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The Secret IRS Files: How The Wealthiest Avoid Income Tax

edited June 8 in Other Investing
Can't vouch for the sourcing or the math but thought this was interesting:

image

The Ultrawealthy






Comments

  • edited June 10
    Too much for me to digest tonight. But I trust ProPublica. On YouTube, I've run into a guy who runs a business geared for the ultra-wealthy. He helps them strategize about how to hide money from the tax man. It can get extreme. He mentions that there are countries around the world that SELL citizenship, for a donation into a "National Fund." Alternatively, you could buy and hold real estate for at least 5 years. Then, after 5 years, you could apply for citizenship there. (Until then, you're granted a 5-year "golden visa," residency permit.) St. Lucia. Vanuatu. Dominica. Granada. Trinidad & Tobago. Serbia. Montenegro. Portugal. Ireland. (Got that one covered.) Even Egypt.

    This guy recently RENOUNCED his US citizenship. THAT will take care of the higher US tax in a big way..... He chose St. Lucia.
  • It isn't as easy as it sounds. They make it difficult for you to renounce your US citizenship. If your net worth is over 2 million$, then they make you pay all of the tax that you could possibly pay. Then you are liable for taxes for 10 years after you renounce. Plus, it's not like these other countries will let you get away with paying no tax. Maybe in the Caribbean, but that could change. So you renounce, pay a huge amount of taxes to the US, and are liable for the next 10 years. In Portugal, they have a special deal where you don't get taxed on your foreign income as long as it can be taxed in your home country. That plan is good for 10 years.

    The guy you mentioned is Andrew Henderson from Nomad Capitalist. It sounds like he isn't a tax resident anywhere since he has 3 or four homes around the world. He renounced his US citizenship. I guess it can be done legally, but everything is subject to change. Anyway the ultra rich don't need to worry because they get away without paying much tax legally.
  • I think this "true tax rate" is ridiculous headline generating nonsense. They take the total unrealized gain of public companies stock and then claim Buffet and Bezos, etc should have paid taxes on that number. They may be "worth" that on paper but these are unrealized gains, not money in the bank.

    Under this theory, we would all have to pay taxes on any unrealized gains, including the appreciation in your own real estate. If property values fall would the government give us a rebate?

    Buffet's income tax rate is 24/125 or 19%. I agree this is low, but so does he. Buffet has always said that the tax system is stacked in his and other millionaires favor.

    Wealth taxes have been tired and abandoned in Europe as ineffective. What we need is a simpler tax system, that makes it harder to game, and better audits and enforcement
  • It isn't as easy as it sounds. They make it difficult for you to renounce your US citizenship. If your net worth is over 2 million$, then they make you pay all of the tax that you could possibly pay. Then you are liable for taxes for 10 years after you renounce. Plus, it's not like these other countries will let you get away with paying no tax. Maybe in the Caribbean, but that could change. So you renounce, pay a huge amount of taxes to the US, and are liable for the next 10 years. In Portugal, they have a special deal where you don't get taxed on your foreign income as long as it can be taxed in your home country. That plan is good for 10 years.

    The guy you mentioned is Andrew Henderson from Nomad Capitalist. It sounds like he isn't a tax resident anywhere since he has 3 or four homes around the world. He renounced his US citizenship. I guess it can be done legally, but everything is subject to change. Anyway the ultra rich don't need to worry because they get away without paying much tax legally.

    YES, that's the guy. He never mentions all of the specifics you detailed. SHIT! Can the IRS really do that to someone? I have no sympathy for the uber-wealthy, but there must be limits upon what they can demand..... Henderson said that he renounced in some foreign US Consulate or Embassy, and they all were quite professional and considerate. And that was that. Wow. ...Yes, he owns homes in a few countries, recently got married. With the St. Lucia citizenship, he'd need a visa to come visit the USA again...
  • Another angle on our system of taxation (interpreting the fine print in an occasional Schedule K-1 is as close as I come to this approach):

    Private Inequity: How a Powerful Industry Conquered the Tax System



  • I found the original article pretty underwhelming scandal-mongering.

