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I recently overheard an interesting dinner conversation. A woman and her partner, who runs his own private equity fund, and who live in different cities, were discussing the time they spent commuting to see each other. She lives in New York; he’s in a southern city for business. When he expressed how much fun he was having at their Manhattan pied-à-terre, I suggested they simply buy a bigger place and live together full time in New York. His response: “Oh, I couldn’t do that. I’d be paying a much higher tax rate.”
Call me a hopeless romantic, but I was both depressed and outraged by this sentiment. The idea that an ultra-high-net-worth individual (or any individual) would prioritise tax rates over personal considerations like where to live with a partner makes me sad. But it’s certainly not the first time I’ve heard about such extreme tax “optimisation” among the American elite.
I was once at a party in the Hamptons where a very wealthy Democratic donor mentioned to me that he covers healthcare and educational expenses for his children and even grandchildren, because it’s tax deductible for him to do so (such payments are excluded from federal gift taxes). “Really?” I asked. “You’d rather infantilise your adult kids than pay more money to the government?” (and this was the Biden government, his own). He looked at me incredulously: “Well, it wouldn’t be good tax planning to do anything else.”
The idea that taxes are something we should spend inordinate amounts of time, money and emotional resources avoiding is quite commonplace among wealthy Americans. The whole US tax code, which runs to nearly 7,000 pages for federal statutes alone (it’s 70,000 if you count all the bells and whistles), is a nest of loopholes designed to be exploited by rich people with good lawyers. Companies and wealthy individuals have lobbied for it to be so, and fight tooth and nail not to pay an extra cent to the government.
The current president is the ultimate tax avoider. During the 2016 debate, when his opponent Hillary Clinton suggested that he may have paid no federal income tax, Donald Trump replied “that makes me smart”. Last week, in exchange for halting his $10bn lawsuit against the Internal Revenue Service, Trump, his eldest sons and the Trump Organization cut a deal with the Department of Justice that gives them immunity from any existing claims or audits. Talk about kissing the ring.
The larger point here is that Trump is just a lagging indicator. Too many Americans have come to see taxes as simply a burden, rather than a responsibility — the price we pay to live in a republic with rule of law, including courts that protect our wealth and property, public schools that educate our citizenry, roads to drive on and a police force that makes sure we get home alive rather than being attacked in the streets and held to ransom by bandits.
As former US Supreme Court Justice Oliver Wendell Holmes famously put it, in a quote now carved above an entrance to the IRS building in Washington, “Taxes are what we pay for civilized society.”
But are we still living in one here in America? Sometimes it doesn’t feel like it. The tech bros who built their fortunes off the back of government-funded infrastructure like, for example, the internet, are complaining about the state of Washington’s 10 per cent tax on those who make more than a million dollars a year, and even California’s billionaire tax, which would hit only the wealthiest 200 or so individuals in the state. Wall Streeters like Dan Loeb complain that New York Mayor Zohran Mamdani is “stirring up class warfare” because he wants to put a tiered surcharge on second homes worth more than $5mn to help balance the city budget. The myopia is breathtaking to normal people.
How did we get here? Essentially, since the 1980s, Republicans have cut taxes on the rich and on corporations. The deficit has exploded as a result. Businesses and rich people, having pocketed the tax cuts (which increasingly go into the markets in a cycle of buying and selling existing assets rather than into the real economy), then complain about the deficit. Worried about supposedly unsustainable government spending, they demand cuts to entitlements like social security and Medicare and say there is no money for infrastructure, education or healthcare. This is particularly nauseating, given how much richer the US is than European nations that have universal healthcare.
Democrats respond by defending these core entitlements, while otherwise being forced to embrace fiscal austerity. This understandably doesn’t result in growth. Some disappointed Democrats then vote for Republicans (even charlatans like Trump) who promise growth, and the cycle repeats. Each time, the top of the income scale pays less in taxes, particularly on the returns to capital, the debt grows and the investment gap widens.
What might change things? The rich, and even the upper middle classes, aren’t inclined to fix things, whether they vote Republican or Democrat. We most likely need a political coalition between the poor and the working middle class to overhaul the system (something that a new generation of progressives is promising). Yes, the rich will have to pay a bit more. But if we don’t end tax-cut fetishism, the ultimate cost may be the republic itself.
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