How to Tax a Billionaire (or Not)


Our institutions created centibillionaires and are now trying to contain them.

In Ayn Rand’s novel Atlas Shrugged, a group of high-achieving industrialists have had enough with being exploited (in their view) by “parasitic” collectivists and “second-handers”. They withdraw to a perfect community Galt’s Gulch aka Atlantis where they can live in peace and prosperity with each other, far away from the do-nothing (in their view) populace and according to their own laws and beliefs.

Because Rand mercifully never wrote a sequel (the original has more words than either War and Peace or Les Misérables), it is not clear whether these supermen and women lived happily ever after or whether, after enjoying the initial high of sticking it to humanity, their infinite egos led them to devour each other to oblivion and Galt’s Gulch disappeared Roanoke-like with no explanation left for posterity. That is, no explanation other than the obvious which is that a healthy society requires a fuller range of social strata and cultures, not only a super-stratum and a monoculture, in order to survive and to prosper.

No escape to Galt’s Gulch is currently offered to today’s billionaires who have so far opted to remain in the real world though they contend daily with insults and attacks from many quarters. It is necessary to say “so far” because some have been toying with otherworldly escapes, be they monetary via cryptocurrencies or interplanetary via emigration to planet Mars. Cryptos would free them from the gravity of central banks. And space from the gravity of Earth. After all, in our culture, “to leave it all behind” is nearly synonymous with high quality living. And to disrupt, to reject the dominant paradigm, are seen as ways to create new wealth.

Bernie vs. Billionaires

While still among us on earth however, even the ultra rich deserve… empathy. Or at least some recognition for their achievements. Their defining characteristic, shorn of all social and economic artifice, remains their humanity, not their wealth. Yet it is assumed by the angry-egalitarian political complex that it is fine to insult and harass a billionaire, as if their humanity was inversely proportional to their wealth. Starting with Bernie Sanders for example, some members of Congress have stated plainly that “billionaires should not exist”.

Because there are among the people mob inciters who amplify their message through social media, this slogan could be interpreted as incendiary, or as unsafely ambiguous. Does ‘billionaires should not exist’ mean that we should tax them until they are no longer billionaires? That would entail taking away 99% of some billionaires’ wealth. Or does it mean that we should limit their growth plans when their wealth hits the $999 million mark? Or force them to give away their wealth to charity? Or something else?

Parenthetically, one reason that Sanders has gained popularity late in life is that his typically incendiary words in younger years were not yet dampened by the excuses generally afforded to older people. Today some believe that he is more aging than dangerous, that he is merely a ranting old man, a grumpy but avuncular figure of sorts. But the reality is otherwise: Sanders seems very lucid and his views have steadily grown in popularity in the past ten years.

ProPublica Report

A June report by ProPublica suggested some new directions in taxing billionaires. The report’s authors, led by senior editor Jesse Eisinger (a 2016 guest on our podcast), noted that billionaires are able to amass vast fortunes thanks to the rise in value of their assets and that they are able to do so essentially tax-free until they sell those assets. This is both true and legal. Income tax applies to many categories of income but mainly to W2 earnings (wages from a job), interest, dividends, income from a business, and capital gains on sold assets (such as a home or a stock).

Most glaring in ProPublica’s telling is the fact that there is currently no income tax applied to unrealized capital gains, which are gains on assets that were not sold during the tax year under consideration. This is an important point because the vast wealth (over 90% in many cases) of most billionaires has resulted from gains in the stock market, gains that are unrealized as long as these holdings are not sold. So, for example, Jeff Bezos’s wealth is mainly in his Amazon stock. And Elon Musk’s in Tesla stock.

But how then are billionaires able to live their expensive lifestyles if they never sell any stock? ProPublica explains that many of them borrow against their stock holdings, ostensibly in order to avoid having to liquidate them. This strategy is perfectly legal and it makes a lot of sense from a tax-saving perspective. But it also makes good fodder for anti-billionaire headlines.

Of course, the ordinary American is also benefiting from the fact that he/she is not paying tax on unrealized capital gains. Were he to do so, he would have to send a check to the US Treasury for every year in which his house appreciated in value, which is to say in most years. The vast majority of people would not be able to make these cash payments while still owning their houses. So every homeowner (65% of households) can be thankful that taxing unrealized capital gains has so far been considered off limits.

So on the one hand, we have huge reserves of wealth accumulated tax-free that also allow large scale borrowing and tax avoidance. On the other hand, we have the impossibility and unfairness of taxing unrealized capital gains.

The answer from the ‘make them pay their fair share’ camp would be to only tax the very wealthy in this fashion, but not the middle class or the merely well off. What constitutes “fair share” is of course never defined. The only certainty is that “fair share” is “more” and will always be more than what the wealthy are paying at any given time, for as long as politicians can build a following by using the rhetoric of envy.

Pew Study

Politicians sometimes use math to promote their arguments. One favorite of late is the comparison of a wealthy person’s tax rate to that of a low-earning person. If the lower earner has an income of $30,000 and pays 20% or $6,000 in taxes, it is considered “unfair” if the higher earner has an income of $3 million and pays a lower rate, say 15% or $450,000 in taxes. The fact that the higher earner is paying a tax that is 75 times greater in dollar terms is deemed to be of no relevance to the discussion. This sleight of hand seems rooted in a growing belief that the higher earner does not fully deserve his/her wealth and that it was largely obtained through privilege or cronyism, rather than through hard work and personal merit.

Read the rest of this piece at Populyst.

Sami J. Karam is the founder and editor of and the creator of the populyst index™. populyst is about innovation, demography and society. Before populyst, he was the founder and manager of the Seven Global funds and a fund manager at leading asset managers in Boston and New York.

Photo credit: Wally Gobetz, via Flickr, under CC 2.0 License.