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Agreed, it's very silly. No one attacks people in the upper middle class for using mortgage deductions, tax advantaged investment vehicles (ie 401Ks), education

Agreed, it's very silly. No one attacks people in the upper middle class for using mortgage deductions, tax advantaged investment vehicles (ie 401Ks), education accounts, tax loss harvesting etc to minimize tax burden; however, whenever a wealthy person tries to minimize their tax burden, they are immediately judged. It is not reasonable to state that one group of people can take advantage of tax code incentives and other groups cannnot.

ip26 8y ago
Middle class folks who are using the mortgage deduction generally use it exactly as intended. They don't have an army of accountants on retainer to figure out how to game the tax code and accomplish things that weren't really intended. The example that always sticks in my head- maybe this isn't true, but I've heard there are strategies of buying failing companies for pennies, shuttering them, and then writing off their losses on your own taxes. You incurred no risk, you lost no money, and now you pay no taxes. Whether it's actually intended to happen that way, it doesn't seem right, and ordinary people can't do it. Anyway, I'm not an accountant, but the upset over the tax exploits of the wealthy revolve around the concern that they are managing to exercise the tax code in a way that was never intended to pay less than they were meant to owe. Middle class folks don't wind up in the crosshairs because they generally file very ordinary returns, following both the letter as well as the spirit.
- ada1981 8y ago
  Do you have any more info on the “buying failing businesses” strategy? A
  - leetcrew 8y ago
    i'm also curious. unless i'm not understanding something, your tax writeoff could not exceed your cost basis on the purchase of the business, making the maneuver a net loss.
    - charlesdm 8y ago
      Tech startup A is capitalised with $1m. Burns through $1m, left with $0 in the bank, now has a million dollars in carry forward tax losses. That means you can make a million dollars without paying taxes. At a 21% corporate tax rate, that's $210,000 in taxes you'd pay on a $1m profit if you didn't have the carry forward loss. How much are the shares of that shell worth if you can use the tax losses to offset profits of a different, profitable business? Somewhere between $0 and $210,000.
      - leetcrew 8y ago
        sure, but aren't you still out the original $1mm? it looks like in your example you end up with $1mm, since you didn't have to pay tax on the profits of company B. but if you had just kept the original million and paid tax on B's profits, you would have ~1.8mm? or are you implying that you can buy company A for less than the market cap in the first place?
        charlesdm 8y ago
        Yes, the owners of company A can sell their shares to profitable company B for an amount between $0 and $210,000. Obviously you wouldn't burn a million to create tax losses. Remember: this company has $0 in the bank. It's essentially the same as a newly incorporated company, but with tax losses. There would generally be a discount on the value of the tax loss due to historical liability risks of the previous operating business. The things written above are highly simplified though, and might not give a completely accurate reflection of the situation. There are likely some anti avoidance rules in place to stop this behavior. But this again depends on the country. Billionaire John Malone (who hates taxes) talks a bit about tax in this business talk at a university: https://youtu.be/v5QfCLeloEg?t=2174 https://youtu.be/v5QfCLeloEg?t=2174. Also this: https://www.businessinsider.com/what-liberty-really-loves-about-sirius-tax-losses-2009-2?IR=T https://www.businessinsider.com/what-liberty-really-loves-ab... "There are some catches here. To use the NOLs (net operating losses), Sirius can't undergo a full change in control for three years. So Malone has to bide his time with his 40% for three years before scarfing up the rest of the company." This is one such anti avoidance mechanism. By being smart about taxes, he essentially got that business for free.
- charlesdm 8y ago
  That strategy works in some countries, not in others. Not sure about the US. In certain countries a profitable company can acquire a company with carry forward tax losses, and by merging both you can offset profits from the profitable company with the losses of the unprofitable one. Not exactly extreme tax avoidance I'd say. This is quite a well known mechanism.
- AnthonyMouse 8y ago
  > The example that always sticks in my head- maybe this isn't true, but I've heard there are strategies of buying failing companies for pennies, shuttering them, and then writing off their losses on your own taxes. You incurred no risk, you lost no money, and now you pay no taxes. Whether it's actually intended to happen that way, it doesn't seem right, and ordinary people can't do it. That's the problem with most of these situations -- people don't understand what's really happening. Suppose you have a company that started off with $25 million thinking it would turn it into fifty million, but really it turned it into five million. Then the company is still worth $5 million dollars, right? Except that it has a $20M tax loss, which is worth something. When other people have profits they're paying a 35% tax rate on, the tax loss has a market value of $7M, so the company is actually worth $12M. Which means that's what richie rich who wants to use the tax loss has to pay for it, since the seller can shop the tax loss to the highest bidder and get close to the full value for it. The money isn't going to the rich guy, it's going to the guy with the tax loss. Which means it's a rule that helps the little guy. If you take a risk and fail, it allows you to at least recover as much of your investment as the big guy with diversified investments would have had as a tax deduction -- i.e. it prevents creating a disadvantage when the little guy takes a risk vs. the big guy. And if you have creditors, the buyer has to make them whole in order to take the tax loss, which makes them more likely to lend to you to begin with. But people see the result that rich people are getting a tax deduction and clamor to get rid of the rule.
