America’s Highest Earners and Their Taxes Revealed | Hacker News Reader

America’s Highest Earners and Their Taxes Revealed

projects.propublica.org

32 pointsdavidbarker20 comments

"revealing the incomes and tax rates of the 400 Americans with the highest incomes from 2013 to 2018"

That seems like an odd analysis? Why would you take the average income and average tax rate over a 6 year span? I assume that many of these folks have large parts of their income coming not from W2 salary but from periodic equity sales. All of that nuance is lost when six years are all treated as equal.

They do allude to this in a footnote "For the top 400 by income, the total shown in the table is total AGI for the top 400 in each year, so this is a shifting population and one different from the top 400 by average discussed throughout the story."

And before someone says "to protect their private information". Well I mean they are naming these folks directly so any privacy at this point is kind of lost.

And also this footnote "Each individual’s percentage of income taxed at the lower rate is calculated using their highest income earning year from 2013 to 2018." So that stat is not representative of the time period in question but rather a single year. Again, if they offloaded a bunch of long-term capital gains, that number is the max not the typical or average.

There are enough nuggets in here for some interesting discussions. Take the Walton heirs, nearly 100% of their income is long-term capital gains, so they will basically pay only 20% or less of their income for their entire lives. A doctor would pay around 30%. Is that delta of 10% represent the risk of investing in the market? Looking at the historical data and the US policy, long term investing in the market is basically a sure thing. The tax discount is way too much for the actual risk.

I didn’t think long-term capital gains rate was lower to account for risk, it was to account for:1) inflation, since you pay taxes on nominal not real gains unlike income which has indexed brackets and 2) to incentivize long term investment over short term investment which is taxed at a higher rate.

1) Stocks and real estate are a lot more inflation proof than wages. Their prices already handle inflation.

2) I still think there should be a discount for long-term investing, just that it is too much. They could lower the spread between long and short term investing with almost no consequence.

In terms of #1, it’s the fact you pay taxes on inflation, not just real growth.

So if you buy a stock at $100 and sell at $200 ten years later, but with inflation that same dollar is worth $1.50 ten years later, your real return is $50, not $100, but you’ll pay taxes on the full $100 of $20, which means a 40% real tax rate.

With income the brackets are indexed to inflation so that issue is removed.

I get that, but would rather have a $300k salary with a COLA each year or an S&P 500 index fund with an expected return of $300k? There is just no way your take-home income is less with the index fund over a 10, 20, or 30 year period.

Seems like an odd comparison considering your $300k salary would grow over 30 years too.

Point is, if you pay taxes on the nominal returns, your tax rate is much higher than the 20% long-term capital gain rate implies.

> In the American system, there’s a huge difference between how we tax wages and how we tax investments. Income from financial assets is generally taxed at a lower rate.

Right, this is the part people miss. The top wealthy aren't getting hundreds of millions of dollars per year via truckloads of cash which they then somehow pay a small tax rate on. Instead they (for example) own a large % of a company and when the value of the company goes up, the value of their wealth goes up. So in some sense that money is imaginary.

Imagine buying a million dollars worth of gold bars and putting them in your house. Next year, the value of gold has gone up 50% so the same pile of gold is now worth $1.5 million. So you've "made" $500k! But it's not a real $500k, it's an "imaginary" aka "unrealized" $500k. You might find it's not really worth that much if you attempted to sell it all. Until you've "realized" those gains buy selling your gold, you don't pay taxes on it. I think most people agree that's a reasonable policy, yet a lot of people are outraged that there is no "wealth tax" to force the gold owner to sell off gold every year to pay for any unrealized gains.

What people ought to be outraged at are the loopholes the wealthy exploit in order to not pay taxes on realized gains such as the "buy, borrow, die" loophole (https://wallethacks.com/buy-borrow-die-estate-planning-strat...). For example, wealthy people will take out huge loans backed by unrealized assets (stocks), use the loans to fund their lifestyle, and then die without paying back the loan. Then your heirs use the inherited money to pay off the loan at a way lower rate than normal because the stock cost-basis is stepped up at the time of inheritance.

