IRS leaks reveal how the wealthiest avoid tax

  1. 5

    Interesting read. The number of high income countries with wealth taxes have been dropping (from 12 in 1990 to 3 in 2018, https://www.oecd.org/ctp/the-role-and-design-of-net-wealth-taxes-in-the-oecd-9789264290303-en.htm) because they don't move the needle (according to OECD):

    In 2016, tax revenues from individual net wealth taxes ranged from 0.2% of GDP in Spain to 1.0% of GDP in Switzerland. As a share of total tax revenues, they ranged from 0.5% in France to 3.7% in Switzerland

    (Switzerland stands out, but has no property tax)

    Check out Timothy Taylor's Why Have Other Countries Been Dropping Their Wealth Taxes? ( https://conversableeconomist.blogspot.com/2019/02/why-have-other-countries-been-dropping.html ) especially the "What other incentives does a wealth tax create?" part, where point 1 applies to indiehackers:

    1. While we often think of a wealth tax as being applied to those who have already "made it" and accumulated a fortune, it's worth remembering that when a small- or medium-sized business is trying to get established, or going through hard times, it may lead to a situation where the overall value of the asset is substantial, but profits may be near-zero or even negative for a time. But at least in theory, a wealth tax would still be owed. As the OECD report notes:

    "Under a net wealth tax, however, if income is zero or negative, the tax liability will still be positive if the capital value of the assets remains positive. In practice, new entrepreneurs which tend to generate low, or even negative, profits in their first few years of operation would still face a wealth tax liability. Thus, a heavy net wealth tax which is unlinked to income might discourage entrepreneurship relative to an income tax with (perfect) loss offset."

    Also since the Propublica's article mentioned borrowing money as a way of how "megabillionaires" pay their "megabills", it's worth noting that a high wealth tax incentives them to do so:

    1. A wealth tax will tend to encourage borrowing. Total wealth is equal to the value of assets minus the value of debts. Thus, one way to avoid a wealth tax is to borrow a lot of money, in ways that may or may not be socially beneficial. The OECD writes: "[D]ebt deductibility provides incentives to borrow and can encourage tax avoidance. If the wealth tax base is narrow, taxpayers will have an incentive to avoid the tax by borrowing and investing in exempt assets or – if debt is only deductible when incurred to acquire taxable assets – taxpayers will have an incentive to invest part of their savings in tax-exempt assets and finance their savings in taxable assets through debt."
  2. 3

    My favorite part of this article are the responses from the people they reached out to:

    A spokesman for Soros said in a statement: “Between 2016 and 2018 George Soros lost money on his investments, therefore he did not owe federal income taxes in those years. Mr. Soros has long supported higher taxes for wealthy Americans.”

    Musk responded to an initial query with a lone punctuation mark: “?” After we sent detailed questions to him, he did not reply.

    [Carl Icahn] "So to answer what I understand to be your basic question — do I think it is appropriate for an individual to pay no income taxes in a year where he had absolutely no income, the answer is emphatically yes. That is why they are called income taxes."

    [Warren Buffett] "After the run-off period following my death, about 99.5% of what I have will go to some combination of taxes and disbursements to various philanthropies… I believe the money will be of more use to society if distributed philanthropically than if it is used to slightly reduce an ever-increasing U.S. debt. But that will be for Congress to determine. Lawyers recommend trusts for avoiding public scrutiny of wills. My will eschews this technique and the public will be able to check what I did compared to what I have said."

    1. 2

      It feels slightly unfair to bracket Buffet and Soros, who as Soros says have advocated for higher taxes on those who hide weath, with others who actively work to get free money from state and federal governments to support their businesses, while "losing" money in high-growth investments.

      For the people who'll inevitably turn up in this thread saying "wealth taxes don't work, let's rely on the wealthy spending their money so everyone eventually gets a share", I recommend Free Lunch Thinking https://www.amazon.com.au/Free-Lunch-Thinking-Economics-Economy/dp/1847942733

      It goes deeply into whether pro-inequality ideas like the Laffer Curve and "trickle-down economics" and have a basis in fact. The Laffer Curve, amazingly, does not. Who could possibly have predicted that paying the rich more does not increase spending to the same degree as putting money in the pockets of those who have no spare money?

      1. 2

        Bezos is currently building a billion-dollar yacht so huge that it comes with its own support yacht (I am not making this up). This represents, say, 1% of his wealth. If you believe in trickle-down, sure, he just supported a shipbuilder for 2 or 3 years. But what else is he going to buy? I doubt he owns more than 50 refrigerators. He's not going to buy 14,000 of them. Or 10,000 sofas. Or any of the kajillion things that make up the economy.

        For many families, a decent sofa is 1% of their wealth. They're far more likely to buy another sofa, and relatively soon, than Bezos is to buy another yacht. That's tiny trickle-down, but the scale is so huge it works. The only way it works for the rich is if a lot of their "purchases" are taxes...which despite their whining is a far, far more efficient market-driven way to distribute resources.

        Many policy experts on both sides of the aisle are also deeply concerned by the rise in "charitable giving," typically the explosion of private foundations since the 1980s. Wow, Scrooge! No, the problem here is that an individual has an outsized influence on matters that affect society as a whole. If you think political donations are bad, what about a foundation that uses its wealth to direct public policy on education, healthcare, etc., none of which affects the foundation personnel? (You best believe their kids aren't going to whatever hellish nightmare they're trying to remake education into.)

  3. 2

    I'm sorry but the entire premise of this is article is completely wrong. They are not avoiding income tax, they are paying income tax on income and paying cap gain where they "realise" the capital gain. e.g. Bezos sold $4B worth of AMZN stock to invest into his other businesses, he paid roughly $900M in taxes. Yes you can argue that 22% is not high enough for cap gains tax, it should be more. But growth in net worth !== income. If I hold $1M in AMZN for 10 years and never sell, I shouldn't be taxed on the unrealised capital appreciation. This should only be recognised when/if I sell those shares. Same goes for Buffett.

    If we go down a path of taxing on unrealised capital growth, then that means you will also need to pay the same taxes on the growth of your pension over the last 12 months. Are you okay with destroying the power of compound interest? Also what about investment into startups where the investors are yet to see any return of money?

    This entire argument is poorly thought out.

    1. 1

      I'm quite OK with destroying the power of outsized compound interest--at the levels we're talking about, it is another animal completely. "BUT MAH STONKS!" is a red herring. If your interest is a billion dollars or more a year, yes, we need to do something about that. If you are a typical bourgeois with $3M in stocks and appreciation of $300-500k a year--actually you're not typical, you're way ahead of the pack--you're already getting taxed plenty and you're too small potatoes to worry about.

      You also might not need a private pension if the US had a comprehensive safety net.

      We could do things like give all elderly people free food forever. Close the Medicare drug gap even without health care reform, under the current corrupt system. Guarantee safe, clean, comfortable housing for every elderly person. Subsidize huge discounts on travel, attractions, etc., just like Europe does for its citizens. How does that retirement sound?

      As a society, we need to talk more about what having this tax money might mean to the quality of our daily lives. It's a banger. Including if you're comfortable now.

  4. 2

    Correct me if I’m wrong, but are they comparing rich people wealth with normal people salary?
    Those are two different things

    1. 2

      Feels like that is what they are doing. Imagine having to a wealth tax on your company that grew from 10 million to 50 million but with no profits in the beginning. A wealth tax would create so many wrong incentives.

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