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tax avoidance
Pass Wyden’s Billionaire Income Tax Bill to Close Unfair Loopholes
The bill would end two of the ultra rich’s favorite tax-avoidance strategies: “Buy-Borrow-Die” and “Buy-Hold for Decades-Sell.”
Jan 06, 2025
America’s ultra-rich today love to play tax-avoidance games. One of their favorites goes by the tag “buy-borrow-die,” a neat set of tricks that lets billionaire households avoid any taxes on the gains they make from their investments.
The simple rules of the buy-borrow-die game: buy an asset—with your millions or billions—and watch it grow. If you have a hankering to pocket some of that gain, don’t sell the asset. Any sale would trigger a capital gains tax. Just borrow against that asset instead, a simple move that lets you avoid capital gains levies so long as you live.
And what happens when you die? Nothing! Your asset’s untaxed gains vanish for income tax purposes under a tax code provision known as “stepped-up basis.”
Thanks to this buy-hold for decades-sell, the effective tax rate on the multi-billion dollar gains of America’s Bezoses, Gateses, and Buffetts, even when they do sell assets before they die, approaches zero.
This buy-borrow-die, progressive lawmakers like U.S. Sen. Ron Wyden from Oregon believe, amounts to a game plan for creating dynastic fortunes. Wyden has proposed an antidote, dubbed the “Billionaires Income Tax,” which would require billionaires to pay tax annually on the gains they make from tradable assets like the corporate shares that list on stock exchanges.
Gains from non-tradable assets would go untaxed, under Wyden’s proposal, but only until the assets get sold, at which point the tax rate would be increased to account for the tax-free compounding of annual gains. And those who inherit millions and billions from billionaires would no longer, under Wyden’s bill, be able to benefit from our current tax code’s magical stepped-up basis.
Closing the buy-borrow-die loophole would, all by itself, be reason enough for passing Wyden’s Billionaires Income Tax bill. But buy-borrow-die may only be the second leakiest loophole Wyden’s proposal would close. His Billionaires Income Tax proposal would also shut down a far less well-known loophole I like to call “Buy-Hold for Decades-Sell.”
How does this loophole work? Consider two rich taxpayers, Jack and Jill. Each invests $10 million in a stock they hope will grow at a 10% annual long-term rate, a good but not great return for a rich investor. Investors in Berkshire Hathaway, for example, have seen average annual returns of about 20%.
Our Jack goes on to hold his stock for 30 years and realizes exactly the 10% annual return he hoped to achieve.
Jill opts for a more aggressive investment strategy. After holding her stock for just over one-year, long enough to qualify her profits for the preferential tax rate available to long-term capital gains, Jill then sells at an 11% gain, pays tax on the gain, and invests the remaining proceeds in a stock she believes has more potential going forward. She successfully repeats this strategy each year for 30 years.
You might guess that Jill’s eventual nest egg at the end of 30 years, after paying federal income tax at the current long-term gains rate of 23.8%, would be larger than Jack’s. But, despite Jill’s superior investment acumen, Jack’s $135 million nest egg turns out to be 20% larger than Jill’s $112 million nest egg.
How could that be? Jack, to be sure, does pay the same 23.8% tax on his capital gain as Jill. But Jack’s money has had the benefit of 30 years of compounding before Jack has to pay that tax. That benefit far outweighs Jack’s lower annual investment return.
Jack’s whopping tax benefit from holding an appreciating asset for several decades should give us pause. After all, we want investors to seek the highest yielding investments, not the ones that get the best tax treatment. We don’t want developers of promising new technologies, for example, struggling to raise capital because our tax law confers higher returns on investors who just keep on holding old, under-performing investments.
In our example, Jill’s annual tax of 23.8% on her gains reduces Jill’s 11% pre-tax rate of return to an after-tax return of 8.38%. But Jack, because he gets to defer the tax on his 10% annual gains for 30 years, sees the after-tax return on his investment reduced by only 0.93 percentage points, to 9.07%.
As a result, Jack, a poorer investor than Jill, has millions more wealth on hand at the end of 30 years.
