This week an organization that may benefit from heavy tax burdens on rich people is launching a campaign to advocate for heavier tax burdens on rich people.
“The Secret IRS Files: Trove of Never-Before-Seen Records Reveal How the Wealthiest Avoid Income Tax” is the headline on a story this week from ProPublica, which also avoids income tax. The story is highly disturbing because someone or perhaps multiple people broke the law in disclosing private tax-return data that ultimately ended up with ProPublica. This appears to be either a case of criminal hacking, an appalling abuse by Internal Revenue Service staff, or perhaps an abuse by foreign government actors who duped the IRS into oversharing. Under tax treaties the IRS may disclose taxpayer information with some foreign governments if the information is “foreseeably relevant” to tax issues in the overseas jurisdictions.
As for the substance of the article, it is nominally about income taxes but it really amounts to a long gripe that the U.S. Constitution prohibits wealth taxes unless they are apportioned by state population. In the absence of a wealth tax, U.S. entrepreneurs who hold on to shares in the companies they built and then donate them to causes they support can end up paying very little federal tax in relation to the value of the enterprises they built. This is especially true if their growing businesses pay few or no dividends along the way, but instead use available cash to invest in new plants and new products, which often creates new jobs.
For some reason this bothers the ProPublica crowd, but give them credit for being willing to bite a hand that feeds them. The article scores investor
alleging that he “paid no federal income tax three years in a row.”
One reason Mr. Soros hasn’t paid higher taxes over the years is that he has donated billions of dollars to his charitable vehicle, the Open Society Foundations, which in turn has helped to fund various leftist causes, including ProPublica. What would the organization do without billionaires rationally seeking to avoid tax collectors?
As readers scroll down the webpage of this week’s much-discussed Pro Publica article, they are treated to a red “Donate” button, which links to another page featuring another button leading to this message:
ProPublica is a 501(c)3 nonprofit and as such, donations to our organization are tax deductible to the extent permitted by law in your personal circumstances. To find out what that means for you, we recommend consulting with your tax advisor, accountant or the IRS directly. If you plan to claim this donation on your U.S. taxes, please keep your email donation receipt as your official record, we will send it to you upon successful completion of your donation.
This column does not believe that tax deductions are the only reason that people make donations to nonprofit organizations. By many measures Americans are the world’s most generous people and frequently give without claiming tax benefits. But incentives matter and the higher the tax burden, the more incentive people have to consider ways to reduce it with deductions like the ones available to ProPublica donors. At the margin, high tax rates can encourage more donations.
For an organization like ProPublica, there is not just a tax benefit for donors when they give, but also for the organization if it receives more than it spends. According to the IRS:
Organizations organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, educational, or other specified purposes and that meet certain other requirements are tax exempt under Internal Revenue Code Section 501(c)(3).
Full disclosure, your humble correspondent is a regular consumer of ProPublica stories and often finds them to be informative and well-written. But it’s not immediately clear why ProPublica should enjoy a tax advantage over its media competitors simply because it does not have shareholders. There’s no doubt who funds the work. If it weren’t for entrepreneurs looking for a reason to donate their wealth rather than just handing it over to the government, ProPublica might not even exist. The organization’s website notes that among its donors are the foundations created by the Ford automobile dynasty, steel magnate Andrew Carnegie, Silicon Valley pioneer William Hewlett, and Home Depot co-founder Arthur Blank. Donors also include the Hollywood Foreign Press Association, though perhaps that relationship is now subject to cancellation.
But there is one organizational donor standing above all others in the history of ProPublica. In a 2019 obituary in the New York Times Neil Genzlinger noted:
Herb Sandler, a banker and philanthropist who with his wife, Marion, provided the initial financing for ProPublica… died on Wednesday at his home in San Francisco. He was 87…
Mr. Sandler and his wife, who died in 2012, made their fortune by building a small bank in Oakland, Calif., into Golden West Financial, a multibillion-dollar lender. They had long supported progressive causes when, in 2007, their Sandler Foundation provided almost all of ProPublica’s initial funding… Mr. Sandler was its board chairman from its beginning until 2016.
As for the wealth that enabled ProPublica, Mr. Genzlinger described the end of the Sandlers’ Golden West adventure:
When the couple finally sold the operation to Wachovia in 2006 — for a reported $25 billion — they plowed much of their share of proceeds, about $2.4 billion, into the Sandler Foundation, which they had created in 1991… Mr. Sandler’s support of progressive causes drew criticism from the right, especially after some news outlets, including The New York Times, published articles suggesting that certain types of mortgage loans issued by Golden West had, after the Sandlers sold the business to Wachovia, contributed to the financial crisis of 2008. The Sandlers denied that their loans had played such a role…
In 2008, “Saturday Night Live” broadcast a skit about the congressional bailout of the banks that labeled the Sandlers, portrayed by actors, as “people who should be shot.” After complaints, the show took the unusual step of editing the online version of the skit. Lorne Michaels, executive producer of the show, told The Los Angeles Times that he had not realized the Sandlers were real people.
They really were. In the depths of the financial crisis in October of 2008, the Journal’s Dan Fitzpatrick reported:
Wachovia Corp., in likely its last earnings report before being acquired by
Wells Fargo &Co.
, swung to a quarterly loss of $23.88 billion that confirmed how badly the bank was staggered by its takeover of mortgage lender Golden West Financial Corp. at the peak of the real-estate market.
The quarterly loss is among the largest ever posted by a U.S. company and signals the likelihood of more pain ahead for other U.S. financial institutions.
In this week’s article, the ProPublica team describes a “true tax rate” that it suggests should be paid, even if not required by current law. Especially given the manner of its funding, perhaps ProPublica should now lead by example and finally start paying its fair share of federal taxes.
James Freeman is the co-author of “The Cost: Trump, China and American Revival.”
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