ProPublica’s analysis of recently-revealed tax documents from the ultra-rich reveals that they pay almost nothing in taxes – completely legally – because the U.S. tax code primarily targets reported income rather than total wealth. Because the vast majority of the top earners’ fortunes are stored in stocks and other assets, their income tax ends up being tiny fraction of what they’re worth.
The average worker does not have this luxury.
Unfortunately, rather than rebalance the tax system in the average citizen’s favor, the North Carolina Senate’s proposed budget would make inequality worse. Senate Bill 105 would eliminate the corporate income tax (CIT) and lower the already flattened personal income tax (PIT), which is exactly the opposite of what needs to be done.
This inequality is not the result of an oft-exploited loophole – it is built directly into the tax code. From the beginning, rich interests lobbied hard to keep their wealth from being taxed in the same way as earned income, allowing them to shift much of the tax burden onto everyday workers.
Today, the U.S.’s definition of earned income only includes the value of stocks, property, and other assets if the owner decides to sell and collect a paycheck for them. If not, those assets are ignored. In the United States, the vast majority of wealth owned by the top 1 percent is in the form of these so-called unrealized gains, with only a small percentage of their net worth in the form of a reportable income. CEOs like Jeff Bezos, for example, have yearly wages set as low as $80,000, yet are worth billions of dollars.
The majority of Americans, however, do not hold treasure troves of untaxed wealth in the same way. Many people live paycheck to paycheck, their wages going straight to paying for necessities, not to buying up real estate. Additionally, most Americans do not own extensive stock portfolios that exist to buoy their personal wealth while shrinking their tax burden. In fact, the bottom 50 percent of the wealth index own less than 1 percent of all corporate equity and mutual fund shares in the United States.
Now some leaders in the General Assembly want to let billionaires amass even more wealth.
The state Senate recently revealed its version of the biennial budget, which would eliminate the North Carolina corporate income tax by 2028 and further reduce the personal income tax rate. Unfortunately, these tax cuts would provide little benefit for the least well-off, those who need financial support coming out of the pandemic the most. The Institute on Taxation and Economic Policy (ITEP) found that the benefits of eliminating the CIT are heavily concentrated at the top, with more than 70 percent going toward people in the top 20 percent of the income bracket once the CIT reaches zero in 2028. The resulting potential rise in stock value and profit margins would go straight into the pockets of the wealthy owners and shareholders, not the low-wage workers, and would increase the kind of inequity outlined in ProPublica’s findings.
Lowering the PIT would also disproportionately benefit the rich. ITEP calculated that the poorest 20 percent of the state’s taxpayers would end up seeing a shocking zero percent of the benefit, once the changes are fully phased in. On the other hand, nearly three-quarters of the PIT reduction would benefit the richest 20 percent of income earners. The wealthiest group, the top 1 percent, would see their tax bill plummet by almost $16,000 – the very same people who hold the majority of their wealth in forms besides their incomes and who would least benefit from another tax break.
Despite any promises to the contrary, the choice of lawmakers to make these tax changes will harm the people of our state. In the first year, this budget is projected to reduce operating funds by $680 million, and would jump to nearly $5 billion by 2026 when more of the tax cuts take effect. The full elimination of the CIT is not scheduled to take place until 2028, so the full cost of this budget is almost certain to surpass $5 billion per year. These dramatic losses would compound inequality by undermining the state’s ability to invest in the things that support the well-being of its people and its economy.
The news about the ultra-rich and their taxes – or lack thereof – reveals a critical failing of the U.S. tax code to capture a person’s true wealth and ensure that they contribute their fair share. Instead of responding to these problems effectively, SB 105 worsens the inequality between the wealthiest few and the majority of North Carolinians with tax cuts that benefit the rich at the expense of everyone else.
Emma Cohn is an intern with the Budget & Tax Center, a project of the NC Justice Center.