Senators Debate Tax Avoidance Methods Used by Ultra-Wealthy

"One thing we should do is dispel the notion that there is support on any side of the aisle for tax evasion," Crapo said. "We all agree that tax payers should pay the tax they legally owe. For the grey areas of tax law, we should constantly assess how the code can better and more fairly target impermissible activities."

However, in Crapo's view, "framing this whole issue through the subjective lens of 'fairness' is also misguided."

"We shouldn't focus on rhetoric but on data," Crapo argued. "To be clear, most of the tax burden [on an absolute dollar basis] is paid by higher earners. We should also acknowledge that tax collections have been at or near all-time highs in recent years, and the voluntary tax compliance rate is high and stable."

Finally, Crapo argued that, depending on how they are implemented, higher taxes can be a major disincentive to work, savings and investments. He argued that a better approach is to keep taxes low enough and stable enough to foster greater and lasting economic growth, which he called the "real solution to our deficit problems."

Expert Testimony

During her testimony, Huang emphasized that America's highest-income earners would pay hundreds of billions of dollars per year in additional taxes if more sources of earnings were treated like working income for federal tax purposes.

"The tax breaks enjoyed by the ultra-wealthy increase deficits and increase inequality," Huang argued. "They also spur excessive tax avoidance activity and they harm the economy by locking up capital based on tax treatment rather than innovation. Talent goes to waste dreaming up tax schemes for the ultra-wealthy rather than innovating and fostering entrepreneurship."

Pearl offered a similar perspective, suggesting the wealthiest Americans are effectively given carte blanche to "choose when to pay taxes, how to pay and even whether to pay at all."

"It's all because their wealth comes from property and ownership and assets — not work," Pearl said. "Roughly speaking, the top rate on salaries is above 40%, while the top rate on capital gains is about half of that, at 23%."

Most capital gains are invisible to the tax system until they are realized, Pearl explained, and this usually only happens when the asset is sold. Or, the asset is held by an individual until death, at which time the asset can pass to an heir while enjoying a tax-free step-up in basis.

"So, the wealthiest filers have this significant degree of control and flexibility that can mean they pay practically no taxes even as their wealth balloons — and even though they can borrow and spend against their assets to live a lavish lifestyle," Pearl said.

The commentary from McBride and Holtz-Eakin was more technical in nature and sought to paint a clearer picture of exactly how the amount of taxes paid varies by income group. They also sought to provide insight about how changes to the tax code could address questions about fairness while helping to reduce the federal deficit.

Both also emphasized how there is "nothing simple about he way these taxes are assessed and collected," as McBride put it.

"Taxes are inherently complex, and various credits and preferences add to the complexity," McBride said. "The current code is more than 4 million words long, and in 2022 alone, Americans spent 6.5 billion hours trying to comply with the tax code — and that doesn't even include the cost of tax planning. It is time to pursue significant simplification of the system."

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