Why HNWIs must take note of the ‘true tax rate’ debate

“Only the little people pay taxes.”

I was reminded of Leona Helmsley’s famous quote when I read the ProPublica report into how the wealthiest in the US avoid income tax.

It is no secret that the ultra-wealthy have access to the best advice and can therefore avail themselves of sensible tax mitigation strategies. In the vast majority of cases, nothing untoward is going on – they are operating within the parameters of the relevant tax laws and using the resources at their disposal to lower their tax exposure. This is tax planning, not tax evasion.

However, there are still reputational implications – and potentially costs – to this. At present, there is a groundswell of support among the public for tax rules to be rewritten, and national leaders are looking to take action.

This is not surprising, given the economic strain that the Covid-19 pandemic has brought. Infinite Global’s recent Tax and Reputation report shows that economic downturn ignites the tax fairness debate, thrusting wealth inequality into the spotlight.

Until now the issue has remained largely about corporate tax. Big tech companies such as Amazon, Facebook and Google in particular have dominated the headlines. The G7-led international tax reforms announced over the weekend aim to ensure the tax they and other large corporates pay on profits is made in the location of revenue-generation while a minimum global corporate tax rate of 15% is implemented.

In the meantime, though, the ProPublica article has shifted the focus of the ‘tax fairness’ conversation on to individuals. The same rules of reportage will apply. Big, high profile names will dominate column inches and some of the immediate poster children are the bosses of those same big tech companies.

They are obvious ‘targets’. Low-hanging fruit. Their names are recognisable and their own personal tax affairs are now firmly in the public domain because of the leaks received by ProPublica.

ProPublica’s research has identified what it calls the ‘true tax rate’ of the 25 richest Americans. Jeff Bezos, Warren Buffett and Elon Musk take the lion’s share of the limelight. But how should they respond, from a communications perspective?

Buffett appears to be the most conscious of the potential reputational fallout. His response was proactive and transparent. He supports changes to the US tax code but, rather than wait for policymakers to act, intends to forge his own path to addressing the fairness and inequality question.

“I believe the money will be of more use to society if disbursed philanthropically than if it is used to slightly reduce an ever-increasing US debt,” he said. His statement is hard to argue with but, more importantly, it is authentic. CNBC reported that, in 2020, he donated almost $3 billion in Berkshire Hathaway stock to five charities. He has also pledged that 99% of his wealth will be directed to philanthropic efforts when he dies, if not before.

Contrast Buffett’s response to that of another billionaire investor, Carl Icahn.

Asked whether it was appropriate that he had paid no income tax in certain years, Icahn told ProPublica he was perplexed by the question. “There’s a reason it’s called income tax,” he said. “Do you think a rich person should pay taxes no matter what? I don’t think it’s germane. How can you ask me that question?”

Buffett famously pursues a relatively modest lifestyle for someone worth almost $100 billion. Those with more lavish lifestyles would be well-served, reputationally, not to flaunt that. Inviting attention only increases the risk of attracting criticism. If criticism does arrive, the response should be measured and not stoke the flames further.

Reforming corporate and individual tax rules will not happen overnight. But public attitudes can and do change during that timespan, and reputations can be lost in minutes. With that in mind, HNWIs must consider not only whether their affairs are in compliance with the relevant tax laws, but whether they also pass muster in the court of public opinion.