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For the Wealthiest, a Private Tax System That Saves Them Billions
- deleted 11y ago[deleted]
- seibelj 11y agoIt just amazes me that you could spend your whole life working as a tax panner in a family office, when you aren't even related to that family. An entire career devoted to helping a single super rich family avoid taxes. What a life!
- draw_down 11y agoA lot of us do basically that, it's just less direct, and maybe not an actual family.
- Dwolb 11y agoAgreed - but there are a lot of family businesses that do billions in revenue. A few off the top of my head are Cox Enterprises which does 17B in revenue and is owned 99% by the family, SC Johnson which does 11B and my understanding is it's mostly held by the family, and Hallmark which does $3.8B and is held by the family. We also could trace back family shareholders of large corporations who have gone public - Wal-Mart, Ford, etc.
- patio11 11y agoIt's a career devoted to helping a very large enterprise with diverse interests comply with a very complicated, fact-intensive, and generally multinational set of regulations in the same manner as every tax professional since Learned Hand: diligently paying the lowest amount consistent with the law. Substantially every business owner you know -- the ones with top line revenues of $100k, $1 million, $10 million, and $100 million -- employ 0.05 to 100+ full-time accountant equivalents for the same purpose. I am on uncomfortably good terms with my friendly local tax office and they're all but begging me "Mr. McKenzie, it will be easier for all of us if you just get a pro to do it for you this time." (Tax agencies essentially delegate surveillance duties to CPAs; a Japanese CPA signing off on my return means the Meguro tax office doesn't have to trouble their heads about how Japanese tax law interacts with an American LLC owned by a Japan-resident American covered by a really complicated treaty.)
- ahh 11y agoWhy don't you contract to a CPA then? I wouldn't think you'd be opposed to hiring a professional for his specific skills.
- patio11 11y agoI have a really good CPA in the US. I simply have not been able to locate one in Japan yet, because my requirements are rather esoteric: table stakes is "bilingual; you need to know the difference between on-premises and off-premises software or be able to retain a working model of that difference after having it explained to you once; you must be comfortable working in the intersection of Japanese and American tax law; you need to be comfortable doing business over email and Dropbox; please don't charge me $2k per hour as that will eclipse the profits of the business before my taxes get filed." I don't know who best fits these criteria in Tokyo yet but would welcome an introduction. I have a strong suspicion that I was the best qualified person in Gifu. Hence me trudging down to the tax office a few times a year with a notebook, a stack of forms, and a highlighted copy of a National Tax Agency publication with the query "So I've got an odd one for you..."
- chollida1 11y agoI wrote a bit about this in an earlier comment as to how hedge fund employee's shelter their taxable income here: https://news.ycombinator.com/item?id=10457725 https://news.ycombinator.com/item?id=10457725 The fact is that this is going to happen because there just isn't a "one size fits all" tax code that would work. If you tax income, then people will take their compensation in a corporation. You tax corporations, then people will take their compensation in a deferred format, like options. YOu tax that and people will just move their money making operations off shore. You tax that and people will start to use charities, ala the famous Walton family charity tax shelter... http://www.bloomberg.com/news/articles/2013-09-12/how-wal-mart-s-waltons-maintain-their-billionaire-fortune-taxes http://www.bloomberg.com/news/articles/2013-09-12/how-wal-ma... And now it becomes very obvious why the tax code is so convoluted. If you make 8 figures year then it's worth your while to spend alot of money to structure your finances so you pay as little tax as legally required. Someone like Mark Zuckerberg never needs to earn another dollar or get another option grant again. He can just let his capital gains appreciate and loan against it such that he doesn't have to ever pay income tax again. As an accountant once told me unless you tax wealth then you can't fight this... and good luck getting an annual tax against wealth passed into law.
