On this episode of the Campbell Conversations, Grant Reeher speaks with Jesse Eisinger, a senior editor and reporter at ProPublica. In 2011, he won a Pulitzer Prize for National Reporting for a series of stories on questionable Wall Street practices that were related to the financial crisis. On Friday, March 3rd he'll be giving a talk at Syracuse University based on some of his new research titled, "How the Ultra Rich Avoid Taxes and Why it Matters For Our Democracy".
Program transcript:
Grant Reeher: Welcome to the Campbell Conversations, I'm Grant Reeher. My guest today is Jesse Eisinger, a senior editor and reporter at ProPublica. Before joining ProPublica, he was a columnist for The Wall Street Journal and The New York Times. He's the author of, “The Chicken Shit Club: Why the Justice Department Fails to Prosecute Executives”. In 2011, he won a Pulitzer Prize for National Reporting for a series of stories on questionable Wall Street practices that were related to the financial crisis. And on Friday, March 3rd, this Friday March 3rd at 4 p.m., he'll be giving a talk based on some of his new research titled, “How the Ultra Rich Avoid Taxes and Why It Matters for Our Democracy”. That'll be in the Maxwell Auditorium at Syracuse University's Maxwell School of Citizenship. And for more information about attending this public event, please go to the Campbell Public Affairs Institute's web page. Jesse, welcome to the program, and thanks for taking the time to talk with me.
Jesse Eisinger: Hi. Thanks for having me.
GR: So let me start with kind of some basic questions about this topic. And I want to break down the problem in some ways first. There are obviously legal ways to avoid paying taxes that might be open only or mostly to those with high wealth and high incomes. And so there's that kind of tax avoidance and then there's just out and out tax fraud, and both of those happen. Do you have any sense in any kind of meaningful relative terms of the magnitude of each of those buckets of tax avoidance, if possible?
JE: We do have a sense of legal tax avoidance, it kind of depends on what you're talking about. So classically, there are two ways to think about avoiding taxes. There's something called avoidance, and there's something called evasion. And avoidance is typically regarded as legal, but perhaps undesirable if you're the federal government or the polity you want people to pay more taxes in a democracy. And then evasion is something that's illegal and it's a question of a law enforcement action. And then there's a question, a larger question of when you're avoiding taxes, that don't even fall in those buckets. And that's what ProPublica explored in its Secret IRS File stories. That was the main thrust of it, was that we have a system that taxes income and everybody who works is familiar with this. Their taxes get taken out of their W-2, and you can see it in your W-2 every year, how much you paid and you really don't have a choice in the matter. And people who work for a living comply with their tax obligations about 99% - between 95 and 100% of the time, because it's simply taken out. And then there's the world of the ultra-wealthy, the billionaire class. And they can avoid taxes with very simple legal means. And the key is to avoid income, which is quite counterintuitive. But there you have it, avoid income and you avoid taxes.
GR: Okay, and I want to delve into that a little bit, but that resonates with some of the other things I've read in addition to your work. But let's talk about the illegal stuff first and then we'll get into that. And you know, answer these to whatever degree you're familiar with it, but, has tax fraud increased, you know, tax evasion, I guess, to use the proper term. Has that is that increased in recent years, do you know?
JE: Yeah. The unsatisfying answer is we just don't know, but we do know some things. One of the things we know is that prosecutions of tax fraud have collapsed. And the Internal Revenue Service is in charge of criminal enforcement of the tax code and then they can't bring charges, they're not prosecutors and they work with the Department of Justice to bring tax fraud charges. And what we know is that charges from the IRS and the DOJ, based on having legal income but illegal tax schemes to avoid taxes on that legal income, those have collapsed. And one of the reasons is that the priorities of the IRS in investigating have changed. They kind of like to attach themselves to already existing criminal investigations like money laundering investigation or a drug cartel investigation. And then they do the tax investigation part of that. Think of that as kind of the Al Capone aspect of tax enforcement. And that’s kind of sexy, it's drug cartels. You also don't have to kind of prove the underlying crime, so it's difficult because the income is not legal. And they're very welcomed with open arms because it's often hard to, even though you've got this clear crime criminal network in the drug cartel, it's easier to prove tax evasion than to prove knowledge from the capos you know, from the cartel leaders. And so tax evasion becomes an attractive charge. So those cases exist and the legal criminal case, tax fraud cases really collapsed. And one of the biggest case that was based on a legal income case was a venture capitalist named Robert Smith, who worked with his funder who was a software engineer, a Texas guy. And they, it was one of the most spectacular tax fraud cases in recent years. And what the IRS ended up doing was settling for really chump change with Robert Smith, who's got this very high profile as an African-American donor to historically black universities and colleges and other philanthropic gains. And then he was going to turn evidence against the venture capitalist who'd funded him, and the venture capitalist died. And so nobody's going to go to prison for what is largely, you know, thought of as one of the biggest tax fraud cases in years. What Paul Kiel and Jeff Ernsthausen and I found in our Secret IRS Files is you've got this other layer of what looks like potential tax fraud but isn't prosecuted as such because the IRS has really lost funding. And what we found, and we get into the details on this, is that the wealthy use their hobbies as tax shelters so they can have fun running a horse farm or flying around in a private jet. And it helps reduce their tax bill, and that could be illegal. It could be something that's audited, but it's not it's neither because the IRS really doesn't have the wherewithal to do it.
