Earlier this week I wrote that PolitiFact got it wrong on a claim by President Biden that billionaires pay just 8% of their income on federal taxes. PolitiFact said Biden’s assertion was “false,” and I disagreed. I got some pushback from several readers. On second thought, I decided I was incorrect. But on third thought, I’ve concluded that I was right.
Here is what Biden said Monday night:
And folks, you know we have 1,000 billionaires in America. You know what their average tax rate is? 8.2%. If we just increase their taxes, as we proposed, to 25%, which isn’t even the highest tax rate, it would raise $500 billion new dollars over 10 years.
The issue is complicated. Biden was basing his claim on the fact that unrealized stock market gains are not taxed. It’s only after you sell that you’re subject to the capital gains tax, which is 20% if your income is higher than about $500,000 (the actual income levels vary depending on marital status and how long you held the stock).
Since you can’t spend money that isn’t in your possession, and since you do actually pay taxes once you sell, then it might seem that PolitiFact was right and Biden was wrong. But not so fast.
First, the wealthy, and billionaires in particular, have multiple ways of lowering or even avoiding taxes on capital gains. Whizy Kim, writing for Vox in March of this year, put it this way:
How much tax a wealthy person owes in a given year is a complex tapestry threaded with exemptions, deductions, credits, and obscure loopholes you’ve never heard of. The ideal is to owe zilch. If that sounds impossible to achieve, just look at the leaked tax returns of the wealthiest Americans that nonprofit news site ProPublica analyzed in 2021: Over several years, billionaires Elon Musk, Jeff Bezos, and Michael Bloomberg, among others, paid no federal income taxes at all.
Her story, headlined “The billionaire’s guide to doing taxes,” outlines a number of tax-avoidance schemes, and obviously those options are not available to middle-class Americans. As James Royal writes for Bankrate: “While it can be easy to overlook, the IRS has clearly laid out how you can qualify for a 0 percent capital gains tax rate, and it’s not that difficult for most Americans to achieve.”
Second, Biden has actually proposed taxing unrealized capital gains, and Kamala Harris has endorsed that idea as well. So when Biden talks about billionaires paying 8%, he has something very specific in mind, and something that he would change if he had the opportunity. PolitiFact argues that the very fact that this is a proposal rather than the current reality makes Biden’s assertion false, but I think it’s just the opposite. In effect, he’s saying: Billionaires are paying a tax rate of just 8% on their income. Vice President Harris and I want to change that.
The second sentence doesn’t negate the first, entirely true sentence. In reporting on Biden’s proposal for MarketWatch, Victor Reklaitis writes:
Treasury officials offered their rationale for the proposed change, saying the country’s current approach with unrealized capital gains “disproportionately benefits high-wealth taxpayers and provides many high-wealth taxpayers with a lower effective tax rate than many low- and middle-income taxpayers.” They also said the current approach “exacerbates income and wealth disparities” and “produces an incentive for taxpayers to inefficiently lock in portfolios of assets and hold them primarily for the purpose of avoiding capital gains tax on the appreciation, rather than reinvesting the capital in more economically productive investments.”
You can agree with the Biden-Harris tax proposal or disagree with it, but it doesn’t change the reality that billionaires are paying about 8% of their income on federal taxes. (A White House report cited by PolitiFact says that 8% — to be more precise, 8.2% — is an estimate, and that the actual rate could be somewhere between 6% and 12%. The report also says the data pertain to the 400 wealthiest families. Biden cited 1,000 individuals, so maybe that amounts to the same thing.)
For Biden, it was a talking point — he didn’t take the time to define what he meant by income, and we shouldn’t expect that in political speeches. But by any measure of truth and accuracy, he was right and PolitiFact was wrong.
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I am certainly in favor of taxing the wealthy, but don’t know how it makes sense to tax unrealized gains, or use them as a measure as Biden did. Those unrealized gains fluctuate on a daily basis. If they are taxed while being held, what happens if the value has dropped when they are liquidated? Could create a ridiculous accounting nightmare for the IRS to have issue refunds simply because someone paid taxes on gains that ended up being wrong.
What could be a good strategy would be to have invesrment companies withhold 20% from gains when liquidated and send this to the IRS, similar to payroll withholding. The states could also do this for their own cap gains taxes.
Yeah, I don’t know what I think of Biden’s proposal. I was more interested in figuring out that he was right. I actually sat down thinking I was going to write a mea culpa.
The 0.1% have another trick – they don’t *sell* the stock; they *borrow* against it as collateral – to be transferred on death. Even though the *lender* has now put a realized price on it (the loan amount), the IRS has not. I have no problem with only taxing “realized” gains – *if* we include transactions like these as a *realized* value ..
I’m glad you pointed this out…PolitiFact, while a great resource, often makes these errors when dealing with a sound bite with a very complicated issue. I’d love them to point out the nuance as you did.
The difference is one interpretation being technically correct with an extremely complex tax system across federal, state, & city/town that does not give a good real world measure. While the other is practically correct because it ignores the complexity and reports the end result which keeps the rich accumulating wealth faster than the poor, like they’ve been doing since the countries founding. 🙁
PolitFact should have rated this Half True and explain why. About taxing unrealized gains, that’s what happens when you purchase incentive stock options (ISOs) from your company. And people sometimes do get caught with stocks going underwater after the tax has been paid on a gain that never materializes. Taxing unrealized gains might be more palatable if the IRS would not limit the loss credits. Per Tracy Hall’s excellent point, maybe borrowing against an asset should be considered realization, with accrued interest payments (if any) considered deductible.
How about True; Context Needed?