News stories like the one recently published for the first time in ProPublica, which describe how Jeff Bezos, Elon Musk and other billionaires pay little or no taxes, seriously undermine confidence in our tax system. People get the impression that the system is being played and the rich are not paying their fair share.
However, based on what was reported, these people simply followed the tax law. It is Congress that should be despised, not entrepreneurs who have built sizable and successful businesses.
In terms of tax law, the federal government only taxes certain items. There are taxes on income from wages, profits, and businesses above certain thresholds, taxes on payroll (for Social Security and Medicare), taxes on a limited number of deceased estates, and excise taxes on such goods and services as fuel, tobacco, alcohol, and even services in the tanning salon. If it is not declared, it will not be taxed.
One of the things that is not declared and not taxed is the proceeds of loans made to individuals. When a person borrows money, the money received is not taxed as income. This is mainly due to the fact that there is a repayment obligation. What Bezos, Musk, and others have done that many find offensive is borrowing money by using their companies’ stocks as collateral for loans.
Is it wrong that they do not tax these loan proceeds?
I think so, but they haven’t escaped taxation because they’re rich and haven’t paid their fair share. For the tax law as it is written is not equal to the just imposition of the tax burden. The tax law should be amended so that loan proceeds become subject to income tax if the loan serves only to derive value from significant assets of the debtor.
Bezos could have (and did) sell Amazon stock to gain value, and the law taxed profits from stock sales. By borrowing against these stocks, Bezos and others added value but were not taxed. He should have been taxed and the tax law should have been changed to require it, but if he repays such a loan he should not get an income tax refund. Instead, loan repayments should be added to its tax base in Amazon stock, reducing taxable gains from subsequent stock sales.
Our Internal Revenue Code already taxes loans from controlled foreign corporations to US shareholders as if they were dividends, so there is precedent in our tax laws for taxing loan proceeds. However, the taxation of loan proceeds to individuals as income should be limited and not applied across the board. Loan proceeds from second mortgages and financing in the ordinary course of business should not be taxed.
Congress should draw lines separating loan proceeds that should be taxed from those that should not. This can be done based on the borrower’s income status and other tests to limit taxation of loan proceeds to billionaires if that is the will of the legislature. After all, as Drew Westen states in his book The Political Brain, the Internal Revenue Code was meant to be an extension of our collective moral code of what is right and what is wrong.
A wealth tax was proposed by Sen. Elizabeth Warren and others to address income inequality and clarify what’s right and wrong about our Internal Revenue Code. However, a wealth tax has not worked well in Europe, where it has been attempted, and it would require an additional IRS enforcement system to value assets such as land, art, private companies, collectibles, etc. that are not publicly traded on stock exchanges and thus have no easily ascertainable price. A wealth tax would bring many tax disputes that could be a waste of everyone’s time.
Congress would be better off spending its time refining our income taxes and making them fairer. One area is the taxation of loans, which are in fact sales in disguise. Congress should also require banks to report loans to the IRS, just as employers are required to report wages, to help enforce these new tax rules.
We can make our tax laws fairer, but that’s up to Congress. Don’t blame those who obey the law.
Archie Parnell of Sumter has been a tax attorney for more than 40 years, including with the US Department of Justice, on the staff of the US House Ways and Means Committee, and in private law firms in the United States and abroad. Due to COVID-19, he teaches international tax at a law school in India, remote from the United States. He was twice a Democratic candidate for Congress.
