I’ve been thinking a lot these days about taxes and the celebrated art of tax avoidance. Disclosure: I have an accountant. He’s a professional with a license and everything, and he keeps me out of I.R.S. prison, also known as prison. I also have my own S-Corporation that I run my business out of. I’ve learned it’s far better to be a corporation in the United States than a human. You literally get more respect. I take what I consider to be reasonable steps to plan my taxes such as writing off business expenses and using tax-free retirement accounts.
Of course, the wealthiest among us play by more esoteric rules. Earlier this summer, ProPublica got its hands on the tax records of 25 of the nation’s richest people, revealing their “true tax rate”—defined as federal income tax as a percentage of their net worth—of 3.4 percent. The basic and very legal scam is this: very wealthy people can deny themselves a traditional income. They pay themselves something symbolic like $1 per year, and they look like good allies to working people doing it. Then they use their investment assets to borrow the money that they actually live off of. The borrowing rates are far lower than the tax rates, and even the interest on these loans they get to write off on their taxes. I knew the system was rigged (Hi, Bernie!) but damn!
A few weeks had passed since I read the ProPublica piece. I wasn’t even angry about it anymore. I had moved on to anger about America’s low vaccination rates and the horribleness of the movie The Tomorrow War. Then I learned about Peter Thiel’s steroidal use of the Roth IRA to avoid taxing his wealth. The Roth account was established with a few thousand dollar contribution cap specifically to benefit middle class people. Thiel, worth about $7 billion, was not the intended beneficiary. But he—or his tax attorneys, presumably—figured out how to take advantage. He deposited founders shares of his companies and declared the value something artificially low. When he did it with PayPal, for instance, he said each share was at par value, or worth $.001, which is standard for start-ups (and now SPACs). But because the company was private, he had a safe harbor to set that value at an incredibly low number. When those companies got a real valuation and grew over time, so did his tax-free investment. Now the total value of his Roth IRA is estimated to be $5 billion.
So what’s the problem? This is just how wealthy people roll, right? We all expect it. We are a nation that taxes labor, not capital. And there is, historically, a certain economic logic to it. Investment is risky, and about 50 percent of businesses fail within five years. In theory, there are good reasons for a society to incentivize more productive uses for capital than padding a bank account or buying another car. In practice, of course, this preferential tax system is routinely abused by those with no need for its benefits while people who make money with their labor have no such loopholes at their disposal. Private equity, venture capital, investment banks—entities that are, as my colleague William Cohan says, in the business of making money from money—understand how to structure deals where they get paid rain or shine. And that money compounds relentlessly.
As a result, wealth inequality today is in a different stratosphere than when Democrats joined with Republicans to lower tax rates in the 1980s—and America is in desperate need of more redistribution. It’s selfish and hypocritical, in a nation with crumbling infrastructure and endemic homelessness, for people who’ve made so much money to avoid paying into the common pot that allowed them to compound their wealth. They chose to create their companies in the U.S., but after wildly succeeding they want to take all their stuff and go home. The problem is, they don’t simply go home. When you avoid taxes to such an absurd degree, you’re committing a tiny act of secession, removing your resources from the commons. But with so many in this community, they still want to tell the rest of us how to govern.
This cohort avoids taxes and instead funds their own charities with far less public accountability than government efforts offer. They hyper-fund politicians in the hopes that they will advocate for policies that are, in many cases, beneficial to them and their financial interests, or at least their worldviews. As my colleague Teddy Schliefer has noted, they have an outside hand in influencing how we should structure our education system, labor market, climate plans, pandemic response, and tax policies.
They chide us for failing to balance our public budgets while they have already opted out of public budgeting. By refusing to pay into public services at a reasonable rate, they are defunding the police far faster than Black Lives Matter could ever pull off, along with schools, emergency response, national defense and more. And we listen because we’ve been raised in a culture that says they are not only more valuable economically, but intellectually and morally. We’ve equated financial worth with self-worth and so have ceded much of our remaining collective power to a group that works to undermine that power.
I have a better idea. If you’re going to avoid taxes to such an extraordinary degree, fine. You just also don’t get the benefits of membership in the United States. One view of a nation is that it is basically a membership club, and if you stop paying dues, you stop benefiting.
