Why aren't Multi-Billionaires Taxed for Social Security?

Maybe it's because billionaires don't need Social Security benefits when they retire (or become disabled). But we can also assume that they made (or inherited*) their billions from consumers and employees (workers) who will eventually need these benefits at some point in their life. So should billionaires, who are exempt from paying Social Security taxes on their "investment income" (aka "unearned income"), be made to contribute more to the Social Security Trust Fund? (* Forbes: "Over 20% — including many Walton family members — inherited enough wealth to place them on the Forbes 400 list with their inheritance alone. It's like they were born on home plate!")

Speaking of which, is it really "investment" income, or is it just "unearned" income?

A recent article about Carl Ichan — "Could a four-year-old do what Carl Icahn does?" — is an interesting piece about the corporate raider who uses vulture capitalism to rake in over a billion dollars a year. This is the guy who sent Apple’s CEO Tim Cook a letter urging him to “meaningfully accelerate and increase the magnitude of share repurchases” — meaning, using “stock buy-backs” to increase the stock value of the remaining outstanding company shares.

Besides greatly benefiting major stockholders like Carl Ichan, this strategy also bodes well for company execs (such as CEOs like Tim Cook) who holds millions of dollars in stock-option grants as "pay for performance". Once vested, after an option is realized after one year, they can cash out with millions and pay a capital gains tax rate of 23.8% — whereas, the top marginal tax rate for regular wages over $406,750 is 39.6% --- not to mention, there is no Social Security taxes paid on any earnings from capital gains if that is someone's only income. (More on this in the notes at the end of this post.)

That’s why Warren Buffett says he pays a lower tax rate than his secretary. Not only does she pay a higher tax rate, but she also pays Social Security taxes* on the first $117,000 of her wages.

* Most employers in the U.S. (working on behalf of the IRS) deduct payroll taxes from their employees' paychecks, and are most commonly for federal income taxes and FICA (Social Security and Medicare). Sometimes employers might also deduct for state, county and city taxes as well (depending on where a person lives and works). Employees defined as "independent contractors" are responsible for paying their own taxes and pay the tax rates for "self-employed" workers. Note: 95% of ALL wage earners pays the Social Security tax on 100% of their wages; whereas billionaires like Warren Buffett and Carl Icahn (whose only income might be from capital gains) would pay ZERO in Social Security taxes — unless they also paid themselves a "base wage" or an annual salary; in which case, if they paid themselves only one dollar, they might only have to pay about 3 cents in Social Security taxes on that one dollar in regular wages — because "investment income or "unearned income" is exempt from Social Security taxes. (More on this in the notes at the end of this post.)

Regarding Justin Fox’s article at the Harvard Business Review, he writes:

Carl Icahn’s game plan looks something like this:

• Buy stock in a company.
• Write a letter to the company’s board demanding that it do something different from what it’s doing (buy back shares, break up, sell out to another company, throw out the CEO).
• Wait a while. If necessary, write another letter, or a few tweets. Go on TV.
• Sell stock in the company.

Carl Icahn’s campaign to get eBay to spin off PayPal succeeded last month. Then their CEO quit the board. Ichan reportedly took home compensation of $1.7 billion in 2013, making him the fifth highest-paid fund manager in the land. In 2012 it was $1.9 billion, putting him in second place. In 2011 it was $2 billion, good for third place. In 2010 it was $900 million — seventh place. In 2009 it was $1.3 billion, which tied him for sixth.

I'm always interested in Carl Ichan. I used to work at the Stratosphere Hotel and Casino in Las Vegas when he once owned it (that was before he later fired a top exec for embezzlement). He has since sold the hotel/casino to Goldman Sachs, who has since fired a few more employees (Job terminations are always a by-product of vulture capitalism creative destruction).

From the IRS data for "Individual Income Tax Returns, Preliminary Data 2012" (2013 is not yet not available. If you find it, please leave a comment.) Tax Year 2012: "Taxpayers filed 144.9 million U.S. individual income tax returns, a decrease of 0.4 percent from the 145.6 million returns filed for Tax Year 2011. This decrease occurred because of the large decline in returns filed by taxpayers in the smaller adjusted gross income (AGI) classifications. The largest decrease (3.9 percent) was a 1.5 million change in the number of returns with an AGI of under $15,000. (Maybe raising the minimum wage and reshoring jobs from Asia could help rectify this tragedy.)

But the news for top income earners was much better. According to the IRS, in 2012: "Net capital gains showed the largest increase, rising 60.4 percent from $310.9 billion in 2011 to $498.7 billion in 2012" — and no Social Security taxes were paid on this income. Assuming gains like this were also realized in 2013, then over those 2 years alone close to $1 trillion in realized capital gains was not taxed for Social Security.