    For the record, the system that favors Bezos also favors me -- I have a very small number of shares in a boring old-tech company that were gifted to me a number of years ago which I (foolishly) never cashed out when I first received (and was a struggling student). As such I have modest paper wealth as well that I'm not paying tax on.
  • msf
    edited June 13
    ProPublica did its usual thorough job in crunching numbers, with thoughtful and transparent methodology. See, e.g. https://www.propublica.org/article/how-we-calculated-the-true-tax-rates-of-the-wealthiest

    That said, I agree that the press release was designed as much to shock as to inform. Like some others, I'm not thrilled with the way the "true tax" rate was presented. But there is something real behind it. The greater the wealth, the greater the amount of unrecognized income.

    The problem I see with ProPublica's presentation is not in the point being made, but in the way it glides too easily between wealth and income. ProPublica is more precise in its full writings, but is glib in its summary.

    Net increase in wealth is a reasonable measure of income for the wealthy, because "operating expenses" like necessities and taxes become a smaller percentage of asset gain as wealth goes up. But for the "common man", this is not a good calculation.

    For the typical middle class, early 40s household, net increase in wealth over the past five years (ending in 2018) was $65K while this household paid $62K in federal taxes - a 95% "true tax" rate. (ProPublica figures.) The reason is twofold: taxes and living expenses roughly match wage income so savings/growth is a small percentage of wealth, and what growth there is comes almost all from home appreciation.

    I hesitate to say that the issues raised by Shostakovich and sma3 are distractions, but they are details that don't take away from the main point. It's not just on growth of old-tech company stock where taxes are deferred, but also on the laborer's home appreciation.

    Further, how we tax home appreciation shows it is possible to protect the average person while still taxing outsized gains. We exempt $250K/$500K of gain on homes, even when it is realized. That means a lot to most people, but but it is a pittance on $100M mansions.

    sma3 wonders how unrealized capital losses would be handled. Why would that be any different from the way we treat realized losses? Currently you get to apply $3K of losses against ordinary income, but you have to carry over the rest on your books. It's not a hard problem; it's what we do now. And that $3K cap is another way in which we try not to hurt the typical taxpayer (letting them get an immediate benefit from losses) while not facilitating abuse of the system (converting huge cap gains losses into ordinary losses).

    I agree that the headline piece was designed for shock value; I disagree that there is less substance in the whole piece of work than meets the eye.
  • @msf

    I disagree that there is an adequate way to "tax" unrealized gains, that would not end up hurting the middle class and upper middle class more ( at least proportionally) than billionaires. So much more of the "billionaires" wealth is in non publicly traded vehicles and items that are hard to value at all ( Art and collectibles) that trying to value them for tax purposes would be almost impossible.

    You cannot spend unrealized gains. People have claimed that Billionaires can borrow money against them to avoid paying taxes without data to show this really happens.

    I have never heard of "unrealized income". You either receive income or you don't. There is no way I know of to realize income without declaring it except in an IRA.

    I believe this issue is a diversion, taking our attention away from practical and easy fixes to the tax system.

    The IRS budget has been gutted in the last decades, making it very unlikely that high income returns are audited at all. This is easy to fix with more staff and more audits, which would go a long way to identify unreported benefits that should be taxed and hidden tax shelters

    "Carried Interest" is just one example of simple changes in certain tax items that benefit mainly the wealthy that would raise a large amount of money.

    Eliminating capital gains carry over and trying to tax unrealized capital appreciation, even limiting it to a large dollar amounts will only hurt the baby boomers who have inherited the stock Mom got in 1950 or who have seen their 1980's $100,000 house become a $1,000,000 "mansion"
  • msf
    edited June 13
    Now we're reaching well into the realm of diversions.

    You cannot spend unrealized gains.

    What's being taxed is what we get in, i.e. income, regardless of whether it is spent or saved. If you want to switch what's being taxed from what we get in to what we spend, then suggest replacing income taxes with consumption taxes and see how well the middle class fares.

    I have never heard of 'unrealized income'

    You've probably heard of phantom income - income that's recognized for tax purposes but not realized. That can't be spent either.

    Eliminating capital gains carry over and trying to tax unrealized capital appreciation, even limiting it to a large dollar amounts will only hurt the baby boomers who have inherited the stock Mom got in 1950


    Except for 2010, there is no capital gains carry over. Just the opposite - heirs get a step up in basis. So let's skip the nonsense about baby boomers who have inherited stock with several decades of taxable gain. True the gain from 1950 is unrealized, but for tax purposes has already been wiped off the books. Same as ETFs wipe their gains off the books - by passing it along to someone else without being taxed on the transfer and without a cap gains carry over.