- bradleyjg 11y agoAs an accountant once told me unless you tax wealth then you can't fight this... and good luck getting an annual tax against wealth passed into law. The direct tax clause of the original constitution, even as modified by the sixteenth amendment, probably forbids such a thing at the federal level. So it'd likely take a constitutional amendment. That said, I'm not quite as pessimistic as you. Between consumption taxes and estate taxes (which are about the only wealth tax we have) we could get at most money if we had the will to do so. The estate tax is filled with holes because Congress wants it to be, not because of any inherent complexity or definitional difficulties. There is an ultimate tax avoidance strategy of renouncing citizenship and living and consuming abroad. I would impose a lifetime ban on entry on renouncers, but beyond that I think it is fair game. If you aren't an American we shouldn't be taxing you.
- vezzy-fnord 11y ago
- cbeach 11y agoThe Laffer Curve illustrates a sweet spot of taxation to produce maximum revenue. People will always avoid tax if it's too high. Either they'll pay millions to accountants to avoid paying tens of millions to the taxman, or they'll simply not bother working so hard and they'll stop fighting to realise their career potential. The answer is not for the taxman to spend tens of millions to reclaim tens of millions of tax. The answer is to lower tax rates to the sweet spot of the Laffer Curve and thus maximise revenue. That's all too boring and technical for the media, though, and it won't sell papers. The media aren't concerned with maximising Treasury revenue. Instead they indulge people's instinctive grievances around inequality and demonize the wealthy. https://en.wikipedia.org/wiki/Laffer_curve https://en.wikipedia.org/wiki/Laffer_curve
- theyoungestgun 11y agoSee-also: trickle down economics.
- jbooth 11y agoSo you're saying that if the tax were lower, people would fire their accountants and pay more taxes out of the goodness of their hearts? A sense of fairness?
- cbeach 11y agoIf tax is lower, tax loopholes are less lucrative. Basically you kill the market for accountants.
- viscanti 11y agoThey would if the cost of hiring someone to help save money on taxes cost more than it saved. It's not about a sense of fairness. If paying someone to save on taxes is a bad investment, people stop doing that.
- jbooth 11y agoSo, if we're talking revenue of billions.. cut taxes to 0.0001% and that's the peak of the Laffer Curve where we maximize revenue? That's the argument?
- hackuser 11y agoSocieties where money strongly influences politics breed corruption and lose productivity: You can buy political influence with money, of course, but also it works vice-versa: You get money from political influence, by controlling law and policy, rather than as a reward for economically productive activity. The business of the nation, or at least a major industry, becomes corruption.
- dogma1138 11y agoName a single society in history where money didn't strongly influence politics.
- jdimov10 11y agoThis is where all the commies are dying to say "communism", but even they don't have the eyes for that.
- afutd 11y agoThe 1980s called. They are in dire need of more cold warriors and want you back.
- levosmetalo 11y agoGrowing up in an communist country I saw much less corruption than after we were liberated by democracy and liberal capitalism has been introduced. As a consequence of the system change, the corruption throughout the country rose to the unforeseen levels. But of course, since communism lost, at least for now, it is an easy target for snarky comments.
- dogma1138 11y agoMy parents grew up in soviet Russia they ran out in the late 80's if they would've waited and survived the turmoil they would most likely have become Oligarchs but it wasn't a good time to be a prominent Jew in Russia and they tell quite a different story. Every institution was corrupt to the bone, if you wanted to send a package somewhere and for it to actually arrive at it's destination you had to bring 2 loafs of bread and a jar of home made pickles with you to the post office. Communism like most dictatorships was more or less clean and organized on it's surface. One of the scariest things about authoritarian regimes is just how normal and calm they seem to many people that live under them. Heck martial law is quite commonly regarded by many to be quite "nice", all crime stops, the streets are clean, no one bothers anyone ofc if any trouble ensues all parties tend to be lined up against the wall and shot but other than that it's almost utopic.
