Senators Debate Tax Avoidance Methods Used by Ultra-Wealthy

What You Need to Know

Democrats on the Senate Finance Committee focused on exposing oft-used pathways to not paying taxes.
Although committee Republicans offered a different perspective, all agreed that the tax code’s complexity is a big problem.
They also agreed that the tax-mitigation techniques bemoaned by Democrats are legal and therefore a legislative issue.

The Senate Finance Committee held a hearing Thursday to examine and decry what committee chairman Sen. Ron Wyden, D-Ore., called “all the schemes the ultra-wealthy rely on to legally get away without paying their fair share in taxes.”

During the hearing, Wyden and several Democratic colleagues specifically called for ending the tax avoidance pathway sometimes referred to as “buy, borrow and die.”

More broadly, they also argued that the federal government should take significant and immediate steps to make the tax treatment of investment earnings, capital gains and other forms of wealth more similar to that of normal earned income.

According to the committee Democrats, such steps would simultaneously improve the average Americans’ perception of the fairness of the tax system while also raising significant amounts of new revenues that could help offset the fast-growing federal budget deficit.

While the hearing did not grow contentious or even overtly partisan, Republican committee members, led by ranking member Mike Crapo, R-Idaho, sought to paint the current tax code as being more progressive and balanced than the committee’s Democrats would admit.

To that end, they cited data showing that wealthy Americans already pay the lion’s share of federal income taxes on an absolute dollar basis, even if the average percentage of taxation on their overall earnings in any given year may be lower compared with less-wealthy Americans who depend more on work income.

The hearing also included the testimony of four expert witnesses, including Chye-Ching Huang, executive director of the Tax Law Center at NYU Law; Morris Pearl, chair of Patriotic Millionaires and a former BlackRock managing director; William McBride, vice president of federal tax policy at the Tax Foundation; and Douglas Holtz-Eakin, president of the American Action Forum.

One point the senators and witnesses agreed on is that the current tax code, which runs to more than 4 million words, practically invites abuse of its many seeming contradictions and grey areas.

They also agreed that many of the tax-mitigation techniques bemoaned by the committee’s Democrats are perfectly legal — meaning the consideration of such issues is a legislative matter and one that the current Congress will continue to debate in the years ahead.

The Democratic Case

The Senate Finance Committee’s Democrats and several witnesses offered testimony about a range of tax-mitigation strategies that they see as problematic and as unfairly favoring the wealthy, The main thrust of their argument, as noted, is that the tax code should be changed to treat earnings on wealth the same way it treats earnings from work.

Simply put, the Democrats argued, there are many potential pathways for earnings derived from investments, real estate and privately held businesses to be structured so as to avoid much, if not all, taxation.

There is no analog for this flexibly when it comes to normal working income, they argued, meaning that the average American whose wealth is derived primarily from work is at a significant disadvantage.

“The ultra-wealthy are abusing this difference to shield their vast fortunes from federal taxes,” Wyden argued. “It’s time to change the code so that we collect the fair share from those at the top, and we should use the money to help families — for example to help people get a jumpstart on child savings accounts.”

In addition to improving Americans’ perception of the fairness of the tax system, Wyden and other speakers suggested, the collection of additional taxes on investment income and the value of privately held businesses and other wealth assets could help to put key programs like Social Security and Medicare on a more solid financial footing.

Republican Counterpoints

Though careful to maintain a congenial tone during the hearing, Crapo also pushed back against many of the assertions leveled by the committee’s Democrats and their preferred witnesses.