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With an apartment on glitzy Park Avenue and a hefty portfolio of stocks, retired investment manager Morris Pearl seems comfortably ensconced in the 1 percent.

And one thing helps him stay there: The taxes he pays are lower than that of the average elementary school teacher.

"All my money comes from investments. I'm doing fairly well. But my tax rate is in the teens," says Pearl, a former managing director at the investment giant BlackRock.

President Donald Trump isn't the only wealthy person 

 little or no federal taxes. The U.S. tax code favors people who make money through investments like stocks and real estate, including a lot of people in finance, such as hedge fund titans and money managers.

Instead of paying income taxes, which rise to about 37 percent as a person's income goes up, investors pay the much lower long-term capital gains tax, which tops out at 20 percent.

This inequity in the tax code is something investment giant Warren Buffett has frequently remarked upon, noting that he pays taxes at a lower rate than his own secretary.

"Our system allows rich people, particularly real estate developers and investors, to pay far lower taxes than people that work for a living," says Pearl, who chairs the group Patriotic Millionaires, a group that advocates for a more equitable tax system.

When Trump ran for president, he repeatedly promised to strip the tax code of loopholes that allow rich people like him to pay less in taxes.

"It is riddled with loopholes that let some special interests — including myself in all fairness. This is going to cost me a fortune this thing, believe me. Believe me. This is not good for me," he said, in a speech in St. Louis in December 2017, when Congress was preparing to vote on a tax cut bill.

The tax bill he ultimately signed did strip the tax code of some deductions that tend to benefit the well heeled, but it retained the lower tax rate for investment income.

"As far as tax loopholes go, it is one of the more well-known tax loopholes, more because it is so ridiculous," says Charles Khan, organizing director at the Strong Economy For All Coalition, a partnership of liberal community and labor groups.

Trump's tax bill also retained the very controversial carried interest provision, which allows many people who work in finance to take the money they make as investment income instead of salary. That sharply lowers their tax rate.

Trump has long argued that his tax bill was "rocket fuel" for the economy, generating a surge in jobs, at least until the pandemic struck last March.

But William Spriggs, an economics professor at Howard University, says the bill did little to address the inequities in the tax code.

"People who were owning stock were the big beneficiaries because their income was going up whereas wages had stagnated," says Spriggs, who served as assistant secretary for policy at the Department of Labor in the Obama administration.

In fact, the corporate tax cuts included in the 2017 bill have benefitted rich people even further, says Pearl from BlackRock.

"The reasons stock prices have gone up is because the companies we own stock in are making more profits. The reason they're making more profits is because they're paying less taxes," Pearl says.

Pearl says that the inequities in the system are dangerous and could even lead to "civil unrest."

Most of the other wealthy people he knows share that conviction, according to Pearl. "I think most wealthy people understand that we have to change our system — because the current system is not sustainable," he says. 

Business and Economic News

Politics and Government News

Jim Zarroli

Author

The tax code allows wealthy people who live off investment income to pay taxes at a much lower rate than average people who earn salaries.

He's part of the 1%. And he thinks his taxes aren't high enough

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