Dear Mr. Gates:
You have, by dint of your intelligence and sincerity, become a major spokesman for wealthy Americans calling for higher taxes. Since the nation’s budgetary problems will only be solved by combining spending reductions with tax increases, this is a compelling claim.
However, the devil, as they say, is in the details. Allow me to call three details to your attention:
1) Microsoft’s tax avoidance. Microsoft has become increasingly adept at parking its profits in low tax foreign jurisdictions, rather than paying U.S. taxes. After analyzing Microsoft’s financial statements, Tax Analysts’ Martin A. Sullivan recently concluded that Microsoft “has dramatically stepped up its efforts to take advantage of lax U.S. transfer pricing rules.” In lay terms, Microsoft is avoiding U.S. taxes by accounting maneuvers which shift its profits to low tax havens.
Of course, Microsoft is not alone in this behavior. However, Microsoft is the source of your family’s wealth and influence. I suggest that you start a campaign to press U.S. corporations to pay U.S. taxes and that you lead with Microsoft as the campaign’s first target.
2) Millionaires and billionaires are different. You are the leading proponent of the plan to establish an income tax in Washington State. The tax will be levied at a rate of 5% on annual incomes over $200,000 ($400,000 for couples). The rate will increase to 9% on annual incomes over $500,000 ($1,000,000 for couples).
Individuals earning these kinds of incomes are undoubtedly affluent. But few of them are software billionaires. Unfortunately, the Washington State levy will tax millionaires and billionaires at the same rates.
Many individuals triggering the first tier of the Washington income tax will be professionals like me. Many of the individuals triggering the higher tax level will be small businessmen and businesswomen. As to this latter group, the Washington tax will be among the nation’s highest. For these people, the tax will impose a noticeable burden and could lead to economic distortions such as a decision to leave Washington for a state with a low or no income tax.
It is neither fair nor efficient for the billionaires of Microsoft to pay the same marginal tax rates as these other taxpayers.
I suggest that you call for a third, substantially higher rate for the Washington State tax to apply to individuals such as you. The resulting revenues would permit a reduction of the rates applying to other, less affluent Washington State taxpayers.
3) The Gates Foundation is a tax shelter. The Gates Foundation does great work of which you and your family can be justifiably proud. But there is one thing the Gates Foundation doesn’t do: pay taxes.
You and your son have both been outspoken proponents of federal estate taxation. However, the resources you and he contribute to the Gates Foundation avoid such taxation. Moreover, the foundation, as a tax-exempt entity, pays no federal income tax.
I understand and applaud the charitable impulse which animates the Gates Foundation. My wife and I have established a private foundation in memory of our son though this fund is, needless to say, much smaller than the Gates Foundation.
It is, nevertheless, problematic to call for others to pay higher estate and income taxes while the Gates Foundation, one of the country’s largest, effectively shelters your and your son’s incomes and estates from the federal fisc.
I urge that the Gates Foundation annually and voluntarily pay to the U.S. Treasury and to Washington State an amount equal to the federal and state taxes the foundation would pay were it not tax-exempt. I also urge that these annual payments in lieu of income taxes be supplemented periodically by additional payments from the Foundation to mimic the estate taxes being avoided through the Foundation.
In calling for higher taxes, you raise an important issue for the future of America in a compelling and public-spirited manner. The three actions I recommend will help clarify and reinforce your message.
Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. He is the author of The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America.