What tax rate would Jack have to pay annually on the growth in his stock value to place him in the same position at the end of 30 years as a one-time tax of 23.8% upon the sale of that stock? He’d only have to pay tax at a 9.3% annual rate. That 9.3% would actually run lower than the 10% income tax rate that our federal tax code currently expects Americans with incomes barely above the poverty level to pay.
In some extreme cases today, our super rich can enjoy an effective annual tax rate on their investments far lower than Jack’s.
Consider a lucky Berkshire Hathaway investor who bought 100 shares back in 1979 at $260 per share, a $26,000 investment. That investor’s shares would be worth about $70 million today. The annual pre-tax return on those shares would be 19.19%. If the investor sold the shares and paid tax at 23.8% on the long-term gain, the investor would be left with about $53.35 million.
The investor’s annual rate of return after-tax would be 18.47%, a trifling 0.72 percentage point reduction from this investor’s pre-tax rate of return. The effective annual rate of tax on the growth in the investor’s stock value would be 3.75%, less than one-sixth the 23.8% one-time rate on the investor’s compounded gains.
That about sums up perfectly the magic of buy-hold for decades-sell, the loophole that causes the effective annual tax rate on the growth in the value of investments to decline as the rate of return and length of holding period increase. Thanks to this buy-hold for decades-sell, the effective tax rate on the multi-billion dollar gains of America’s Bezoses, Gateses, and Buffetts, even when they do sell assets before they die, approaches zero.
We don’t need to just close the buy-borrow-die loophole. We desperately need to shut the buy-hold for decades-sell loophole just as firmly.
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Corporate Tax Avoidance Rampant During First 5 Years of Trump-GOP Law: Study
"Corporate tax avoidance occurs because Congress allows it to occur, and the Trump tax law made it worse," says a new study by the Institute on Taxation and Economic Policy.
Feb 29, 2024
Many large, profitable U.S. companies paid little to nothing in federal taxes during the first five years of the 2017 Trump-GOP tax law, an unpopular measure that slashed the corporate tax rate from 35% to 21% and introduced new loopholes that the rich and powerful rushed to exploit.
A study released Thursday by the Institute on Taxation and Economic Policy (ITEP) examines 342 companies that were profitable during each of the first five years of the tax law's enactment. The new research shows that corporate tax avoidance has been rampant under the law, with 23 of the companies included in the study paying nothing in federal taxes between 2018 and 2022 and 109 businesses paying nothing in at least one of the five years.
Kinder Morgan, NRG Energy, and T-Mobile were among the profitable companies that paid a 0% or negative effective tax rate during the study period.
"When President [Donald] Trump and congressional Republicans slashed the statutory corporate income tax rate from 35% to 21%, they could have maintained or even increased the effective rate paid by corporations by shutting down special breaks and loopholes in the corporate income tax," reads the new report. "But from the very beginning of the debate over the 2017 legislation, it was clear their goal was to allow corporations to contribute less to the public investments and the society that makes their profits possible."
Nearly a quarter of the companies analyzed by ITEP "paid effective tax rates in the single digits or less" during the law's first five years, including prominent corporations such as Netflix, Nike, and Citigroup.
ITEP found that the "industries enjoying the lowest five-year effective tax rates were utilities (negative 0.1%); oil, gas, and pipelines (2.0%); motor vehicles (3.2%); and telecommunications (7.7%)."
On average, the 342 companies included in the analysis paid an effective tax rate of 14.1% between 2018 and 2022—significantly less than the 21% statutory rate established by the Tax Cuts and Jobs Act.
The difference between what companies would have paid in taxes if they were held to the 21% statutory rate and what they actually paid amounts to a major taxpayer subsidy, ITEP said. The 342 companies received a combined $275 billion in subsidies during the first five years of the Trump-GOP tax law, with the majority going to just 25 companies.
Bank of America received the largest tax break of all the companies analyzed—$23.89 billion.
"For many of the biggest corporations in America, our 21% tax rate is an accounting fiction," said Matt Gardner, a senior fellow at ITEP and the lead author of the new study. "Because of an array of special-interest tax breaks, the most profitable corporations in America routinely pay effective tax rates far below the legal rate."