The next time there’s a ransomware attack on your company, don’t call the F.B.I. If you do, you’ll be met with an automated voice message: “We’re sorry, but the services of the Federal Bureau of Investigation are only available to dues-paying members. According to our calculations, you are behind on your dues by roughly three kajillion dollars. To be connected to our billing department, press 1. Otherwise please hang up. Tying up this phone line is costing actual taxpayers valuable resources. Good luck.”
The next time one of your properties catches fire, you don’t get to call the fire department. You can hire your own private firefighters, which I understand many are already doing, but leave the people’s fire department out of it. The next time you want to know the weather forecast, launch your own satellites; need to adjudicate a contract dispute, dust off your negotiation skills; need to flee a conflict zone, hire a private evacuation team. Just don’t call on the people’s National Weather Service, court system, or military.
I saw an impassioned rant on Instagram the other day, directed toward people who can get the COVID vaccine but choose not to. The speaker’s wife, who suffers from Stage 4 breast cancer, was discharged early from the hospital to make space for a surge of COVID patients, the vast majority of whom are unvaccinated. He didn’t quarrel with people’s rights not to trust the well-tested, scientifically vetted vaccine. Instead, he said that those who make that choice shouldn’t also be able to use well-tested, scientifically vetted hospital services.
I can understand his frustration: vaccines help provide for the common defense. So do taxes. Both can be unpleasant. Many of us don’t enjoy the process. But we do it for the benefit of us all. We do it because individually very few of us could fight a pandemic or contain a wildfire or educate a generation.
Some of the very wealthiest people can and try to do everything privately. And it sort of works, for the thousand or so people who can afford that Ayn Randian fantasy. For the rest of us, it’s collective suicide. If each of us tries to emulate the behavior of the wealthiest among us, we’ll have nothing left. We won’t be a nation, just islands of individuals fending for ourselves.
George Packer recently wrote an essay in The Atlantic that explores America’s definition of equality and how that can lead to a hyper-individualism: “In a society of equals, people focus on their own affairs as if they owe nothing to others and expect nothing from them.” I want to expect more from us. I want to believe that a nation, our nation, is far more than a benefits-maximizing membership club. While I get short-term satisfaction from imagining aggressive tax dodgers barred from using the government-funded Global Positioning System (thanks, Department of Defense!), exile and shame are not a long term plan for nation-building.
I would rather we remember the good we can accomplish through collective investment, which is a better way to define taxation. I would rather we each feel a sense of ownership and belonging in this place founded on the imperfectly executed ideal that liberty and justice belong to everyone.
And I admit, self-government is hard. The practice of government is inefficient and often corrupt, as with almost every human endeavor, and I don’t like the idea of funding corruption, inefficiency, or oppression. I slow-rolled my own federal student loan repayments during the Iraq War because I didn’t want to fund it, and I certainly don’t like the idea of paying insurrectionist Senator Tom Cotton’s salary. If any group has a sound moral argument for tax avoidance throughout U.S. history, it’s Black Americans. Why should we be forced to fund our own destruction? So no, I’m not always thrilled to reinvest my money into the collective project that is the United States.
But if we all choose to opt out of self-government the way our wealthiest members have done, we’ll be left with no government at all. Although we’ve normalized the practice—when you start making “real money” seemingly everyone advises you to make sure the government gets as little of it as possible—the path forward isn’t more acts of mini-secession. It’s a recommitment to our collective project. Our goal shouldn’t be to starve the government of resources but to make government work better. Doing this might restore a bit of our faith in government, which in a democracy means restoring a bit of faith in ourselves.
And for those of us who have mastered the art of making money out of money, or are on the path to doing so, congratulations—and it’s complicated! As ProPublica’s reporting makes clear, most of our wealthiest people’s fortunes exist as unrealized gains: paper claims on future cash flows that can be bought and sold, leased and borrowed, but begin to evaporate the moment they’re seized. The solution isn’t necessarily to liquidate their equity, but to find ways to make the economy more inclusive and less punitive, so that more people can participate in the process of wealth creation. It begins by uplifting the poorest among us, so that everyone has access to the same opportunities. And it is perpetuated by incentivizing the kind of success that gives back to the society (and planet) that makes such success possible.