The group called ProPublica recently claimed data on America's 25 richest people which showed that some of them paid very little tax. It published masses of records about wealthy individuals, such as Jeff Bezos, George Soros and Elon Musk. A commentator on such issues argues that the basis of its claims are not just mistaken, but absurd.

The following commentary comes from regular writer, Germany-based investor and author Dr Rainer Zitelmann. A strong proponent of free markets, he pushes back against claims that the "rich" gain unfairly from the tax code in many Western nations. (See an example of his work here.) At a time when complaints about inequality are being used to justify ideas such as wealth taxes and other levies, his comments are timely. As ever with guest comments, the usual editorial disclaimers apply. To respond, email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

ProPublica has published confidential tax data on the super-rich, apparently showing that they pay next to no income tax.

The unbelievable claim: Over the past decade, the 25 wealthiest Americans paid tax at a total rate of 3.4 per cent of their wealth - their “true tax rate.” This figure made headlines all around the world. And you can be sure, such efforts to expose the super-rich for paying too little tax feed into and reinforce common prejudices.

But how does ProPublica arrive at its figure? “To capture the financial reality of the richest Americans, ProPublica undertook an analysis that has never [been] done before. We compared how much in taxes the 25 richest Americans paid each year to how much Forbes estimated their wealth grew in that same period. We’re going to call this their true tax rate. The results are stark. According to Forbes, those 25 people saw their worth rise a collective $401 billion from 2014 to 2018. They paid a total of $13.6 billion in federal income taxes in those five years, the IRS data show. That’s a staggering sum, but it amounts to a true tax rate of only 3.4 per cent.” For Warren Buffett, who has repeatedly advocated higher taxes on the rich, ProPublica calculates a “true tax rate” of 0.1 per cent.

ProPublica highlights the supposed discrepancy by comparing its figures for the super-rich with those of the median American household earning $70,000 a year and paying 14 per cent in federal taxes.

The message: Look at how “unfair” the American tax system has become. The ultra-rich are subject to different laws from everyone else. But is that really the case? Let’s say you own a house that increases in value from €1 million ($1.19 million) to €1.5 million within four years. How much income tax do you have to pay on the increase? In Germany, at least, zero. And that’s how the system works in most countries. You don’t have to pay income taxes on unrealized gains, but on realized gains. The same principle applies to stocks: If stock prices go up, but you don’t sell your stocks, you don’t have to pay taxes. You pay taxes when you sell your shares or your house, i.e. when the unrealized gains become realized profits. Conversely, if you make unrealized losses, i.e. if the value of your house goes down, you don’t get a refund from the tax authorities, i.e. you cannot claim these unrealized losses, which only exist on paper, to reduce your tax liability.

ProPublica has compared apples and oranges: The growth in the worth of the 25 richest Americans estimated by Forbes primarily derives from an increase in the value of their assets, such as stocks and property. Jeff Bezos’ wealth, for example, has grown because the value of Amazon stock increased. Warren Buffett’s fortune grew as the stock he holds in his company, Berkshire Hathaway, gained value. ProPublica compares the increase in wealth, which primarily derives from (unrealized) stock gains, to income taxes, which, in contrast, are levied on a very different tax base. And not just on the super-rich, but on everyone. Or when was the last time you paid income taxes because your house was worth more on paper than it was a year earlier? For ProPublica, this so-called “true tax rate” is evidence of “loopholes” for the ultra-wealthy. 

What would happen if you, I or the super-rich had to pay income taxes on unrealized capital gains? What would have happened in 2001 or 2008/2009 when share prices dropped off a cliff? The state would have had to issue tax refunds to cover the substantial share price losses. Most journalists have not asked these critical questions because the fake figures fit their existing prejudices about the rich. 

About the author:

Rainer Zitelmann is author of The Rich in Public Opinion.