  - bsder 8y ago
    > But people see the result that rich people are getting a tax deduction and clamor to get rid of the rule. The big problem is that people see and remember companies like Toys R US and Guitar Center that would be JUST FINE if companies like Bain capital hadn't loaded them with debt to pile in tax writeoffs.
    - AnthonyMouse 8y ago
      > The big problem is that people see and remember companies like Toys R US and Guitar Center that would be JUST FINE if companies like Bain capital hadn't loaded them with debt to pile in tax writeoffs. Except that their strategy had nothing to do with tax write offs. In theory what they were doing is borrowing money to buy an ailing company and turn it around, and as long as they succeeded they could have serviced the debt. What they actually did was fail to turn the company around while charging it hundreds of millions in consulting fees, until it finally collapsed. The way things were set up, if they succeeded in turning the company around, they would get the profit in excess of the interest. If they failed, they still get all their consulting fees and the lenders are stuck trying to recover their loan principal in bankruptcy. That situation creates terrible incentives. Either they can be lazy and just collect consulting fees for doing nothing, or they can take big risks with house money and cash in if it pays off or walk away if it doesn't. The people who lent them the money were nuts. They would have been better off buying the company for themselves.
- refurb 8y ago
  You need to read up the history of the 401k.[1] It was an obscure part of the tax code that was never intended to be a tax-deferred saving vehicle until some guy named Ted Benna figured it out. He even suggested it to other clients and they said "no, the IRS will never buy it". So is your argument that anyone using a 401k is a "greedy tax cheat"? [1]https://learnvest.com/article/your-401k-when-it-was-invented-and-why https://learnvest.com/article/your-401k-when-it-was-invented...
  - ip26 8y ago
    Nearly forty years ago that was the case. Today it's expressly intended to be used that way, the gov't even heavily promotes it.
- dev_dull 8y ago
  > They don't have an army of accountants on retainer to figure out how to game the tax code and accomplish things that weren't really intended. Even that doesn’t sound that bad to me. All of those people have a job, are being paid and are also paying taxes. Also that sounds like a tax code bug and not a rich people problem. The government is allowed to collect exactly the minimum required by law and nothing more.
  - moate 8y ago
    >>Also that sounds like a tax code bug and not a rich people problem. The government is allowed to collect exactly the minimum required by law and nothing more. Not to be "that guy" but who do you think is writing the tax code, if not rich people and the government officials they help fund? Of course it's a rich people problem, or rather a rich people solution.
mcny 8y ago
> Agreed, it's very silly. No one attacks people in the upper middle class for using mortgage deductions, tax advantaged investment vehicles (ie 401Ks), education accounts, tax loss harvesting etc to minimize tax burden; however, whenever a wealthy person tries to minimize their tax burden, they are immediately jumped on. It can't be ok for one group of people to take advantage of tax incentives and not others. I don't like tax credits and deductions at all. I think all of these things are an additional burden on the lazy and the stupid (like me). Using taxes to encourage the public to do something or not do something doesn't even make sense for the political party that keeps harping about making taxes simpler. Personally, I think all businesses should pay taxes on total revenue. I don't give two ships if you had a revenue of $2B and expenses of $5B. You owe taxes on that $2B. If your business model is low margin, that's your problem. No credits. No deductions. No deferrals. The current policy isn't based on fairness or logic. It is simply based on who can get their way and by how much.
- ummonk 8y ago
  Do you think all businesses should be vertically integrated?
  - mcny 8y ago
    I have a (horrible) solution for that as well. Make the board criminally liable for the actions of employees, contractors, or other agents where such actions are a condition to the employment or contract. Tax rates will probably need to go down and this is obviously just a thought experiment because no change is possible as we are too comfortable being hypocrites.
    - AnthonyMouse 8y ago
      There is a much simpler solution for the vertical integration problem. If you buy something from another company which has already paid tax on it, you don't have to pay tax on it a second time. The resulting tax is called VAT.
- greglindahl 8y ago
JamesBarney 8y ago
Those tax breaks all sound like they benefit the middle class, even though they do mostly benefit the upper middle class. But are you surprised that people are more willing to accept tax breaks on the middle class over the rich?

