a legacy of empire, where wealthy residents of the UK who can claim that their “domicile” is elsewhere only pay tax on their income that “arises” inside or is brought into the UK. (So they carefully make sure that any income stays offshore.)
The bigger British speciality is, of course, tax havens. We protect and nurture some of the world’s biggest, from the Cayman Islands to the British Virgin Islands to Jersey. Americans use tax havens too, but they loom far larger in British billionaires’ tax-escape strategies, often in a legal grey zone. (Trump’s main tax haven strategy, my investigation found, was to park multiple corporations in Delaware, a US state boasting strong secrecy and other offshore characteristics.)
What can be done? There is no silver bullet, but a few broad strokes, with appropriate exemptions for “the little people”, would be wildly popular and economically successful.
First, abolish the non-dom rule, as a sign that we are serious.
Next, bolster the corporation tax, most of which is ultimately paid by wealthier folk. Rishi Sunak admitted recently that George Osborne’s cuts to the UK’s corporation tax rate from 28% to 19% had failed to bring investment. The cuts have also failed to deliver growth, as Tom Bergin explains in his new book, Free Lunch Thinking. Sunak is pushing corporation tax rates up to 25% now; raise this further still. Meanwhile, G7 leaders have just agreed on measures including a global minimum corporation tax rate of at least 15% to tackle tax havens. The G7 deal faces many hurdles, and leaves little for poorer countries, but it’s a decent start. Complement this by broadening the tried-and-tested financial transactions tax. A new push on this is now underway.
Wealth taxes, used successfully for years around the world, are essential too. If someone owns £1bn in assets (in shares, gold coins, castles or whatever), a simple 1.5% (say) annual wealth tax earns £15m a year. The UK Wealth Tax Commission estimates that a 1% tax could raise more than £50bn a year: the size of last year’s extra health funding for Covid. Add to the list a land value tax, another kind of wealth tax.
Equalise tax rates. If we taxed income from wealth at the same rate as income from work, we could raise up to £120bn, about double what we get from corporation tax. As we get braver we should also aim to tax all those unrealised gains – so if a billionaire’s wealth rises, they pay tax on that annually, whether or not they sell (or “realise”) assets. Some powerful Democrats in the US are now pushing for just this.
In the UK, as in the US, the tax authority has been under attack. HMRC staffing levels have fallen from 105,000 in 2005 to around 60,000 today. Estimates of the “tax gap” of uncollected taxes range from £35bn to a more credible £90bn a year. Tax collectors repay their salaries many times over. Reinvest in HMRC, and especially focus on taxing the wealthy and multinationals.
Finally, of course, get serious about our crime-infested tax haven racket. This would not only shore up our tax system, our economy and our democracy, but it could be our greatest gift to the world right now, as humanity struggles to overcome the pandemic.
Nicholas Shaxson is the author of The Finance Curse: How Global Finance is Making us All Poorer
