Originally published on Forbes.com.
The budding bromance between Charles Koch and Bernie Sanders has gotten quite a bit of attention. In case you missed it or mistook it for a satire piece when your friend posted it on Facebook, it traces back to an op-ed in the Washington Post by Charles Koch in which he agreed with Bernie Sanders that not only do we have a rigged economy, but also that our criminal justice system is pretty screwed up.
The Charles Koch Paen To Bernie Sanders
Right at the opening there is, I think, a small inaccuracy.
As he campaigns for the Democratic nomination for president, Vermont Sen. Bernie Sanders (I) often sounds like he’s running as much against me as he is the other candidates.
Bernie Sanders has three two-word tropes that he uses to evoke certain reactions. They are “middle class”, Pope Francis” and “Koch brothers”. So Bernie isn’t running against George. He is running against George and David – probably Frederick and William not so much.
At any rate, George agrees with Bernie that there is a rigged economy. He just doesn’t agree with Bernie’s methods for unrigging it. Then there is the criminal justice system.
Our criminal justice system, which is in dire need of reform, is another issue where the senator shares some of my concerns. Families and entire communities are being ripped apart by laws that unjustly destroy the lives of low-level and nonviolent offenders.
Unlike other special interest groups and mega-donors, the Koch brothers are less crony-capitalists than they are billionaire zealots. They are free market fundamentalists who completely despise the government — especially when it gets in their way with things like environmental regulation.
The Sanders Tax Plan
What intrigues me about this little drama, though, is something that I don’t think a lot of people have noticed. Bernie Sanders proposes raising taxes quite a bit, but as it turns out his plan does not hit billionaires that hard. At least while they are alive. And even with that qualification, the estate tax changes do not seem to include an attack on the charitable lead annuity trust, which according to Jane Mayers is the technique that Fred Koch used to transfer his fortune to his sons with minimal estate taxes. And then there are those charitable foundations – don’t get me started.
The Sanders tax plan is framed as a spending plan. It lays out programs and matches them with tax proposals. The two big ones that are of most interest for this analysis are the medicare for all tax (6.2% on employers and 2.2% on households) and turning the full social security tax back on for incomes over $250,000. I don’t know what the rationale is for having the tax turned off between $118,500 and $250,000, but that is what he is proposing. Maybe that’s the “middle class” that he is worried is disappearing.
If you are willing to take the leap of faith that the medicare for all will be pretty decent, a big leap for many, I know, people making even up to the low six figures will be either ahead or close to even, when you consider health care savings. As you pass $250,000 though the tax becomes more of a burden on net. Add to that social security being turned back on and you find people making in the high six figures are facing marginal rates approaching 60% even though the big increases in the top marginal income tax rates don’t kick in until you get to $2,000,000.
The high marginal rate is particularly noticeable for the self-employed or people who run their businesses through corporations since both sides of the social security tax and the 6.4% health care tax clearly fall on them. (There is a good chance that the incidence of the employer share falls on employees, but that is getting complicated) Right now, high paid professionals will be able to beat a good piece of the added social security taxes and the 6.4% employer health care tax by running as S corporations, but I suspect that dodge will not last.
Back To C Corporations
Although the Sanders plan calls for choking off a variety of ways to avoid corporate income taxes, what the plan does not do is raise corporate income tax rates. So if you are in wealth building mode and making in the high six figures or beyond, there will be a very strong temptation to run as a C corporation and face a maximum rate of 35% on retained earnings. Of course the problem with that is that the retained earnings are subject to a second tax and under the Sanders plan whether it is in the form of a dividend or a gain from a stock sale is subject to the regular marginal income tax rate.
So mere millionaires will find themselves facing a real dilemma. They can accumulate at a favorable rate, but someday they figure they will have to liquidate. You will find that a lot of people end up borrowing from their closely held corporations, which as long as low interest rates persist and the formalities are observed will work, kind of. And of course, you can have the C corporation buy a corporate retreat and a plane if you are really getting up there, but there are limits to that sort of stuff.
Easier On The Billionaires
But aren’t the billionaires in the same boat? They are not. The difference is that the next dollar of earnings that Koch Industries retains is a dollar that Charles Koch is absolutely certain he will not have to spend to maintain his lifestyle nor will his children or grandchildren need that dollar for their lifestyle. I don’t know what the threshold is where you have that type of assurance, but it is probably well beyond the ]$5,450,000 current estate tax exemption that Bernie Sanders wants to lower to $3.5 million.That particular change is probably the most unkind to mere millionaires. For billionaires, it is a flea bite.
It would seem that eliminating the special rate for capital gains will be a great blow to the wealthy, but again it will hit those who are moderately wealthy or on their way to becoming wealthy much harder than billionaires. The great wealth of people like ]Bill Gates, ]Mark Zuckerberg, Warren Buffet and the Koch brothers rests in unrealized appreciation. And it is unrealized appreciation that will never be realized. The only way to get at that is through a wealth tax. And for that you need the Green Party.
It would be way too cynical to think that Charles is bromancing Bernie, because he recognizes that Bernie might actually be making it harder for there to be new members of the Forbes 400 without doing much harm to those who are already there. It is more ironic