"It does not have to be this way. Congress should take more steps to crack down on this widespread corporate tax avoidance."
While corporate tax avoidance certainly didn't begin with the 2017 tax law, ITEP's study notes that it "did little to change" the status quo—"except to allow companies to pay less than ever."
"Corporate tax avoidance occurs because Congress allows it to occur, and the Trump tax law made it worse," the analysis says.
Some notorious tax avoiders, such as Amazon, were excluded from the study because they reported a loss during at least one of the five years that ITEP examined. Amazon paid an effective tax rate of 8.9% between 2018 and 2022.
"Americans who heard President Trump and his supporters in Congress tout the 21% corporate income tax rate they enacted in 2017 may be alarmed to hear that so many corporations pay much less than that in reality," said Steve Wamhoff, ITEP's federal policy director and report co-author. "But it does not have to be this way. Congress should take more steps to crack down on this widespread corporate tax avoidance."
The report specifically advocates a global minimum tax that would require multinational companies to pay an effective rate of at least 15%, a proposed change aimed at cracking down on profit-shifting. The Biden administration negotiated a global minimum tax deal with other nations in 2021, but the divided U.S. Congress has yet to advance the proposal.
"Drafters of the Trump tax law made some token efforts to address these problems, for example, by imposing a weak U.S. tax on certain profits that American corporations claim to earn offshore," ITEP's report observes. "This left the corporate income tax in dire need of the Biden administration's efforts to reform it."
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OECD Pushed Australia to Drop Plan Aimed at Showing Where Corporations Pay Taxes
"What little credibility the OECD had is now in tatters," said one campaigner. "The OECD makes promises about ending global tax abuse but was evidently doing everything it could behind closed doors to protect tax abusers."
Jul 08, 2023
The Financial Timesconfirmed Friday that the Organization for Economic Cooperation and Development lobbied Australia to weaken a law that would have compelled about 2,500 highly profitable multinational corporations to reveal where they pay taxes, eliciting outrage from tax justice advocates.
Citing two unnamed people familiar with the discussions, FT reported that the Paris-based club of wealthy nations "pressured Australia's ruling Labor government to drop a crucial part of a new finance bill that would have required some multinationals to publicly disclose their country-by-country tax bills."
"This shows the true colors of the OECD."
According to the newspaper, "The OECD, which has driven efforts to force the world's largest companies to pay their fair share of tax, believed the bill would have undermined its own efforts to make multinationals' affairs less opaque."
Campaigners were incredulous given that the legislation the OECD enfeebled "would have delivered the biggest transparency breakthrough to date on the taxes of multinational corporations," as the Tax Justice Network put it.
The advocacy group estimates that multinationals shift more than $1.1 trillion of profit into tax havens annually, costing the world $312 billion per year in foregone corporate tax revenue. It also calculates that at least 1 of every 4 of those lost tax dollars could be saved if corporations were required to publish country-by-country reporting data.
"The OECD yet again doing the bidding for big business, the only winners here," tweeted Nabil Ahmed, economic justice director at Oxfam America.
Ahmed's observation was shared by Isabel Ortiz, the former director of social protection at the United Nations' International Labor Organization, who said, "This shows the true colors of the OECD and who [it is] serving."
Australia's original proposal "would have exposed unprecedented details about companies' tax affairs in each country they operate," FT reported, aiding efforts to crack down on tax evasion by forcing an estimated 21% of the world's multinational corporations—including many of the biggest firms in history—to come clean about "how much of their revenues are booked in low-tax jurisdictions."
As the newspaper explained:
The bill was expected to clear the Australian parliament in June and come into force on July 1. However, the version of the bill that passed last month removed crucial disclosures, with the Australian government announcing a delay of the planned public country-by-country tax reporting regime for a year.
People close to the decision said officials from the intergovernmental body had stressed to the Australian Treasury that countries that signed the 2015 OECD agreement did so on the basis the tax reports would not become public.
"This is not a good look for the OECD," the Fair Tax Foundation wrote on social media. "Their work is by definition consensus-based and often lowest common denominator. If a country wants to push on and do something more substantial, they should applaud, not oppose."