And according to Bloomberg, the $498.7 billion in capital gains in 2012 were concentrated among the highest-earning U.S. households. Taxpayers with more than $250,000* in adjusted gross income received 83 percent of the net capital gains. This is because, most capital gains are earned from holding and selling stock; but it's also earned from the sell of "assets", such beachfront mansions, fine art, wine collections, precious stones, gold, silver (etc.) — aka SWAG investments. (* Less than 1% of all wage earners made more than $250,000. For more detailed wage data, see this recent post: Graphing American Wage Statistics is Not a Pretty Picture)

During 2012, long-term capital gains and qualified dividends were subject to a top rate of 15 percent. Starting in 2013, the top rate was 23.8 percent, because of the expiration of some of President George W. Bush’s tax cuts and an investment tax in President Obama’s 2010 health care law.

A short history of the current capital gains tax rate: Capital gains were taxed at 28% before Bill Clinton lowered them to 20%. Then George W. Bush lowered them again to 15%. By law, this tax cut was set to expire at the end of 2010 — but Obama extended this tax cut for 2 more years in a compromise with the GOP in exchange for also extending payroll tax cuts for regular wage earners and for extending federal unemployment benefits for the long-term jobless. This tax cut finally expired at the end of 2012, and went back to 20% with a 3.8% surtax added under Obamacare to expand Medicare. This 3.8% tax on capital gains for the rich is the GOP's biggest of all reasons for wanting to repeal Obamacare — while at the same time, denying health care for the poor and working-class. (Historically, the maximum capital gains tax rate was once close to 40% in 1978.)

According to Forbes, for 2012 the top 5 hedge fund mangers had personal earnings of $1 billion or more. And those who have their own capital invested (and not just managing other people's money and collecting a management and/or a performance-based fee) earned this with realized capital gains, and subjected to one of the lowest tax rates when compared to "marginal tax rates" for wage earners.

1 - David Tepper $2.2 billion - Appaloosa Management
2 - Carl Icahn $1.9 billion - Icahn Capital
3 - Steve Cohen $1.3 billion - SAC Capital Advisors
3 - James Simons $1.3 billion - Renaissance Technologies Corp.
5 - George Soros $1.1 billion - Soros Fund Management LLC

And many of these hedge fund managers (like Robert Mercer, Paul Singer and Julian Robertson) are giving tons of money to "buddy groups" to rig our elections with dark money to get preferential legislation enacted — such as lower (or zero) capital gains taxes. (A new analysis from Public Citizen shows the biggest “dark money” spender is none other than the US Chamber of Commerce, a mega-lobbying group representing all sorts of big corporations and are constantly lobbying for lower tax rates.)

And if multibillion-dollar hedge funds and other big-money corporations had less than 500 employees, should they also be considered a "small business" (and get an additional tax break) based on their number of employees rather than on their revenues? The GOP thinks so. From Bloomberg:

"A Republican proposal to give small businesses an extra 20 percent tax deduction may yield cuts for some multibillion-dollar hedge funds, law firms and other enterprises that create significant profits with few employees. Republicans hope to release details of the bill during the week of March 19 [2012], said Laena Fallon, a spokeswoman for Representative Eric Cantor, the House majority leader. Cantor told House members in a memo last month his plan would let every business with fewer than 500 employees deduct 20 percent of its profits."

VOX: Exploding Wealth Inequality in the United States (October 28, 2014 by Emmanuel Saez and Gabriel Zucman):

"Current preferential tax rates on capital income compared to wage income are hard to defend in light of the rise of wealth inequality and the very high savings rate of the wealthy. Second, estate taxation is the most direct tool to prevent self-made fortunes from becoming inherited wealth – the least justifiable form of inequality in the American meritocratic ideal. Progressive estate and income taxation were the key tools that reduced the concentration of wealth after the Great Depression. The same proven tools are needed again today."

Full Disclosure: There were 2.4 million LESS individual federal tax returns filed in 2013 than there were in 2012. I was one of those that didn't need to file a tax return that year (or the year before in 2012, or the year before that in 2011). I last filed a federal tax return for 2010 when I was jobless and only had unemployment compensation for that year — but even then, I still owed a little over $135 in federal taxes. Before 2010, I had filed a tax return every year for the previous 35 years.

Political Commentary:

In addition to taxing capital gains for Social Security, all capital gains should be taxed as regular wages based on the current progressive tax rates. This would GREATLY help pay down the government debt and shore up the Social Security Trust Fund (of which 95% of all wage earners will eventually rely on). The first big hurtle to getting this tax reform passed is getting voters to vote in their own best economic interests by voting for progressive Democrats — those who would actually reform the tax code and strengthen Social Security (see below).