- elbigbad 11y agoI was interested in some of the mechanisms that they use specifically. Here are some examples from the article: 1. Mr. Loeb, for example, has invested in a Bermuda-based reinsurer — an insurer to insurance companies — that turns around and invests the money in his hedge fund. That maneuver transforms his profits from short-term bets in the market, which the government taxes at roughly 40 percent, into long-term profits, known as capital gains, which are taxed at roughly half that rate. It has had the added advantage of letting Mr. Loeb defer taxes on this income indefinitely, allowing his wealth to compound and grow more quickly. 2. One aggressive strategy is to place income in a type of charitable trust, generating a deduction that offsets the income tax. The trust then purchases what’s known as a private placement life insurance policy, which invests the money on a tax-free basis, frequently in a number of hedge funds. The person’s heirs can inherit, also tax-free, whatever money is left after the trust pays out a percentage each year to charity, often a considerable sum.
- toast0 11y agoNot sure about the offshore reinsurer, but the charitable trust sounds like a charitable lead trust, probably a non-grantor charitable lead annuity trust. The basic idea with a charitable lead trust is that it's organized for a certain term (a number of years, or life of a specific person or some combination) and during that term, the charity will get specific payments (subject to the trust remaining solvent), and when the trust ends, a beneficiary will get the remainder. If the trust is properly constructed, when the trust is funded, the present value of the remainder is determined and used as the gift/estate tax value for the gift to the beneficiary; if you can make that zero, while also investing assets in the trust in such a way that the remainder is not actually zero, then you've avoided gift/estate tax. I believe the donor also gets a charitable tax deduction for the present value of the payments to charity, spread over 5 years, and subject to clawback in some cases. I'm not really sure how the private placement life insurance plays in, it's likely a way to avoid income tax for the trust (a charitable lead trust is subject to tax on its income), as life insurance proceeds are generally untaxed.
- winstonewert 11y agoDemocracy has failed. Nobody likes what's going on here, yet, somehow despite democracy we cannot produce change.
- deleted 11y ago[deleted]
- vezzy-fnord 11y agoMight as well just scrap representative democracy as a whole rather than add band-aids like this. Not that closing tax loopholes is even that huge of an issue. It's mostly a populist talking point. We're not pegged to gold anymore.
- minimuffins 11y ago> scrap representative democracy What would you like to see it replaced with?
- vezzy-fnord 11y agoI'm not advocating anything personally, I'm saying the GP's proposal might as well go further into decentralized direct democracy, which is clearly the intention.
- andriesm 11y agoI agree with many of the sentiments here, as a non-American coming from a dispotic regim. I spend months in the US to explore setting up my startup here and to talk to investors and possible clients - * I was put off by the tax system. * The taxes are too high, and too complex. With such high taxes I'm surprised the gov has so much debt. Sure there are places with higher taxes. But I thought America was the land of opportunity, the mecca of Capitalism. It stil was all that - I would love to have the option to stay there - an amazing experience - the quality of life and the level of consumer choice is fantastic. However America should consider copying the tax codes of places like Singapore, Hong Kong or Taiwan. The biggest challenge is of course the federal system which imposes taxes seperately at the state and central gov/federal level - making things complicated - but of course in return creates stronger local alignment and more choice. (Better for democratic freedom) But especially business taxes need to top out at lower level at the federal level. In my opinion, as an outsider. We ended up NOT registering our business in the US and would only do so if forced by investors - but we'll be bootstrapping for a while so not a consideration. The US as a place to register a startup for an outsider, is a seriously unattractive proposition. - On top of this the US has this batshit crazy policy of double taxation for international people. Most other countries have double taxation treatiea so that you aren't taxed twice on the same income! The US does not.