David McNair, executive director of global policy at the anti-poverty nonprofit One, argued that "this story seriously undermines the OECD's credibility in the one area that it was leading in recent years."
"I hope it prompts some soul searching on the mission and values of the organization," he added.
"OECD has put itself firmly on the side of secrecy—on the side of tax abuse—against one of its members. That's an extraordinary state of affairs."
As FT observed, "For the past decade the OECD has spearheaded global efforts to close loopholes and restrict the use of tax havens after it was asked by the G20 in 2013 to address the growing problem of corporate tax avoidance."
"While large multinationals already report some country-by-country data to tax authorities under an international agreement brokered by the OECD in 2015, the Australian proposal would have disclosed additional new data points," the newspaper noted. "And crucially the OECD country tax reports are not shared with the public."
FT's article corroborates earlier reporting by the Center for International Corporate Tax Accountability and Research (CICTAR) and the Tax Justice Network.
Two weeks ago, immediately after the Australian government unexpectedly postponed key components of its landmark bill, both groups suggested that "lobbying against the legislation by multinational corporations and their professional enablers may have been bolstered by the OECD itself—the organization which claims to set international tax rules in order to reduce corporate tax abuse."
In the wake of FT's bombshell story, Tax Justice Network chief executive Alex Cobham said in a statement that "what little credibility the OECD had is now in tatters."
"The OECD makes promises about ending global tax abuse," said Cobham, "but was evidently doing everything it could behind closed doors to protect tax abusers."
The Australian law opposed by the OECD – which may yet be adopted despite the delay – would force one 1 in 5 multinational corporations around the world to come clean about their profits and taxes. This includes many of the world’s biggest multinational corporations... pic.twitter.com/9j3KqNPee4
— Tax Justice Network (@TaxJusticeNet) July 8, 2023
Cobham called it "genuinely shocking to see it confirmed that the OECD has lobbied its own member country against introducing a key measure to fight corporate tax abuse."
"Public country-by-country reporting, when it arrives, will increase revenues around the world to the tune of billions of dollars, by exposing the most egregious profit shifting," Cobham continued. "Investors will benefit from reduced risk in their shareholdings, and employees will benefit both from lower risk and from the chance to negotiate fairly based on a true reporting of the profits of their work. Smaller and domestic businesses will benefit from a more level playing field, instead of a system that subsidizes multinationals' tax bills by effectively granting them immunity from abuse."
"OECD has put itself firmly on the side of secrecy—on the side of tax abuse—against one of its members. That's an extraordinary state of affairs," he added. "And it couldn't send a clearer signal to countries wondering whether the OECD's proposed tax rules will help them to curb tax abuse. They won't, and countries should pursue their own alternatives while preparing for negotiations to establish a proper tax body at the United Nations instead."
Supporters of UN tax leadership have pointed to the OECD’s failure to meaningfully include most countries in its rulemaking process – a concern unlikely to be eased by news of the OECD lobbying its own member against introducing a key measure to fight corporate tax abuse.
— Tax Justice Network (@TaxJusticeNet) July 8, 2023
As economic historian Adam Tooze pointed out, the OECD strong-armed Australia's left-leaning government while being led by Mathias Cormann, a right-wing Australian who previously served as the country's finance minister.
On Saturday, Cormann said in a statement that "the OECD has a proud record of facilitating global cooperation on tax policy and administration, to help ensure globally effective measures to tackle multinational tax avoidance."
"Suggestions the OECD pressured Australia into weakening legislation to tackle such tax avoidance are false," he claimed.
Cobham criticized Cormann's response, pointing out that the OECD secretary-general goes on to admit that the body's experts "raised a number of technical issues," after which Australian lawmakers watered down their proposal.
According to Cobham, the "possible unintended consequences" brought up by OECD experts are "flat wrong." He added that "Cormann seems to have confessed that the OECD did lobby Australia to weaken their proposals to fight corporate tax abuse... and also that they used a false threat to do so—one which, as experts in their own standard, they surely knew was erroneous."
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