Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Monday, August 30, 2021

To get the wealthy to pay more tax, first we need to work out why they avoid it

Wealth taxYou do not often hear rich people advocating for paying taxes. John McAfee, who in June was found dead in a Spanish prison from an apparent suicide, was "inarguably the most [colorful] character in the world of antivirus software." 

Mere hours before McAfee's death, the Spanish authorities agreed to extradite him to the US to face tax evasion charges. McAfee was openly against taxation. In 2018 McAfee tweeted, that he had not filed a US tax return in eight years because "taxation is theft" claiming he had already paid "tens of millions already and received jack [expletive] in services."

Abigail Disney, wrote in an article that she was "taught from a young age to protect [her] dynastic wealth." 

The ultra rich often use legal tax-avoidance strategies to limit their federal income tax bills. A report by non-profit ProPublica concluded that legal tax-avoidance strategies allowed the 25 richest Americans to limit their federal income tax bills to $13.6 billion in the five years to 2018 even though their wealth had been boosted by an estimated $401 billion. 

According to Abigail Disney, a big part of the problem is that wealth is not income and tax avoidance is not tax evasion. Legal tax avoidance strategies are just that—legal. Disney also acknowledged that, like Jeff Bezos, the system allows the rich legally to avoid paying tax on huge fortunes that grow every year. 

Some argue that we live in a world in which the rich do not need to practice illegal tax evasion because legal tax avoidance is "so easy and effective." Disney then posed the question: "What motivates people with so much money to try to withhold every last bit of it from the public's reach." 

Alex Rees-Jones, a behavioral economist at Wharton Business School, wrote that "analysis of tax data confirms that tax decision [the desire to pay or avoid] are influenced by loss aversion." In other words, taxpayers engage in strategies that make losses smaller and gains larger. 

From here, Rees-Jones suggested "reframing taxpayer perceptions of what constitutes a gain or a loss." 

The "fix" may be to convince taxpayers that the losses they take as a consequence of tax avoidance are worse than whatever loss they may take if they were to avoid the loopholes. 

See Rhymer Rigby, To get the wealthy to pay more tax, first we need to work out why they avoid it, Financial Times, August 29, 2021. 

Special thanks to Joel C. Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.


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