ip26 8y ago

Middle class folks who are using the mortgage deduction generally use it exactly as intended. They don't have an army of accountants on retainer to figure out how to game the tax code and accomplish things that weren't really intended. The example that always sticks in my head- maybe this isn't true, but I've heard there are strategies of buying failing companies for pennies, shuttering them, and then writing off their losses on your own taxes. You incurred no risk, you lost no money, and now you pay no taxes. Whether it's actually intended to happen that way, it doesn't seem right, and ordinary people can't do it. Anyway, I'm not an accountant, but the upset over the tax exploits of the wealthy revolve around the concern that they are managing to exercise the tax code in a way that was never intended to pay less than they were meant to owe. Middle class folks don't wind up in the crosshairs because they generally file very ordinary returns, following both the letter as well as the spirit.

ada1981 8y ago
Do you have any more info on the “buying failing businesses” strategy? A
- leetcrew 8y ago
  i'm also curious. unless i'm not understanding something, your tax writeoff could not exceed your cost basis on the purchase of the business, making the maneuver a net loss.
  - charlesdm 8y ago
    Tech startup A is capitalised with $1m. Burns through $1m, left with $0 in the bank, now has a million dollars in carry forward tax losses. That means you can make a million dollars without paying taxes. At a 21% corporate tax rate, that's $210,000 in taxes you'd pay on a $1m profit if you didn't have the carry forward loss. How much are the shares of that shell worth if you can use the tax losses to offset profits of a different, profitable business? Somewhere between $0 and $210,000.
    - leetcrew 8y ago
      sure, but aren't you still out the original $1mm? it looks like in your example you end up with $1mm, since you didn't have to pay tax on the profits of company B. but if you had just kept the original million and paid tax on B's profits, you would have ~1.8mm? or are you implying that you can buy company A for less than the market cap in the first place?
      - charlesdm 8y ago
        Yes, the owners of company A can sell their shares to profitable company B for an amount between $0 and $210,000. Obviously you wouldn't burn a million to create tax losses. Remember: this company has $0 in the bank. It's essentially the same as a newly incorporated company, but with tax losses. There would generally be a discount on the value of the tax loss due to historical liability risks of the previous operating business. The things written above are highly simplified though, and might not give a completely accurate reflection of the situation. There are likely some anti avoidance rules in place to stop this behavior. But this again depends on the country. Billionaire John Malone (who hates taxes) talks a bit about tax in this business talk at a university: https://youtu.be/v5QfCLeloEg?t=2174 https://youtu.be/v5QfCLeloEg?t=2174. Also this: https://www.businessinsider.com/what-liberty-really-loves-about-sirius-tax-losses-2009-2?IR=T https://www.businessinsider.com/what-liberty-really-loves-ab... "There are some catches here. To use the NOLs (net operating losses), Sirius can't undergo a full change in control for three years. So Malone has to bide his time with his 40% for three years before scarfing up the rest of the company." This is one such anti avoidance mechanism. By being smart about taxes, he essentially got that business for free.
charlesdm 8y ago
That strategy works in some countries, not in others. Not sure about the US. In certain countries a profitable company can acquire a company with carry forward tax losses, and by merging both you can offset profits from the profitable company with the losses of the unprofitable one. Not exactly extreme tax avoidance I'd say. This is quite a well known mechanism.
AnthonyMouse 8y ago
> The example that always sticks in my head- maybe this isn't true, but I've heard there are strategies of buying failing companies for pennies, shuttering them, and then writing off their losses on your own taxes. You incurred no risk, you lost no money, and now you pay no taxes. Whether it's actually intended to happen that way, it doesn't seem right, and ordinary people can't do it. That's the problem with most of these situations -- people don't understand what's really happening. Suppose you have a company that started off with $25 million thinking it would turn it into fifty million, but really it turned it into five million. Then the company is still worth $5 million dollars, right? Except that it has a $20M tax loss, which is worth something. When other people have profits they're paying a 35% tax rate on, the tax loss has a market value of $7M, so the company is actually worth $12M. Which means that's what richie rich who wants to use the tax loss has to pay for it, since the seller can shop the tax loss to the highest bidder and get close to the full value for it. The money isn't going to the rich guy, it's going to the guy with the tax loss. Which means it's a rule that helps the little guy. If you take a risk and fail, it allows you to at least recover as much of your investment as the big guy with diversified investments would have had as a tax deduction -- i.e. it prevents creating a disadvantage when the little guy takes a risk vs. the big guy. And if you have creditors, the buyer has to make them whole in order to take the tax loss, which makes them more likely to lend to you to begin with. But people see the result that rich people are getting a tax deduction and clamor to get rid of the rule.
- bsder 8y ago
  > But people see the result that rich people are getting a tax deduction and clamor to get rid of the rule. The big problem is that people see and remember companies like Toys R US and Guitar Center that would be JUST FINE if companies like Bain capital hadn't loaded them with debt to pile in tax writeoffs.
  - AnthonyMouse 8y ago
    > The big problem is that people see and remember companies like Toys R US and Guitar Center that would be JUST FINE if companies like Bain capital hadn't loaded them with debt to pile in tax writeoffs. Except that their strategy had nothing to do with tax write offs. In theory what they were doing is borrowing money to buy an ailing company and turn it around, and as long as they succeeded they could have serviced the debt. What they actually did was fail to turn the company around while charging it hundreds of millions in consulting fees, until it finally collapsed. The way things were set up, if they succeeded in turning the company around, they would get the profit in excess of the interest. If they failed, they still get all their consulting fees and the lenders are stuck trying to recover their loan principal in bankruptcy. That situation creates terrible incentives. Either they can be lazy and just collect consulting fees for doing nothing, or they can take big risks with house money and cash in if it pays off or walk away if it doesn't. The people who lent them the money were nuts. They would have been better off buying the company for themselves.
refurb 8y ago
You need to read up the history of the 401k.[1] It was an obscure part of the tax code that was never intended to be a tax-deferred saving vehicle until some guy named Ted Benna figured it out. He even suggested it to other clients and they said "no, the IRS will never buy it". So is your argument that anyone using a 401k is a "greedy tax cheat"? [1]https://learnvest.com/article/your-401k-when-it-was-invented-and-why https://learnvest.com/article/your-401k-when-it-was-invented...
- ip26 8y ago
  Nearly forty years ago that was the case. Today it's expressly intended to be used that way, the gov't even heavily promotes it.
dev_dull 8y ago
> They don't have an army of accountants on retainer to figure out how to game the tax code and accomplish things that weren't really intended. Even that doesn’t sound that bad to me. All of those people have a job, are being paid and are also paying taxes. Also that sounds like a tax code bug and not a rich people problem. The government is allowed to collect exactly the minimum required by law and nothing more.
- moate 8y ago
  >>Also that sounds like a tax code bug and not a rich people problem. The government is allowed to collect exactly the minimum required by law and nothing more. Not to be "that guy" but who do you think is writing the tax code, if not rich people and the government officials they help fund? Of course it's a rich people problem, or rather a rich people solution.