GR: Yeah, I do want to get into that. You're listening to the Campbell Conversations on WRVO Public Media. I'm Grant Reeher, and we're speaking with ProPublica reporter and editor Jesse Eisinger. Yeah, I do want to get into that. Let me ask you another question though about the IRS, since you talked about that at some length. My understanding is that, and this may be related to what you just said, two things popped into my head. First, my understanding is that they've just been gutted in terms of staff and resources and in recent years and I think some of that's been for political reasons, I wanted to hear about that. And secondly, the difference between the money laundering and drug cartel, kind of the attraction of using tax fraud or tax evasion there and the other kinds of cases that one might imagine, it strikes me, in addition to what you said, is that in the latter you don't have to go after what might otherwise appear as a law abiding citizen. You get to go after this person that you've labeled as being part of a drug cartel. And I'd imagine…
JE: Exactly.
GR: …that the blowback would be less. But tell me what's been going on with the IRS in recent years. Has it has it had a staffing crisis?
JE: Absolutely. It's an agency on life support. And really this kind of accelerated in 2010 when Republicans took over Congress in the midterms during Obama's first term.
GR: The Tea Party.
JE: It was the Tea Party, exactly. And the first thing they did was start to slash the IRS budget. And they continued slashing it up until the Democrats just passed in their recent bill, the Inflation Reduction Act, a huge rehabilitation effort for the IRS a kind of reclamation effort, if you will. And in the meantime, in the intervening 12 or 13 years, the budget is down in real dollars, about $2 billion and tens of thousands of employees have left. The IRS is the same number of auditors as it had, literally the same number of auditors that it had in World War Two when the economy was a tenth of the size it is today. And audits have really collapsed, audit rates have collapsed and particularly of the wealthy and the ultra-wealthy. So audits of the wealthier down about 80% from the peak audits of large corporations are down. It used to be that every large corporation was audited every year, 100% audit rate and sometimes it was actually over 100% because multiple years are being audited at once. Now it's roughly one in two, so 50% of companies are audited. And that overstates things because the audits are much thinner than they used to be. Of those tens of thousands of employees that have left, the ones that left first were the people with the highest skill set who would get jobs elsewhere in the private sector. And so there's been an enormous amount of institutional brain drain at the IRS. And as I say, it's really on life support and today if you make $500,000 a year, you are less likely to be audited than if you make $20,000 a year.
GR: Yeah, let me ask you about that, sorry to interrupt, but…
JE: …it's an astounding fact.
GR: Yeah, and it is astonishing. And somewhere I've read that in addition to what you've just sketched out in terms of what's happened with the IRS staffing-wise and skillset-wise, I've also read that part of the reason for that is that it's easier for them to go after someone at that income level and be successful than trying to go after an ultra-wealthy because they know right off the bat they're going to get hit with a phalanx of attorneys and the likelihood of them succeeding is just, it's harder it's much harder to make the case. Is that right?
JE: That's exactly right and you read that in ProPublica.
GE: Okay, sorry! (laughter)
JE: Paul Fiel and I wrote those stories. We wrote a series of stories about the IRS being gutted in 2018 and about this differential in the audit rates between the poor, the working poor and the affluent. And that disproportionately hits African-Americans, and the most audited county is a largely black county in Mississippi. And the reason for that is that the working poor disproportionately receive the earned income tax credit. And again, Republicans have pounded on the IRS to make sure that there isn't EITC fraud and there's no evidence that there is rampant EITC fraud. Certainly there's no evidence that there's more EITC fraud than there is tax avoidance among the super wealthy. In fact, there's evidence that tax avoidance among the super wealthy is worse. And of course, when a super wealthy person avoids taxes, that's lots of dollars. When a poor person avoids taxes, that's very few dollars. So you might look for fraud where the money is, to paraphrase the old Willie Sutton line about robbing banks. But they don't do that. And the reason is precisely what you laid out, which is it's much, much easier you can send a letter. You don't need a skill set. And to audit an ultra-wealthy person requires a team. Often they don't have a team available to do it. It requires sifting through hundreds, often of business entities. We got a glimpse of this in the failed audit of Donald Trump, where Donald Trump had over 400 entities, separate legal entities. They all file up to him and produce income for him, or they produce helpful tax losses that you have to go and see whether the justification is valid for those losses. They put one person on it and one person is drowning, and you have a phalanx of auditors and accountants and lawyers on the other side saying everything is copacetic. And it's just way, way too much for even a substantial team. And so they hardly ever audit partnerships which the wealthy have disproportionately, and they really don't audit the wealthy in any sufficient way that could get at what's going on with their taxes.
