The 25 richest Americans pay little to no taxes thanks to leveraging loopholes in the tax code, according to a report from ProPublica released last week. Billionaires like Jeff Bezos, Elon Musk and Michael Bloomberg are able to pay so little because of policy decisions that result from the lobbying pressure of large corporations like the ones these billionaires run. The problems include the lack of a U.S. wealth tax and the fact that labor is taxed at a higher rate than investment. But to add insult to injury, as the ultra-wealthy take advantage of the fact that capital gains on investments are taxed at a far lower rate than incomes, they are building portfolios of investments that further increase their political power and more deeply entrench inequality.
The wealthy have many options to further increase their wealth, including investing in hedge funds — private investment funds which charge high fees but hold out the promise of returns better than the overall stock market. The 2010 Dodd-Frank Act created new rules of the road for hedge funds, including new transparency into what they own. Once a quarter, they must report certain positions on a form called the 13F. But family funds — in which only the wealth of a single family is invested — lack this same level of transparency, as they were carved out of the Dodd-Frank Act. Many of the billionaires ProPublica found are paying little to no taxes are also growing their wealth through family investment offices.
Family funds have been in the news this year following the spectacular blow up of Archegos Capital. Archegos, created in 2013 by former hedge fund manager Bill Hwang one year after he settled charges of insider trading with the U.S. Securities and Exchange Commission (SEC), made a series of increasingly risky bets that the price of about a dozen stocks would keep rising. He used money borrowed from some of the biggest banks to amplify these bets. When the bets went south and he couldn’t pay the banks what he owed, it led to an estimated $10 billion in losses across the banks, with Credit Suisse taking the biggest hit: $5.5 billion. The lack of public reporting on Archegos’s positions contributed to the fact that none of the banks knew until it was too late that they were all on the same side of the same bad trade.
Archegos wreaked havoc at the largest banks with a fund worth an estimated $20 billion. Amazon founder and Executive Chairman Jeff Bezos runs a family fund that’s even larger: Bezos Expeditions was estimated to be worth a staggering $107 billion in 2020. Bezos Expeditions is described by CrunchBase as a family investment office that manages Bezos’s venture capital investments. It was through Bezos Expeditions that Bezos purchased the Washington Post and created the private space travel firm Blue Origin. But Bezos Expeditions has a host of other investments in companies further entrenching the gig economy. Bezos Expeditions’s website discloses some of its other “select investments,” which include home sharing app Airbnb, which has been accused of skirting state hoteling laws and of displacing long-term residents; and ride-sharing app Uber, which has fought laws to classify its drivers as employees. Bezos Expeditions has also invested in Nextdoor, which in some cities has become a sort of crowd-sourced private surveillance network. As Pam Martens and Russ Martens noted for Wall Street on Parade, Bezos Expeditions has never filed a single 13F form with the SEC; this means the general public has no transparency into which stocks or options he holds. But Bezos is still able to take advantage of losses on his investments, and by disclosing those losses to the IRS, he paid no taxes in 2011, despite having a personal net worth of $18 billion.
Microsoft founder Bill Gates also has a family investment office, Cascade Investments LLC, that has allowed him to amass the largest private ownership of farmland in the U.S. Gates and Melinda French Gates together own 269,000 acres of farmland through companies that all link back to Cascade Investments. Gates may have attempted to add even more secrecy to these purchases by using a series of limited liability shell companies. An NBC News investigation found that Cascade Investments bought farmland using at least 22 limited liability shell companies across the United States. John S. Quarterman, a Georgia farmer and landowner, told NBC News that he discovered by searching property records that companies buying multiple tracts of land in Georgia were all a “shell of a shell of a shell company investing for Bill Gates.” This raises questions about concentration of power over farmland, from the same man who made his fortune through inadequate antitrust enforcement, leading to Microsoft’s concentration of power in the PC business.
Michael Bloomberg also has a family investment office called Willett Advisors. CaproAsia estimated in 2020 that Willett Advisors is worth $25 billion, which would make it the seventh largest family office in the world. Wall Street on Parade noted that the last Form 13F the firm filed dates back to 2014, when the fund had a mere $273,000 in assets.
Elon Musk appears to have used his family investment office, Excession LLC, to buy up some $100 million in property in California around his mansion. Limited-liability companies with ties to Musk purchased six houses across two streets in the wealthy Bel-Air neighborhood of Los Angeles; at least one of those LLCs shares a P.O. Box with Excession LLC, Musk’s family office, the Wall Street Journal reported.
Today’s tax code incentivizes the nation’s billionaires to plow as much of their money as possible into investments in … family funds, further amplifying their wealth.
While reporting has given us some insights into what these family funds are doing, regulations don’t require the sorts of disclosures that hedge funds must make — allowing family offices’ investments to largely remain in the shadows, providing yet another benefit to the billionaires of the nation.
Today’s tax code incentivizes the nation’s billionaires to plow as much of their money as possible into investments in these family funds, further amplifying their wealth and giving them larger influence over the political process. With these investments, they seed companies like Uber that fight against worker’s rights, or buy up farmland, making it harder for smaller farmers to compete.
To her credit, House Financial Services Committee chairwoman Maxine Waters has proposed draft legislation requiring family funds managing more than $750 million to provide disclosures about their investments. Although broader legislation — including a wealth tax — is sorely needed to address the inequalities that family funds create, Waters’s bill is a good start. Bringing more transparency into family offices could be an important first step for Congress to tackle this sprawling problem.
