The Secret IRS Files: Trove of Never-Before-Seen Records Reveal How the Wealthiest Avoid Income Tax
www.propublica.org
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ProPublica has obtained a vast cache of IRS information showing how billionaires like Jeff Bezos, Elon Musk and Warren Buffett pay little in income tax compared to their massive wealth — sometimes,…
@Jeffrey
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I read the book “Quit Like a Millionaire” by Kristy Shen & Bryce Leung, a couple chapters in the book detail the authors’ frustration with how the wealthy can get away with paying so few taxes, and their eventual conclusion that “if you can’t beat them, join them”. I don’t agree with their conclusion, but it was a really interesting chapter to learn about tax optimization which is somewhat different than tax evasion.

Tax optimization is making lifestyle changes and structuring you personal finances in specific ways that incur the lowest taxes/fees possible. Things like maximizing contributions to tax deferred accounts (401k, 403b, etc…) to lower your taxable income for years when you sell investments, and “churning” capital gains on years when you do not. However, the ultra-wealthy are on a whole other level.

Many of the Wealthy Americans’ companies pay no taxes by re-investing profits in order to turn that profit into an expense. It gets complicated in the ways they do that, but one way is to set up another company (a shell company) in a country with lower business taxes than the US. Then, pay the shell company all of the American company’s profits. Those funds do not need to be transferred back to America (and therefore taxed by the US.) to be spent, the shell company can spend those funds for the American company anywhere in the world. Apple is notorious for doing this. To my knowledge using a tax haven is in the gray area between tax optimization (legal) and tax evasion (fraud).

You can, of course, always cross the fine line into tax fraud and save far more money by cheating your fellow citizens.

One example of tax fraud that I have personally witnessed was when a wealthy donor gave to a Boy’s and Girl’s club where I was volunteering. The donor, instead of donating money which was what was really needed, they donated toothpaste and tooth brushes. This was the cheapest, garbage toothpaste I have ever seen, and probably cost the donor ~$0.25 per tube, but they probably wrote if off at a cost of ~$4.00 per tube. I’m estimating my numbers, but they probably turned a ~$1,000 donation into a ~$16,000 tax write off. IF they get audited by the IRS (and that is a big if) they might get caught, or more likely the Boy’s and Girl’s club will confirm they received a donation of 4000 tubes of toothpaste and the auditor will drop the issue.

I am a huge proponent of full-scale income tax reform in the US, it’s about much more than not requiring individuals to do their own taxes each year, it’s about seriously reducing tax fraud and setting the IRS up for success by reducing the impossible workload that is placed on their auditors. I am not an expert on tax policy, but it is pretty clear the tax code needs to be fixed.

@j0ta
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Nice explanation Keep it up !

@Jeffrey
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I kinda went off on tax havens and tax fraud, but I forgot to mention securities-based lending which is 100% legal, and is the main way rich people avoid paying taxes. It’s so easy to do, J.P. Morgan has a simple web form where wealthy clients can request for a bank representative to contact them or their assistants to set up a loan.

Most rich people hold their wealth in the form of securities like stocks, bonds, and real estate. They only have to pay income tax when they sell these securities, so as long as they don’t sell their securities they won’t pay income tax. However, rich people need money to live too, so what they can do instead of selling their securities is take out loans and use their securities as collateral. The info graphic on J.P. Morgan’s site shows how this strategy is more profitable than selling assets, but to make things egregious keep in mind that Client A would also pay $577,707.50 in capital gains taxes while Client B pays $0! Client B does pay $58,500 to service the loan, but that is paltry compared to the additional $148,500 profit, and dodging almost $600,000 in taxes.

Again, this is 100% legal. These tax optimization strategies, and the policies that permit them, are a big contributor to the dramatic wealth inequality in the United States. There’s a lot of focus on income inequality, raising the minimum wage, and Universal Basic Income, but these campaigns primarily distract from the root of the problem: the ownership of securities needs to be more equitably dispersed, and tax policies must be rewritten to disallow flagrant tax dodging.

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