It would only be fair to state that the trio of Bill Gates, Mark Zuckerberg and Jeff Bezos would be consternated with the facts contained within the confines of “Tax The Rich”, and for obvious reasons. A cross between a polemic and a plea, Morris Pearl and Erica Payne’s work is more a manifesto for income and wealth redistribution rather than a book simpliciter. Coupled with the fact that one of the authors of the book, Morris Pearl is a multimillionaire himself, some of the radical proposals promulgated represents a war on the rich, by the rich! The authors begin the book on an ominous note by paraphrasing the words of fellow millionaire Nick Hanauer, “the pitchforks are coming… for us Plutocrats.” And for good measure, Morris and Payne add their own chillingly dystopian footnote to Hanauer’ s bleak prescience, “he got it mostly right. But it won’t be pitchforks. US civilians own more than 393 million guns, 120 guns for every one hundred residents. I want to ask my fellow millionaires, do you really think you can protect yourself from mobs of angry, hungry people?”
Pearl and Payne reserve their choicest scorn for Zuckerberg, Bezos and Gates – the ‘Three Amigos’ as they are referred to in the book. Arguing that the Byzantine labyrinth of rules contained within a convoluted Tax Code that offer more loopholes for the rich than for the common working man, the authors proceed to illustrate with a blend of acerbic wit and stark vitriol, the various schemes prevalent in the American Tax Code and the recently enacted Tax Cuts and Jobs Act, that acts as an “enabler” to devious profit shifting and tax evasion measures. They discuss the advantages enjoyed by wealthy investors enjoying capital gains exemptions and tax free inheritance freebies by providing simple examples involving two pairs of couples. Doug and Carrie Werkhardt (the last name being a clever take on the words “work hard”) are ordinary people making a decent living by slogging their butts out, whereas Ronald and Melanie Slump (no explanations required), sip daiquiri on the beach and just make money by selling stocks and shares. By a convoluted working of the tax laws, the taxes which the Werkhardt’ s pay far exceeds those paid by the Slumps.
The authors provide a lucid explanation of various measures currently prevalent in the Tax Code that enable rampant accumulation of wealth at the highest levels of affluence, such as:
- The Carried-interest loophole that allows fund managers to mischaracterize their ordinary income as capital gains tax, by pretending they are partners with their wealthy investors;
- “The two and twenty” strategy exploited by private equity and hedge funds. The managers of these funds are paid 2% of the total value of the assets managed annually in addition to 20% of the fund’s profits above a certain threshold. The latter component of the remuneration is treated as capital gains since the funds “partner” with the investors;
- A total absence of intergenerational wealth transfer tax that ensures that the first US$11.58 million of an estate is exempt from estate tax. This is a travesty, according to the authors, especially considering the fact that between 35% to 45% of all wealth in America is inherited;
- Deferred Capital Gains Taxation benefits that ensure that taxes are paid only when the underlying assets are sold, and not when the value of such assets increase. Hence by choosing not to “sell” the assets forever, one need not pay any tax since there is no “realised gain”;
- The “stepped-up basis” rule that insulates inherited wealth from being taxed. Instead of the basis being the value of a stock at the time the original transferor bought it, let’s say $10 million, the basis is adjusted to the value of the stock at the time of the transferor’s death, when it is transferred to the heirs. If the value of the stock at the time of such transfer is $100 million, this becomes the “stepped up” basis, and the heirs would need to pay capital gains tax on any value exceeding the $100 million upon sale of the inherited wealth;
After dwelling a wee bit more on extraordinarily convoluted and complex tax avoidance schemes such as the Double Irish Dutch Sandwich structures embraced by various multinational corporations to avail of the minimum tax rates offered by the Irish Tax regime (at the time of this review the scheme has been terminated), and stock options offered by companies such as Facebook to its employees so that they can treat the difference between the purchase price and the exercise price as expenses in their books, the authors propose some radical measures to tax the rich:
- Equalize Capital Gains and Ordinary Income Tax rates for incomes over $1 million;
- “End The Bracket Racket”. This proposal envisages increasing the marginal rates of tax on a progressive basis depending upon the income generated by the target taxpayers. The riveting debate between Michael Dell, the founder of Dell Computers and Dutch Historian Rutger Bergman, at the 2019 World Economic Forum in Davos is referenced by the authors here. Bergman took on Dell in arguing that the marginal rates of tax for the uber rich should be increased to 70%;
- Quite a bit of attention has been devoted to the Elizabeth Warren and Bernie Sanders‘ Wealth Tax proposals. During the recent presidential campaigns both Warren and Sanders proposed their own models of a progressive wealth tax regime to tax the rich. While Warren’s “Ultra Millionaire Tax” was expected to garner $2.75 trillion over a decade, Sanders’ “tax on Extreme Wealth”, was estimated to add $4.35 trillion over a decade to the Government coffers;
- Ban the deferred taxation scheme by switching to a “mark-to-market” system, where affluent investors are taxed every single year on the increased value of the assets they own, thereby foisting on them a periodic/annual tax bill just like any other ordinary taxpayer;
- The authors also in a very incendiary heading titled “Vote the bastards out, the authors argue that intransigent and corrupt politicians who refuse to take a more nuanced approach to taxing the rich ought to be booted out by the voters.
Controversial, yet thought provoking. “Tax The Rich” instigates a fertile ground for debates, discussions and deliberations on one of the most topical and pernicious aspects of our time. However, where the book disappoints is, in reducing an otherwise essential and relevant discourse to a personal harangue. Whether it be talking about Steven Schwarzman, Sheryl Sandberg, Eli Broad or Sheldon Adelson, the tone employed is accusatory. This could have been avoided.
“Tax The Rich” – Invigorating food for thought.
(Tax The Rich: How Lies, Loopholes, and Lobbyists Make the Rich Even Richer ” by Morris Pearl & Erica Payne is published by The New Press and will be released on the 13th of April 2021)