by Bruce Dunlavy
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The Framers of the Constitution left us considerable written evidence of their thoughts on the taxation of wealth. In his Farewell Address, George Washington reminded the country that although taxes are “more or less inconvenient and unpleasant,” they are necessary for obtaining revenue for services to benefit the public good. Thus, he advised, there should be “a spirit of acquiescence in the measures for obtaining revenue.” In other words, one should be willing to pay one’s fair share.
Thomas Jefferson wrote to James Madison in 1785, “The property of the country is absolutely concentred [sic] in a very few hands ….but the consequences of this enormous inequality producing so much misery to the bulk of mankind, legislators cannot invent too many devices for subdividing property.”
In more recent times, however, the idea of taxation as a means to ensure that those who benefit most from the protections of government pay proportionately more for those protections has been overthrown. Taxes on wealth have been attacked as destroyers of innovation and the incentive to succeed. Wealth taxes are considered confiscation of hard-earned and much-deserved rewards.
Taxes on inheritances, which even the wealthy Founding Fathers approved of as a means to prevent the accumulation of too much wealth in a few ultra-rich families, are now mischaracterized as “death taxes.” Just as a reminder – inheritance taxes are not a tax on death; they are a tax on wealth.
In the aforementioned letter to Madison, Jefferson advanced his belief in progressive taxation on inheritances: “Another means of silently lessening the inequality of property is to exempt all from taxation below a certain point, and to tax the higher portions or property in geometrical progression as they rise.” Mathematicians/statisticians will note that a geometrical progression is steeper than an arithmetic one.
The creators of the American nation grew up as subjects of the King of England, and they knew how the system worked in the Mother Country. Wealth was derived from property and property passed to eldest sons. Thus wealth, and the continued accumulation of wealth from the proceeds of existing wealth, remains in the hands of the few and the powerful.
The nation’s first attempt at an overarching legal framework, the Articles of Confederation, taxed wealth by continuing the practice of the colonies, which was to assess and tax real estate, as real estate was considered to be the easiest way to demonstrate wealth. The new States, however, undervalued their assessments to lessen their payments to the national government. Thus the Constitution, in Article I, Section 9, redefined methods of tax assessment to eliminate this. It required that Federal taxes be levied on States in direct proportion to their population, it being assumed that the most prosperous locations would find the most people settling there.
It was not until 1913, with the ratification of the Sixteenth Amendment, that the U.S. government was allowed to tax incomes. As Jefferson, Thomas Paine, and others had proposed in the 1780s, the income tax was intended to be a progressive one, with the lowest incomes exempt from taxation and the rate of assessment increasing as income increased. From 1917 to 1953, the highest marginal rate ranged from 72 to 78 percent. In 1953, with both houses of Congress as well as the presidency in Republican hands, the top rate increased to 91 percent. In 1961, the Democratic Congress and president lowered it to 70 percent, where it remained for 20 years. It has consistently declined since, to its current 37 percent, which is applied only to that part of adjusted income which is greater than $518,000 for a taxpayer filing singly or $622,050 for joint filers. You can read the full table here.
Then there are “capital gains.” What are capital gains? They are the proceeds from investments. For example, if you buy a million dollars worth of Amazon stock and sell it later for two million dollars, the million-dollar profit you made from doing nothing but holding stock certificates is capital gains. If you sell more than one year after you buy, the money thus made is “long-term” capital gains, which are taxed at a lower rate than money made from actually doing work. Currently, long-term capital gains taxes range from no tax at all on the first $39,375 for single filers (twice that for joint filers) up to 20 percent on gains over $434,500 ($488,850 if filing jointly). That portion in between is taxed at 15 percent.
Meanwhile, the inheritance tax has fluctuated wildly. As recently as 1997, there was a tax of 55 percent on the value of estates, with the first $675,000 exempted. By 2010, it was as low as zero, and currently it sits at 40 percent, with the first $11,580,000 untaxed. There are other provisions that lower the effective rate considerably. Less than one-tenth of one-percent of all estates from deaths in 2020 are expected to be subject to any tax at all.
Thus those Americans with income similar to or greater than President Trump’s have (you should pardon the expression) a wealth of options for minimizing their tax liability. But, one might ask, how can someone that rich pay no income tax at all, as it is reported the president did for ten of the last 15 years, or a measly $750 for two of the last three years?
The answer is in the Tax Code. The part of the United States Tax Code applying to income taxes is well over a thousand pages long, but only the first few pages define “income.” All the rest spin the vast and complex web of exemptions. There have been many over the last century. Recent “simplifications” have made them fewer, but a few key ones remain.
The one most valuable to the president and other real estate wheeler-dealers like him is contained in the portion of the law that permits property owners to deduct “depreciation” in the value of their properties. That is, the law assumes that properties decline in value through wear-and-tear or other diminishments.
Of course, anyone with a lick of sense knows that it would be unusual for any high-priced investment property to decline in value year after year. In fact, those properties generally increase in value, often by a lot. So who decides if there is depreciation and, if so, how much?
The answer – amazingly (unless you are a confirmed cynic) – is “The property owners do.” Thus the owner of a property bought for $500 million five years ago that would now sell for $600 million can self-assess its worth at $400 million (or, really, whatever they wish). The depreciation is counted as a tax loss against taxable income. By that means, big-time real estate empires can own billions of dollars worth of properties whose value is ever appreciating, but use the depreciation loophole on those same properties to avoid paying taxes on their other income.
Oh, and remember those capital gains from a few paragraphs ago? The law also allows real estate owners to avoid paying any capital gains taxes on the profit from properties they sell as long as they use those profits to buy more real estate. Thus Federal tax regulations enable and encourage – indeed, reward – the very rich for getting even richer.
President Trump and Congress enacted a tax reform law early in his term, and surprisingly it eliminated some of the dodges that corporations and rich families/individuals had used to avoid taxes. However, there is an exception in the law allowing one particular business to continue to use the old loopholes and thereby keep avoiding taxes. That business is (surprise!) real estate development.