- iheartmemcache 11y agoEveryone is put off by the tax system. It's a product of 300 years of cronyism. Want your tax break? Pay lobby Firm Jones and Smith, LLP on K-street a few million dollars, and in goes your clause as a subsection of an anti-gun hysteria bill passed right after some white elementary school kids in Connecticut get massacred. Like for-profit-prisons, there are too many people who count on the existing tax framework to see any actual alteration of it. The defense department needs their billions, as do the sub-contractors who make money charging 4x the market rate for because they're part of some GSA Alliance contract vehicle; the tax attorneys at Skadden depend on it being complicated, the hundreds of thousands of CPAs do too, as do the people employed by the IRS. If you change the tax-code to something like HK, all of those economic sub-sectors fall apart. As someone who's a partner at a consultancy and in the highest marginal tax bracket, I'd be more than happy to pay my fair share if companies like Apple and Exxon didn't use countries like Ireland to avoid remittance taxes to the tune of 250 billion dollars a year, effectively putting the burden on the rest of us. (Well that and if we stopped spending 5x the aggregate of the next most-heavily invested countries re: defense, and re-allocate even 5% of that money to national education, STEM programs for innercity kids, the arts, and the NSF but again, fat chance of that happening.)
- djvu9 11y agoI think people should really talk more about how the government spends the collected tax money instead of taxing those wealthy more.
- rdudek 11y agoDoesn't matter. Money is created through debt on national level. Eliminate the debt and you're running risk of deflation, not to mention other economic issues associated with that, like job losses in public sectors.
- minimuffins 11y agoFortunately for all of us we can talk about both.
- rayiner 11y ago> > Two decades ago, when Bill Clinton was elected president, the 400 highest-earning taxpayers in America paid nearly 27 percent of their income in federal taxes, according to I.R.S. data. By 2012, when President Obama was re-elected, that figure had fallen to less than 17 percent The article talks a lot about "loopholes" and a "private tax system" but fails to mention the fact that in 1992, the long term capital gains tax rate was 28%, and in 2012 the highest rate was 15% (enacted 2003). That's not a "loophole" or a policy enacted in private. It's a conscious policy decision, one which was a part of Bush II's economic platform, and one which was publicly debated at length both when it was enacted and when Obama effectively made it permanent in 2013, except for raising the top bracket to 20%.
- snowwrestler 11y agoAnd it's worth remembering, as people will try to make it a partisan argument, that Ronald Reagan signed a tax reform bill in 1986 that matched the top capital gains rate to the top income rate. It's been ratcheting back down ever since.
- deleted 11y ago[deleted]
- themartorana 11y agoIt's often said that if he lived today, Regan would be a Republican pariah. While I'm of the group of people that thinks Trickle-Down Economics is one of the worst policies enacted in my 37 years on this planet, it's been so manipulated and abused as to render it almost nothing like what Regan was after.
- deleted 11y ago[deleted]
- noobermin 11y ago>It's a conscious policy decision[...]and when Obama effectively made it permanent in 2013 You say it as if it was intentional. This was in the heat of the fiscal cliff on new years of 2013[0]. Hard to claim that it was very much a rational, deliberated decision. [0] https://en.wikipedia.org/wiki/United_States_fiscal_cliff https://en.wikipedia.org/wiki/United_States_fiscal_cliff
- known 11y agoTax Corporate Revenues, Not Profits; http://news.yahoo.com/warren-buffett-secretary-talk-taxes-221442297--abc-news.html http://news.yahoo.com/warren-buffett-secretary-talk-taxes-22...
- harryh 11y agoThen you put low margin companies out of business while high margin ones still thrive.
- tmaly 11y agotake a look at the loop holes added in the recently passed omnibus spending bill. The tax code in the US just keeps getting patched. Would it not just be easier to choose a flat tax for individuals and stick it to everything? Think of all the paper work costs saved. Another idea would be to go back to an apportioned scheme like we originally had in the constitution. Maybe by congressional delegates than by state as RI could not possibly match CA in tax contributions.
- rmykhajliw 11y agoThe higher income people must pay less taxes, because society cannot provide enough services for their paid taxes. It seems as paradox but that's the Truth. Otherwise the rich person will find a way to pay 0's taxes in one of dozen tax-haven places like andora. As result government got nothing. That's why the richest you're the lover taxes you have to pay.