mcny 8y ago

> Agreed, it's very silly. No one attacks people in the upper middle class for using mortgage deductions, tax advantaged investment vehicles (ie 401Ks), education accounts, tax loss harvesting etc to minimize tax burden; however, whenever a wealthy person tries to minimize their tax burden, they are immediately jumped on. It can't be ok for one group of people to take advantage of tax incentives and not others. I don't like tax credits and deductions at all. I think all of these things are an additional burden on the lazy and the stupid (like me). Using taxes to encourage the public to do something or not do something doesn't even make sense for the political party that keeps harping about making taxes simpler. Personally, I think all businesses should pay taxes on total revenue. I don't give two ships if you had a revenue of $2B and expenses of $5B. You owe taxes on that $2B. If your business model is low margin, that's your problem. No credits. No deductions. No deferrals. The current policy isn't based on fairness or logic. It is simply based on who can get their way and by how much.

ummonk 8y ago
Do you think all businesses should be vertically integrated?
- mcny 8y ago
  I have a (horrible) solution for that as well. Make the board criminally liable for the actions of employees, contractors, or other agents where such actions are a condition to the employment or contract. Tax rates will probably need to go down and this is obviously just a thought experiment because no change is possible as we are too comfortable being hypocrites.
  - AnthonyMouse 8y ago
    There is a much simpler solution for the vertical integration problem. If you buy something from another company which has already paid tax on it, you don't have to pay tax on it a second time. The resulting tax is called VAT.
greglindahl 8y ago

JamesBarney 8y ago

Those tax breaks all sound like they benefit the middle class, even though they do mostly benefit the upper middle class. But are you surprised that people are more willing to accept tax breaks on the middle class over the rich?