He's Part Of The 1%. And He Thinks His Taxes Aren't High Enough

Oct 8, 2020
Originally published on October 8, 2020 6:00 am

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

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

"I, for instance, have not worked since 2014," says Pearl, who was a managing director at BlackRock, one of the world's largest investment firms. He now earns a living from his investments. "I'm doing fairly well ... my tax rate is in the teens."

President Trump isn't the only wealthy person believed to pay 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% as a person's income goes up, investors pay the much lower long-term capital gains tax, which tops out at 20%.

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 benefited 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 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.

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A New York Times investigation into President Trump's tax returns found that in some years, he paid little or even no taxes. Now, he is not the only rich person to not do so. The tax code favors people who live off of investments, including a lot of people in finance who run hedge funds or manage money. Here's NPR's Jim Zarroli.

JIM ZARROLI, BYLINE: Morris Pearl is part of the 1%. He's a former managing director at the giant investment firm BlackRock. He has an apartment on New York's Park Avenue, and he lives off his stock investments. These days, Pearl says, the taxes he pays are lower than ever.

MORRIS PEARL: I, for instance, have not worked since 2014. All of my money comes from investments. I'm doing fairly well, but my tax rate is in the teens.

ZARROLI: That's right. He pays a lower tax rate than the average teacher or letter carrier. Pearl is a millionaire. He even chairs an organization called Patriotic Millionaires, and he thinks the way the tax system works is disgraceful.

PEARL: Our system allows rich people, particularly real estate developers and investors, to pay far lower taxes than people who work for a living.

ZARROLI: U.S. tax law was designed to be progressive, meaning the more you earn, the more you pay. But it doesn't always work out that way. When President Trump was running for office, he promised to overhaul the tax code.

(SOUNDBITE OF ARCHIVED RECORDING)

PRESIDENT DONALD TRUMP: It is riddled with loopholes that let some special interests, including myself, in all fairness - it's going to cost me a fortune, this thing; believe me. Believe - this is not good for me.

ZARROLI: The tax bill Trump ultimately signed into law in 2017 got rid of some deductions and loopholes, but it retained one provision that mostly benefits rich people.

CHARLES KHAN: As far as tax loopholes go, it's one of the more well-known tax loopholes because it is so ridiculous.

ZARROLI: Charles Khan is with the Strong Economy For All Coalition, a group of community and labor groups. He says people who live off investments such as stocks and real estate are taxed differently than people who earn salaries.

KHAN: But instead of paying the income tax rate, which could be as high as, I think, you know, 37%, they pay capital gains.

ZARROLI: And the capital gains tax rate tops off at 20%. Trump's tax bill also retained another very controversial provision. It allows money managers and hedge fund titans to take their salaries as investment income, meaning they pay that lower rate. Trump insists that his tax cuts helped fuel an economic boom, at least until the coronavirus hit. Here he is at his State of the Union address soon after signing the bill.

(SOUNDBITE OF ARCHIVED RECORDING)

TRUMP: We enacted the biggest tax cuts and reforms in American history.

(APPLAUSE)

ZARROLI: But economist William Spriggs of Howard University says the bill kept some rules in place that benefit the rich, especially people such as President Trump who made their money in real estate. And Spriggs says that by cutting corporate taxes, the bill helped fuel a long rally in stock prices, and that's benefited the rich even more.

WILLIAM SPRIGGS: People who were owning stocks were the big beneficiaries because their income was going up, whereas wages have stagnated.

ZARROLI: Even through the recession, the stock market has continued to do well. People who own stocks have seen their portfolios grow, and they continue to pay much lower taxes on the profits they bring in.

Jim Zarroli, NPR News.

(SOUNDBITE OF FEVERKIN'S "MARCH (FT. VACANT)") Transcript provided by NPR, Copyright NPR.