    Perhaps you're thinking about introducing a capital gains carryover and eliminating the step up, so that the gains become taxable to the heirs. Whether that tax is assessed immediately (by taxing unrealized gains) or not (by taxing gains when realized), the tax liability on that gain remains the same. Only the timing is different.

    So how large is that potential liability that "will only hurt baby boomers"?
    The Obama administration proposed repealing stepped-up basis subject to several exemptions, including a general exemption for the first $100,000 in accrued gains ($200,000 per couple). The US Department of the Treasury estimated that, together with raising the capital gains rate to 28 percent, this proposal would raise $210 billion over 10 years. Ninety-nine percent of the revenue raised would come from the top 1 percent of households ranked by income.
    https://www.taxpolicycenter.org/briefing-book/what-difference-between-carryover-basis-and-step-basis

    You may very well be right demographically. It could be the baby boomers getting all this liability. But that's not the question. The question is which baby boomers. The 1 percenters or the 99 percenters?
  • from above post "I have never heard of unrealized income". You either receive income or you don't. There is no way I know of to realize income without declaring it except in an IRA.
    Working in the dark, paid under the table, barter, all come to mind.
    Stay Kool, Derf
  • edited June 14
    Handling 'static' wealth and increases thereof is forever problematic, but the current state is untenable.

    For a cold look, or perhaps it's a hot look, at the state of play from the other direction, check out this article, including the comments, esp from food service workers:

    https://www.nytimes.com/2021/06/13/opinion/stimulus-unemployment-republicans-poverty.html

    "America’s high rate of poverty is a policy choice, and there are reasons we choose it over and over again. ... It is true, of course, that some might use a guaranteed income to play video games or melt into Netflix. But why are they the center of this conversation? We know full well that America is full of hardworking people who are kept poor by very low wages and harsh circumstance. We know many who want a job can’t find one, and many of the jobs people can find are cruel in ways that would appall anyone sitting comfortably behind a desk. ... "
  • beebee
    edited June 14
    When did the U.S. first impose a federal personal income tax?
    On August 5, 1861, President Lincoln imposes the first federal income tax by signing the Revenue Act. Strapped for cash with which to pursue the Civil War, Lincoln and Congress agreed to impose a 3 percent tax on annual incomes over $800.

    Congress repealed Lincoln’s tax law in 1871, but in 1909 passed the 16th Amendment, which set in place the federal income-tax system used today. Congress ratified the 16th Amendment in 1913.
    lincoln-imposes-first-federal-income-tax

    Made permanent by Taft:
    https://history.com/news/income-tax-howard-taft
  • How much would the original $800 be today if adjusted for inflation ?
    Derf
  • From the St. Louis Fed (reporting BLS data), using 1967 as baseline, the estimated CPI for 2021 is 792.5. The CPI for 1861 was 27.
    https://www.minneapolisfed.org/about-us/monetary-policy/inflation-calculator/consumer-price-index-1800-

    That would make the inflation adjusted value of $800 equal to $800 x 792.5/27 = $23,481.48.

    image

    Source: https://www.officialdata.org/us/inflation/1850
  • beebee
    edited June 14
    Derf said:

    How much would the original $800 be today if adjusted for inflation ? Derf

    I read $800 would equate to $16K in today's dollars, but will trust @msf.

  • The problem, in my mind, with the whole "tax the rich" idea is, at MINIMUM, that someone with means can easily relocate to avoid them. Same thing with businesses. I vividly recall Bjorn Borg setting up residence in Switzerland to avoid the taxes which would have been levied by Sweden. Imo, taxes are ALWAYS going to fall on those with SOME means, but who have insufficient funds and mobility to avoid them. Philosophical argument is wonderful, but reality has a tendency to circumvent theory.
  • Do you know the non-anecdotal data about how few wealthy move as a function of tax policy?
  • edited June 15
    Not every one wants to move and leave their relatives, friends, favorite shops, teams, restaurants, house and language, etc. behind. But the "Oh no, the rich will flee" issue can be resolved with tax treaties with other nations like Switzerland, insisting on extradition for tax avoidance, and stiff exit taxes for those leaving to avoid paying their fair share. In fact creating a baseline global income tax for all nations in the treaty for trade to be conducted would be useful.
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