The 0.1 Percent Digs In Against Warren’s “Class War”

The New York Stock Exchange
Photo by Kena Betancur/Getty Images
William D. Cohan
June 12, 2021

Shortly after ProPublica published its groundbreaking examination of the tax records of the 25 wealthiest Americans, a very senior Wall Street banker friend of mine spoke with two of his billionaire clients to gauge their response to the disclosures. The ProPublica report was damning, if entirely unsurprising to those schooled in the arcana of tax avoidance. On Wall Street, eyes rolled at the nonprofit’s definition of a “true tax rate,” calculated by dividing taxes paid by a net worth comprised largely of paper gains. The article underscored the notion that the top one-tenth of the richest one percent don’t pay very much federal tax.

My friend was curious about whether either of these two people, with net worths firmly in the 10-figure range, worried that they might be the next targets of some disgruntled IRS worker or sophisticated computer hackers. (ProPublica, which claims not to know who provided the confidential data, says it has obtained the tax returns for “thousands” of the nation’s richest people.) “Neither was concerned,” he deadpanned to me.

Presumably the billionaires named in the report were not particularly concerned, either. Representatives for Jeff Bezos “declined to receive detailed questions about the matter”; a divorce attorney for his ex-wife, MacKenzie Scott, didn’t respond at all. Elon Musk went radio silent after a ProPublica reporter followed up with additional questions about the $455 million in federal income taxes he paid between 2014 and 2018, during which time his personal wealth jumped by $13.9 billion. (In 2020, Musk’s wealth increased a staggering $120 billion.)

But the report does seem to have prayed on the economic insecurities of the multi-decamillionaire crowd, people like my banker friend, who had arrived at his own personal fortune through years of traditional, if super-sized, paychecks.

What got him going, in the wake of the ProPublica bombshell, was watching Senator Elizabeth Warren fulminating on CNBC about how the only people who pay taxes in this country are the hard-working middle class. “Well, guess what?” my friend said, incredulously. “I don’t have any capital gains. Every dime I have paid in taxes has been on ordinary income. But to say only hard-working middle-class people pay taxes is bull. I’ve probably paid well over $100 million in taxes over the years. I’ve never had a tax shelter.”

This banker keeps his money entirely in Treasuries. As a result, he pays taxes every year on the small amount of interest he receives from owning those securities and, when they mature, he has no capital gains to pay. Under Warren’s proposed plan to levy a 2 percent tax on every dollar of assets over $50 million (and 3 percent on assets over $1 billion), he could end up being taxed twice—first on his ordinary income, and then again on his bank account—to the tune of several hundred thousand dollars every year.

Of course, my friend, like most people I talk to on Wall Street, doesn’t think that will happen. The first thing he did after reading the ProPublica story was to Google “richest U.S. senators.” He was on a mission to see how many of the nation’s top Democrats are worth more than $50 million. He figured if there were enough of them, then Warren’s “Ultra-Millionaire Tax” would never have a prayer of passing the upper chamber. When he saw the names Mark WarnerRichard Blumenthal, and Diane Feinstein—they are in the top five of a recent Investopedia list—he breathed a sigh of relief.

But he was not happy about Senator Warren’s ongoing effort to politicize the issue. (He had some choice words, trust me.) “This is all about the 99% versus the 1%,” said the banker, who is a Democrat himself. “It’s class warfare.”

His concern goes to the central debate that the ProPublica story has kicked up, about the difference between annual income and wealth, and which one should be taxed and when. In this country, we get taxed on all sorts of things: when we buy things, on the property we own, and on our annual income. But we get taxed on financial assets only when we sell them, assuming the assets have appreciated in value. That is, no doubt, a big part of why it seems that Warren Buffett, Musk, and Bezos have paid so little in annual taxes relative to their net worth. (The same might be said of House Speaker Nancy Pelosi and her investor husband, Paul Pelosi, whose nine-figure fortune derives from stocks and real estate.) That’s the law as it stands now. Of course, laws can be changed.

If it does, some of the biggest losers will be among Wall Street’s upper-middle class—the lowliest members of an elite club for whom all wealth is relative. There is, after all, no more aggrieved caste than the superstar financiers whose social value is invisible and always, by the Warrens of the world, unappreciated.

“People rant and rave about an M&A banker who makes $12 million a year, but if you’re playing for the New York Yankees and make $12 million a year, they don’t hold that against you because what you are creating is visible,” my friend sighed. “It’s unfair.”

As a former Wall Street banker, I understand my friend’s frustrations. Without Wall Street, and its legions of bankers and traders, many of the things we take for granted—pick-ups trucks, refrigerators, smart TVs, beer—would be in much shorter supply. Wall Street’s ability to provide capital to companies, municipalities, and governments around the world at a fair price and in a timely fashion makes possible our quotidian lives.

Now, having said that, Wall Streeters will never evoke sympathy, under any circumstances. It is also true that the progressive critics of wealth inequality—Senators Warren and Bernie Sanders, to name two—have a point. For Elon Musk’s net worth to have increased $120 billion in one year, while some 40 percent of Americans don’t have an extra $400 in their bank accounts, strikes me as a deeply inequitable and serious problem, worthy of a serious policy response.

What to do? As ever, providing better educational opportunities is one of the keys to securing better jobs. Increase the capital gains tax rate? Sure. Increase the tax rate for the highest earners? Sure. But how do you get someone like Jeff Bezos to sell his stock in Amazon before he wants to, or before he wants to donate it (and avoid taxation altogether)? These are tougher questions to answer. At the moment, anyway, America is still a free-market democracy, where individual choice is still celebrated. The Democratic Party will need more than populist soundbites to avoid losing ground to opportunists like Josh Hawley or cynics like Mitch McConnell and Ted Cruz. A republic if you can keep it, indeed.