The ever-waning chasm between the rich man’s tax rate and that of the ordinary worker has been a very well-debated issue. Many billionaires have paid an incredibly low percent of their income in taxes against middle-class workers’ earnings despite all their wealth. This gap is largely a function of the income types and tax treatments afforded to the rich that differ so radically from those accorded to ordinary workers. This growing disparity not only raises questions of equity but it also underlines some serious systemic problems with the code that disproportionately favor the wealthy.
As an example, over time, the current system of taxation has changed in ways that have given additional advantages to the rich. Warren Buffett is among the richest persons on earth, and what he has gathered over time through Berkshire Hathaway—even this man recently denounced the unequal characteristics of the tax system in his favor. The case of Buffett, Jeff Bezos, and others says it all about billionaire businessmen who pay less in taxes compared to their employees but make millions of times more than any employee in terms of income through the existing tax laws.
This is a multifaceted problem. Suggested changes in the capital gains tax rate, along with several loopholes, such as the “stepped-up basis,” are two of the key areas of reform through which the system of taxation can be made even fairer. An explanation of how these loopholes work and proposed solutions to these will help further the understanding of the possibility of achieving a more equitable tax system.
The Wealth Gap and Taxation Discrepancies
Wealth and the Super-Rich:
The majority of Warren Buffett’s wealth emanates from Berkshire Hathaway stock, which he has been gradually acquiring since assuming control of the firm back in 1965. Today, one Berkshire Hathaway stock trades for almost half a million dollars from its value of $19 two decades ago. But those enormous holdings have made Buffett one of the richest people on Earth, while his tax bill does not come anywhere near reflecting that extraordinary wealth the way it does for regular workers.
Different Types of Income, Different Tax Rates:
The key to understanding why Buffett and other billionaires pay less in taxes lies in the nature of their income. Most of Buffett’s wealth consists of stocks and investments that fall under the category of capital gains. Compared to ordinary income, perhaps up to 10%-37% tax rates, the maximum long-term capital gain has a tax rate of only 20%. This minimum falls upon the gains made on the investments held for more than one year.
Capital Gains vs. Ordinary Income:
Consider Morris, a Wall Street retiree who lives off his investments. Morris pays capital gains on this investment income—such as profits made from selling stocks like Berkshire Hathaway and Amazon. As a matter of fact, he recently sold $400,000 in stocks and paid about $50,000 in taxes—a far cry from what someone with a $400,000 salary pays in income taxes.
The “Stepped-Up Basis” and Other Loopholes
The Stepped-Up Basis:
One big loophole right now in the tax system—this thing is called “stepped-up basis.” It is a provision that would allow heirs to inherit assets at their current market value rather than the value at which it was purchased by the original owner. When Buffett or some other rich person dies still owning his stock, that heir will pay tax only on the stock gain first realized upon the date of his inheritance, not upon its original purchase price. This can lock in tremendous gains without taxes.
“Buy, Borrow, Die” Strategy:
One other strategy for the wealthy is called “buy, borrow, die.” That’s how billionaires like Elon Musk can borrow against their stock without selling it. In that way, the owners could get liquidity without it being a taxable event. The appreciation of the stock pays back the debt often, leaving the original gains untaxed.
Proposed Reforms and Their Impact
Biden’s Proposal:
The President has proposed increasing the capital gains tax rate from 20% to 39.6% for those earning more than $1 million annually. Reforms have already been proposed that would shut the “stepped-up basis” loophole allowing unrealized gains to go untaxed when the assets are sold. The largesse that the current tax system has extended to capital could mean that the foregone reforms may reduce the tax gap between the rich and the average worker and could generate a substantial amount of extra revenues.
Possible Downsides:
Critics counter that these changes would discourage investment in the stock market or open new avenues for rich investors to avoid taxes. However, supporters believe such changes would go a long way toward making the tax system much fairer and lessening the problems associated with growing wealth inequality.
Conclusion
These huge differences in tax rates for the wealthy and the ordinary worker point to the bigger failures of the United States’ tax system. It basically is not fair that billionaires such as Warren Buffett and Jeff Bezos are privileged enough to enjoy lower taxes on capital gains and to use loopholes like the “stepped-up basis,” while normal working people have to carry the burden of higher income tax rates. Proposed reforms can alleviate these problems and create a much more equitable system. The mechanics of how the rich make their getaway from paying their due share of taxes, coupled with examining a few of the solutions, will allow us to work toward a tax code that more accurately reflects its citizens’ wealth.
Additional Considerations
Let me emphasize that capital gains tax adjustments are only part of the solution, not a panacea in and of themselves. Other measures—targeting wealth taxes or making further adjustments in how investment gains are taxed—could be used in dealing with the imbalances inherent in the tax system. This will ensure that the tax system is fair and that all persons pay their due share of rightful contribution to society.
In the light of how the rich try to avoid paying taxes and some proposed solutions to deal with all these issues, there comes the next step towards a more just and effective tax system which can serve all citizens better.