• “Social Security 2100 Act,” legislation introduced on July 31, 2014 by Representative John Larson (PDF version)
• "Keeping Our Social Security Promises Act," legislation introduced as S. 500 (113th Congress) on March 7, 2013 by Senator Bernie Sanders (PDF version)
• "Strengthening Social Security Act of 2013," legislation introduced on March 14, 2013 by Senator Tom Harkin (PDF version)
• "Rebuild America Act," legislation introduced on March 29, 2012 by Senator Tom Harkin (PDF version)
• "Middle Class Tax Relief and Job Creation Act of 2012" as specified in the conference report on H.R. 3630 (H. Rep. 112-399), requested by Representative Xavier Becerra (PDF version)
• "Keeping Our Social Security Promises Act," Requested by Senator Bernie Sanders (PDF version)

The next biggest hurtle would be electing a president that would sign this tax reform into law — because multimillionaires like Mitt Romney or Hillary Clinton (like foxes guarding the hen house) might veto such legislation; whereas someone like Senators Elizabeth Warren or Bernie Sanders (if elected as President) would pass this legislation. Of course, once again that brings us to what any politician will "say" before they're elected as opposed what they would "do" after they're elected. But either way, so long as the U.S. Supreme Court keeps upholding voter suppression laws, we shouldn't expect too much change. New voting restrictions could swing the 2014 election. (How many Veterans who fought and bled in wars for these rights might now be denied these rights? The GOP "claims" they support our troops, but do they really?)

Notes:

* Charles Schwab — (re: long-term capital gains and qualified dividends) "A top rate of 15% applies to qualified dividends and the sale of most appreciated assets held over one year (28% for collectibles and 25% for depreciation recapture) for single filers with taxable income up to $406,750 ($457,600 for married filing jointly). Long-term capital gains or qualified dividend income over that threshold are now taxed at a rate of 20%" [with a surtax of 3.8% for Medicare].

** Long-term and short-term capital gains: Any capital gain (or loss) is the difference between the cost of purchase and the amount of sell of an asset (Source: IRS). When someone sells a capital asset (such as stocks, which again, hit another all-time record high today) they’ll end up with capital gain if the amount they receive from the sale is more than what was paid for the asset. If an asset is sold after being held for one year or less, any gain is considered a short term capital gain and is added to their annual income and taxed at the same rate they’d pay on regular income (depending on their adjusted gross income and the regular marginal tax rates in the chart below).

2014 Taxable Income Brackets and Rates for Single Filers  (Unearned Income vs. Earned Income)
Rate	Income Bracket	Notes
10%	$0 to $9,075	Includes those drawing an unemployment check (Source: IRS)
15%	$9,076 to $36,900	Includes Social Security and disability benefits if income is over $25,000 (Source: IRS). Note: 50% of all wage earners take home $28,031 or LESS. Workers in this income bracket pays Social Security taxes on 100% of their income.
23.8%	On realized long-term capital gains held at least one year, which represents the vast bulk of most income earned by most multi-billionaires.	Unearned Income: No Social Security taxes are paid on capital gains. (Certain provisions may apply to employee stock options, but only up to the "cap" according to their adjusted gross income.)
25%	$36,901 to $89,350	Workers in this income bracket pays Social Security taxes on 100% of their income.
28%	$89,351 to $186,350	Social Security taxes are capped at $117,000 (for 2014). Congressional salaries are $174,000 a year, so they also enjoy this "cap".
33%	$186,351 to $405,100	This is about what a small business owner or a neurosurgeon might average in annual earnings.
35%	$405,101 to 406,750	This is about what some trial lawyers, the lesser-paid D.C. lobbyists and a few corporate tax attorneys might earn.
39.6%	$406,751+	Regular wages in this income category might be the better paid Washington lobbyists, and represent the base salaries for CEOs of large corporations — but represents a lesser part of their total annual salaries if they also receive stock-option grants, which are driven in part by higher stock prices, helped by low "effective" corporate tax rates (if they pay any corporate taxes at all) and stock buybacks.

*** SSA — Social Security's Old-Age, Survivors, and Disability Insurance (OASDI) program and Medicare's Hospital Insurance (HI) program are financed primarily by employment taxes. The tax rate for self-employed workers is 15.3% (12.4% Social Security and 2.9% Medicare). That's for those who pay themselves a "wage". The Medicare tax of 3.8% applies to net investment income (which may include capital gains regardless of holding period as well as certain dividends) as part of the Patient Protection and Affordable Care Act (aka Obamacare) that was enacted March 23, 2010 — but didn't go into effect until 2013.

**** Bank Rate — Employee stock options that have appreciated is considered additional salary and would be included in your wages, subject to Social Security, Medicare and federal and state income tax withholding. Of course, any appreciation in sold stock options that, when combined with your salary, exceeds [the current "cap"] would not be subject to Social Security tax.

Related Posts:

• A Must Read: Understanding the CEO Pay Debate (Roosevelt Institute, October 23, 2014)
• CNBC: 400 richest Americans now worth $2 trillion
• Forbes: Inside The 2013 Forbes 400: Facts And Figures On America's Richest
• Forbes: They're Back! … And Rich as They Ever Were

***** I posted a different version of this article at the Economic Populist, titled: Should Billionaires be Taxed for Social Security?