Financial Policy Director Alexis Goldstein writes about how 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.

The 25 richest Americans pay little to no taxes thanks to leveraging loopholes in the tax code, according to a report from ProPublica released [in June, 2021]. 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.

Read the full article on Truthout here.