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The problem with Democrats’ plan to tax the rich

If Democrats want the wealthy to pay more taxes, tax where their money actually comes from.

A video protest sign on a truck paid for by the Patriotic Millionaires driving past a mansion owned by Amazon founder Jeff Bezos, in Washington, D.C., on May 17.
A video protest sign on a truck paid for by the Patriotic Millionaires driving past a mansion owned by Amazon founder Jeff Bezos, in Washington, D.C., on May 17.
REUTERS/Jonathan Ernst

Robert Reich, who served a labor secretary under Bill Clinton, and who has degrees in economics and law, used his most recent column and his blog to rail against the recent decision by the House Ways and Means Committee to fund its ambitious spending plan by taxing income instead of wealth.

The key here, which you probably already know, is that the richest Americans organize their empires so that the vast majority of the annual increase in their net worth comes from increases their stocks which are not taxed until they sell them, and hardly any of it comes from the kind of ordinary income that gets taxed each year.

For example, Reich writes:

Jeff Bezos’s salary from Amazon was $81,840 last year, yet he rakes in some $149,353 every minute from the soaring value of his Amazon stocks – which is how he affords five mansions, including one in Washington D.C. with 25 bathrooms.

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Yes, that does say every minute.

Of course, you might want to note that Bezos’ stock gains will ultimately be subjected to capital gains tax, if he ever sells it.

Or, quite likely, he never sells it.

But will it be subject to inheritance tax when he shuffles off this mortal coil? Probably not. Reich notes that if the enormous gains hidden within Bezos’ Amazon stock passes to his heirs, the gains will escape taxation, permanently, under the “stepped-up basis” loophole that allows the heirs to value the stock at its value on the day they inherited it, and the old gains escape taxation forever.

President Joe Biden favors closing this “stepped-up basis” loophole, but “House Democrats balked,” Reich writes. He adds:

This loophole allows family dynasties to transfer ever larger amounts of wealth to future generations without it ever being taxed. Talk about an American aristocracy. We’re on the cusp of the largest inter-generational transfer of wealth in American history, as rich boomers pass it on to their millennial heirs. Closing this loophole may be our one big opportunity to stop this new aristocracy in its literal tracks.

At the bottom of Reich’s column, you’ll find a chart showing how the net worth of the 400 wealthiest Americans has fared over the past four decades. In 1980, it appears that the wealthiest 400 owned about 2.5 percent of all U.S. wealth.

On September 1 of this year, it was a tiny smidge under 20 percent, and rising fast.