Introduction

The recent study alleging that 26 billionaires paid far below 5% in taxes is a prime example of misleading journalistic practice. The narrative, while sensational, overlooks critical details that fundamentally change the story. Understanding these nuances is crucial for a fair and accurate representation of tax policies and the financial landscape of the ultra-wealthy.

Unrealized Capital Gains and Their Impact

The study assumes that "unrealized capital gains" count as income, a common misconception among less financially literate readers and writers. Unrealized gains are simply the paper profit on investments or assets that have not yet been sold. In simpler terms, these gains have not been realized, meaning the taxpayer has not yet received cash or other valuable consideration in exchange for the investment. The logic here implies that the value of an asset on paper should automatically be taxed, regardless of whether it translates into cash. This is fundamentally flawed because, as shown in the example of the 50 wealthiest Americans seeing half a trillion in unrealized capital gains disappear, these gains are speculative and may never materialize.

The Reality of Taxes and Unrealized Gains

Once the gain is realized (i.e., the asset is sold and the sale price is lower than the purchase price), the tax is paid on the difference at the allowed highest rate. Currently, the highest federal capital gains tax rate is 20% for individuals in the highest income bracket. Therefore, even if a billionaire experiences unrealized gains, the tax responsibility only kicks in upon realization.

Taxing Real Income: The Importance of Asset Appreciation

It is essential to differentiate between income and asset appreciation. Income, as per tax law, is defined as the money, property, or other economic benefit that a person receives. Conversely, asset appreciation is the increase in value of an asset. For instance, the increase in the value of a person's home may not be immediately taxable unless the asset is sold, at which point the gain is realized.

Case Studies in Reality

Consider an example where a person is living solely off Social Security benefits. Their home may appreciate in value, but this appreciation does not become taxable income until they sell the home. Similarly, middle-wage earners should not be subjected to increased tax burdens simply because their investments have appreciated on paper.

Debunking the Misnomer of “Deceptive Equivalence”

The article attempts to draw a comparison between the growth in property assets and actual income, a manipulation that discredits the argument. It is highly disingenuous to use paper gains for tax purposes, especially when these gains are not actual income. The Insider article is guilty of such deceptive equivalence, which is not only imprecise but also potentially deceitful.

Implications for Tax Policy and Public Perception

Such misleading stories present a skewed view of the tax landscape and contribute to public dissatisfaction with tax laws. They may foster beliefs that the wealthy pay little in taxes, when in reality, they are subject to the highest rates once their gains are realized. This misrepresentation can lead to calls for greater scrutiny and potential changes in tax policy, which may not always be justified.

Conclusion

It is essential to scrutinize and understand the nuances of tax policies, especially when dealing with the ultra-wealthy. Unrealized capital gains should not be included in the calculation of tax liability unless they are realized. Similarly, asset appreciation should be interpreted and taxed only when it translates into actual income, protecting both the individuals and the integrity of the tax system. The current narrative may be as “deceptive as the ‘Attack of the Killer Tomatoes’,” as the author suggests, and misleading stories about the tax practices of billionaires should be approached with skepticism.