GR: You're listening to the Campbell Conversations on WRVO Public Media. I'm Grant Reeher and I'm talking with Jesse Eisinger. He's a reporter and editor at ProPublica and we've been discussing his recent research on tax avoidance by the wealthy. I wanted to get into something you mentioned the first half of the program about the thing that you really looked into with how the wealthy use activities and other things to just avoid income. We definitely want to get into that. I just wanted to say, though, on the point that you made in talking about the differential in the IRS, you know, looking at lower middle income people versus exceptionally high income people. I can remember I got a letter from the IRS one year saying, you know, I owed them $1,000. And it turned out that was a mistake and I was able to determine that. But, you know, and I consider myself well educated, well-informed, should be, you know, able to handle that and it scared the hell out of me. I mean, it just, it had an impact that was quite strong and so, you know, there's a complete differential about how that experience is going to be felt by people at different income levels. So let's get into this thing, though, about the wealthy avoiding income. Tell us more about that and why it's so important.
JE: Sure. Sot the ultra-wealthy, as I say, they avoid income. And again, that's a very confusing concept because average people, normal people, most of the people are listening to the show right now, need income to live. We need income to eat and to house ourselves. And the ultra-wealthy don't really need it. Once you get to a billon dollars or tens of billions of dollars, then income is really just kind of a nuisance because you have to pay taxes on it. So you might as well avoid income to the extent that you can. Certainly what you can do is control the timing of income when you want to take income. And largely that has to do with selling stock. And you don't have to sell sometimes and you can sell other times. And so instead, what the ultra-wealthy do is, it’s a coinage from a USC tax professor, it's called buy, borrow, die. And what you do is you buy or build your asset, you build Amazon, you build Tesla like Elon Musk, or you build Berkshire Hathaway like Warren Buffett and then you borrow against the asset. And there's no evidence that Bezos or Buffett borrow substantial amounts. But Larry Ellison of Oracle and Elon Musk of Tesla, those guys have literally borrowed tens of billions of dollars using their assets as collateral, using their stock as collateral. You borrow against it, that's tax free to borrow. You're not taking income. And then when you die, there are a variety of tax loopholes you can get into to avoid estate tax with trusts. The best one is, what happens is when you die the assets that you bought at, say, a dollar if it's trading at $10 now, it immediately jumps up to $10 and nobody owes, nothing is owed on the $9 of gains that you had. The minute before you died, if you sold that, you'd owed, you know, capital gains on $9 of gains. Once you die it steps up and that gains are raised for tax purposes. That's probably the biggest loophole in the tax code. And it's a complete mistake, it's an historical accident from a kind of misinterpretation and kind of growth in the code from the 1920’s. And so that allows, buy, borrow, die allows great fortunes to go substantially untaxed. And what you can see is that the average person pays roughly about 15% in federal income tax, a typical wage earner. And somebody like Warren Buffett who takes very little income and has tens of billions of wealth, well, compared to his wealth growth he pays $0.10 for every hundred dollars he earns compared to our $15 for every hundred dollars that the typical person earns. And that's because his wealth growth is so substantial in his taxes compared to that wealth growth, which is the equivalent of income for a billionaire. It's not what we tax in this country, we don't tax unrealized gains, we don't tax wealth growth. But wealth growth for billionaires is really the way that produces their income, produces that borrowing, produces their ability to increase their wealth through investments, through acquisitions, through influencing our politics, that wealth growth is their income. And so you should properly measure it. The tax rate against that wealth growth, which we do, and that's where you get somebody like Buffett paying $0.10 for every hundred dollars in growth.
GR: If you're just joining us, you're listening to the Campbell Conversations on WRVO. Public Media. And my guest is ProPublica reporter and editor Jesse Eisinger. We’ve got about 7 minutes left or so, but in what you just told me, all these questions popped into my head. So I want to try to squeeze in maybe about four if I could.
JE: Sure.
GR: So the first thing that comes to my mind, and I'm sort of jumping around between possible solutions and exploring the problem with you, but the first thing that pops into my head is, couldn't we kind of solve this in a way simply by taxing wealth, like, you know, proposals like Elizabeth Warren put forward when she was running for president. I mean, if you just had a tax on wealth you wouldn't be able to avoid it by borrowing against it and all that. Your wealth would be your wealth, right?
