Billionaire Tax Disparity

Warren Buffett, one of the world’s wealthiest individuals, owes much of his fortune to his leadership of Berkshire Hathaway. This holding company owns numerous other companies such as Geico and Dairy Queen, a significant railroad, and substantial stock in major corporations like Apple and Coca-Cola. When these entities perform well and their stock values increase, Berkshire Hathaway’s stock value rises accordingly. When Buffett assumed control of the company in 1965, a single share was valued at just nineteen dollars. Today, that same share is worth nearly half a million dollars. Buffett personally owns close to 240,000 of these shares, which forms the foundation of his vast wealth.

Despite his immense wealth, Buffett has often highlighted a striking disparity in the U.S. tax system. He has pointed out that he pays a lower tax rate than his secretary. His secretary pays income taxes on her salary, while Buffett mainly pays capital gains taxes on his sold stock, which are taxed at nearly half the rate. This situation is indicative of a larger issue in the U.S., where the wealthiest individuals are under-taxed. Over the past 40 years, the after-tax income of the richest Americans has surged by more than 400%, while the middle-class income has only increased by 50%.

The tax system treats income differently based on its source. Most people earn their income from salaries and wages, which are taxed at a rate ranging from 10% to 37%. However, individuals like Morris, a former Wall Street worker who is now retired and lives off his stock market investments, earn a significant portion of their income from investments. These investments, such as long-term stock holdings and real estate, are taxed as capital gains, with a maximum tax rate of just 20%. For example, Morris recently sold stock for $400,000 and paid around $50,000 in taxes. This amount is significantly less than what someone with a $400,000 annual salary would pay in income taxes.

Furthermore, a considerable portion of the wealth of the ultra-rich, like Buffett and Jeff Bezos, is tied up in their stock holdings and not readily accessible as spendable, taxable income. This wealth remains largely untaxed until they decide to sell their stock. Some billionaires, such as Elon Musk, use their stocks as collateral for loans, effectively bypassing the need to sell and, consequently, avoiding taxes on their holdings.

Another tax advantage for the wealthy is the “stepped-up basis” loophole. If Buffett were to sell his stock, he would owe capital gains taxes based on the profit he made, calculated as the sale price minus the original purchase price. However, if he holds onto the stock until his death, the person who inherits the stock would only owe taxes on the gains realized after the inheritance, leaving the original gains untaxed.

This tax system, which allows the rich to get richer while the middle class struggles, has prompted calls for reform. President Biden has proposed closing the stepped-up loophole and raising the maximum capital gains tax rate from 20% to 39.6% for individuals earning more than a million dollars annually. While critics argue that such changes might deter investment or lead to reduced stock sales by millionaires, proponents believe it could generate significant tax revenue, with estimates ranging from $200 billion to $400 billion over ten years.

Addressing the taxation of unrealized gains could be another step toward a more equitable system. Most Americans are concerned about the fairness of the tax system, which appears to favor the wealthy. While changing the capital gains tax alone may not resolve all issues, it could be a significant step toward reducing income inequality