> The top wealthy aren't getting hundreds of millions of dollars per year via truckloads of cash which they then somehow pay a small tax rate on

I believe your take is incorrect. The article is talking about capital gains tax paid when investments are sold, and how it is lower (as a percentage) than payroll tax.

FTA:

"Since 2013, that long-term capital gains rate has been 20%, about half the top rate on ordinary income (37% in 2018)."

This is correct for Mexico:

Mid-tier income people will pay from 20% to 35% (in a progressive tax setting, granted). This is people whose taxes are collected automatically and they don't have any say in that money.

Whereas rich people, they will invest in Stocks and REITS (FIBRAs in Mexico), the former has a 10% Tax while the latter (FIBRAs) doesn't have any tax (for generated "dividends"). So, rich people have better instruments to make their money grow and pay less taxes, while the average Joe is bled.

In reply to just the FTA quote (not the parent comment's content): The 20% long-term gains might also be subject to 3.8% net investment income tax, right? There is still a difference but it's closer to "about 2/3" than "about half."

And the article does omit state taxes but California would tax both LTCGs and income at 13.3% for this cohort.

That might be splitting hairs and I'm not justifying billionaires' tax rates. Politically I probably line up with the ProPublica stance more than not, but feel there is some hand-waving in this series of articles that distracts from the argument, especially around defining the term "true tax rate."

The super rick get loans against their stock holdings and spend the loans like tax free income.

I'm still learning about buy-borrow-die, but US estate taxes are higher than income taxes above ~$12 million, right? Much less capital gains. So buy-borrow-die would generate more taxes than buy-sell-spend?

Your taxable estate is calculated after subtracting debts from your assets, so even if you don't want to leave any inheritance, you can borrow equal amounts to your unrealized assets and effectively spend all your money while you are alive without ever paying capital gains tax or estate tax.

If you do want to leave inheritance, capital gains basis is reset at death, which effectively forgives your lifetime unrealized capital gains, so you would only owe estate tax. If you sold before you died, you would still have to pay estate tax in addition to the capital gains tax.

That makes some sense. So buy-borrow-die with all the shares used as collateral generates no taxes, if you can find someone to lend for the full value of the shares. I wonder how high a ratio you can borrow if you're e.g. Musk or Bezos.

On the off chance anyone finds this comment, I found this page with the current modification proposals helpful as well: https://crsreports.congress.gov/product/pdf/IF/IF11812?fbcli...

People play these games all of the time with their houses.

"It's worth $600k!"

Yes, it's worth that much. Which means you can take on an even bigger line-of-credit if a mortgagor agrees. (Buy, borrow, die: Normie edition).

Doesn't mean it will sell for that much, and even if it did, the houses around you are likely worth just as much.

The part about donating stock to “avoid taxes” is poorly explained. Yes it reduces taxes but it does so by giving away 100% of a liquid asset to a charity. They could sell the same amount and only pay the top marginal rate plus taxes on the missed deduction, so in effect they are paying more just directing it to a charity instead of the government.

Of course at the high end when you own a significant portion of a public company you can’t actually sell your shares without moving the market, so in that case giving away shares at a nominal value is not the same as paying cold hard cash, but I think they are overstating that nuance the way this is presented.

Turns out Ken Griffin’s wife wasn’t lying…

https://www.cnbc.com/2015/03/03/ken-griffin-makes-68m-a-mont...

I might be on the other side of the article as I came away thinking the tax avoidance of the elite rich isn't nearly as bad as I thought it was. I thought they had loopholes to dodge almost all taxes, but the numbers show most pay more than I expected.

> it can come in the form of dividends, which are taxed at lower rates than ordinary income.

Didn't their companies already have to pay tax on their own profit before distributing dividends; making it higher effective tax than ordinary income?

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