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Richest Americans pay almost no income taxes, report finds

A report from ProPublica illustrated how wealthy people in the U.S. are able to avoid income taxes by keeping the bulk of their wealth in investments that have little or no taxes.
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The 25 richest Americans paid little to no federal income taxes, according to a report released Tuesday by the nonprofit news organization ProPublica, a claim that has reignited debate about the tax code and sparked an investigation by the IRS into the leak of private tax documents.

NBC News has not independently verified the documents, and ProPublica declined to disclose how it had gained access to what it called a "vast trove of Internal Revenue Service data on the tax returns of thousands of the nation's wealthiest people, covering more than 15 years."

The report does not detail any illegality by the people whose tax documents it reviewed, who include many of the richest people in the U.S., such as Jeff Bezos and Elon Musk. The White House is pushing a plan that would tax capital gains as income for those making over $1 million annually.

IRS Commissioner Charles Rettig said in a previously scheduled hearing Wednesday morning before the Senate Finance Committee that the agency is looking into the leak of the documents.

"I can confirm that there is an investigation with respect to the allegations that the source of the information from that article came from the Internal Revenue Service," he said. "Upon reviewing the article, the appropriate contacts were made and the investigators will investigate."

The chairman of the committee, Ron Wyden, D-Ore., seized on the revelations to underscore his point, now echoed by the Biden administration, that the richest people use tactics that most Americans do not.

"The IRS has a responsibility to protect taxpayer data, and you've confirmed that this matter is being investigated," Wyden said.

"The big picture is that this data shows that the country's wealthiest, who profited immensely during the pandemic, have not been paying their fair share," he added.

The article illustrates the vast differences between how the extremely wealthy pay taxes compared to most wage-earning Americans and how they do so using a simple three-pronged approach known in tax circles as "buy, borrow, die."

The strategy focuses on making money off investments and capital, which are taxed only when the assets are sold, known as "realization" or a "realized gain." Typically, investors pay a drastically lower effective tax rate compared to people who make a similar amount in wages.

Lilian Faulhaber, a tax law professor at Georgetown University, said the current tax code offers benefits for those who grow their wealth primarily through investments and consequently pay little income tax.

"But when you look at inequality in our society, it has real consequences," she said.

Samuel Brunson, a tax law professor at Loyola University of Chicago, said it is unlikely that the wealthy will pay more taxes if the current system is preserved.

"Because of the realization requirement, as long as wealthy people hold onto their assets, they're not going to be paying taxes on their increase in wealth," he said in an email. "Like the article says, it goes back about a century. It's not completely clear whether the realization requirement is a constitutional requirement, but it's what we have. As long as they don't sell their appreciating assets, they won't pay taxes on the gains."

The article focuses on a handful of people, including Bezos, the CEO of Amazon. ProPublica said it examined Bezos' tax records from 2006 to 2018.

"Bezos' wealth increased by $127 billion, according to Forbes, but he reported a total of $6.5 billion in income," the article says. "The $1.4 billion he paid in personal federal taxes is a massive number — yet it amounts to a 1.1% true tax rate on the rise in his fortune."

The Tax Foundation, an independent tax policy nonprofit, found that the average individual income tax rate is 14.6 percent.

A representative for Bezos did not respond to a request for comment.

However, the mega-wealthy also use a second strategy: borrowing money at a "single-interest rate and no tax," ProPublica reported.

For example, Carl Icahn, whom Forbes lists as the 40th-wealthiest American, has an outstanding $1.2 billion loan with Bank of America, according to ProPublica. That means he is able to "turbocharge his investment returns" and then "gets to deduct the interest from his taxes."

When asked whether it was appropriate that he should pay no income tax at all — as he did in 2016 and 2017 — Icahn objected.

"Do you think a rich person should pay taxes no matter what? I don't think it's germane," he told ProPublica. "How can you ask me that question?"

ProPublica also detailed the last part of the "buy, hold, die" strategy — vast sums of wealth that can be passed, largely tax-free, from one generation to the next.

In tax circles, that is what is known as the "step-up in basis." Investments and assets that are passed on to a person's heirs are not subject to any capital gains taxes if they are sold as soon as they are received.

Eliminating the "step-up basis" rule, or, as President Joe Biden has called it, the "trust fund loophole," could be one way to raise federal tax revenue to pay for many of the sweeping social programs he would like to enact.

"We need to make a choice to eliminate the loophole," Biden said last month. If "a person passes away and leaves stock to their son or daughter, [they] don't have to pay anything on that multimillion-dollar gain when they sell that stock."