JE: Yeah, absolutely. So there are two possible solutions to this. One is to have a kind of tax on the wealth and you have a mountain of wealth and you add it up and then you tax it at 1% or 2%, whatever the policy is. And Bernie Sanders and Elizabeth Warren have different rates for that. And then the second thing would be to tax unrealized gains, which is probably a smarter and more elegant solution. It's one that Ron Wyden, the senator from Oregon, advocates and actually Biden put it as a proposal in the State of the Union recently, and that was a revisiting of a proposal he's made for a billionaire tax on wealth growth or unrealized gains. It's counterintuitive for many people because they viscerally don't like the idea that, well, if your stock goes up and you haven't sold it, you haven't taken any income. But that's really not the correct way to think about it. It is wealth growth, growth is income it's economic income. Economists have identified it as income since the 1920’s. So it's really not a very controversial idea within the economics profession. And you can have ways to, there are a lot of objections like, well what about private holdings? And what if the stock goes down and you can have ways to make it so that you get money back if the stock goes down or to estimate what the private wealth is worth. But it probably is the best way to do it, which is to tax unrealized gains. And mostly the stock market goes up, so the losses really aren't such a big deal overall for this class.
GR: Yeah, I was thinking immediately of, well, you'd want to get credit for unrealized losses and you just mentioned that. All right, well that was one thing. Another thought that popped into my head was we've been living in recent decades with interest rates that are phenomenally low for borrowing. Now that's changed in the last several months, or year. But nonetheless, generally, that's been the case. I'm just wondering, would this technique, if we got back into a situation like we had, say in the late 70’s, early 80’s, you know, where interest rates were much higher than they are now, that technique wouldn't be as attractive then to this ultra-wealthy class?
JE: I mean, it's a good question. You know, maybe we'd have to just wait and see. But I think the rich are different than you and me as the famous Hemingway / Fitzgerald Exchange has it. And their borrowing is different. If you have stock at your brokerage, it doesn't really cost you anything. They have so much ability to make money on that stock that the borrowing is almost cost free for these guys. Because they've got the collateral, too. So if the stock starts falling, they can just sell the collateral out from under you. They don't have to worry about getting paid back. So they're not that worried. So it's incredibly cheap for a wealthy person to borrow. They don't borrow at your credit card rate, I’ve got to tell you.
GE: (laughter)
JE: Or even your student loan rate, you know, so I don't think interest rates are going to affect them that much.
GE: Okay.
JE: And the other thing is that even if interest rates went up to seven, eight, nine percent on their borrowing it's still better than 40%, which is all in roughly what you pay in the top bracket for income in the United States. So if you were taking ordinary income and you're paying 40%, you know, paying 8%, 9%, the borrowing is a good deal for you still.
GR: Right, right. And then the other thing that popped into my mind too and you didn't mention this in the things that you listed is devices that get used, but I was quite surprised to learn just how favorable the tax code is toward landlords. Anybody renting anything out the way you can depreciate the asset that you're renting. And it's just, you know, it was striking to me when I first learned this. Is that a piece of what the ultra-wealthy do too?
JE: It's so extraordinary, we did a whole story on… there are special breaks for real estate owners and oil and gas owners and in the tax code. And what that means is that billionaires who are real estate developers or oil and gas company owners, they can go literally years and years, if not decades without paying any federal income tax. And Stephen Ross, who developed Hudson Yards in New York City, he owns the Miami Dolphins. He's one of the richest real estate developers in the country, a multibillionaire. He tells the IRS literally that he has lost $400 million that year. $300 million, another year of a $300 million loss over and over years and years for roughly about two decades, with a couple of exceptions. And he's got, I got to tell you, he's a billionaire. He's not losing $400 million a year. If he were losing $400 million a year, he wouldn't be a billionaire for very much longer and he’d have to sell the Miami Dolphins and live under a bridge eating cat food. But he's not doing that. And the reason he's not doing that is it's just a tax break for him and it's not real losses. He's making a lot of money, but he gets to tell the IRS that he's losing money and therefore is not paying taxes.
GR: Well, this is fascinating. But we're going to have to leave it there. And you'll be talking about these issues at the Maxwell School. But also something we didn't get into is why this is important for democracy and the relationship to our political system. And so we have we have deliberately left that tantalizing piece for people to come and see your talk. That was Jesse Eisenger, and again, I want to remind you that on Friday, March 3rd at 4 p.m., he'll be giving a talk based on some of this new research titled, “How the Ultra Rich Avoid Taxes and Why It Matters for Our Democracy”. It'll be in the Maxwell Auditorium at Syracuse University's Maxwell School of Citizenship. For more information about attending, go to the Campbell Public Affairs Institute's web page. Jesse, I want to thank you so much for taking the time to talk with me and looking forward to your visit.
JE: Excellent. Thank you for having me.
GR: You've been listening to the Campbell Conversations on WRVO Public Media, conversations in the public interest.
