The Secret IRS Files: Trove of Never-Before-Seen Records Reveal How the Wealthiest Avoid Income Tax

[Ruth Harris]

View attachment 34023

Did you read the article for the image on the left? This was included in it:

Most of the European countries that had wealth taxes abandoned them after discovering they didn’t raise enough money to justify the administrative headache of assessing a bunch of hard-to-value assets, such as private companies and art. Or the economic distortions that resulted when wealthy people started trying to avoid the tax, for example, by investing elsewhere, or keeping their companies private.

The unintended consequences of what you propose are what worries me.

Ruth

 

[Harry Bosch]

So, you think that appreciating stock value should be taxed but not appreciating real estate? Secondly, would you favor allowing people to deduct decreases in stock value on their taxes?

I'm just a peon. Just a struggling small manufacturer. And yet I have a private banking LOC (unsecured LOC) of $200,000. I mostly only use it for emergencies. But sometimes use it for short term purchases of raw material when it's cheap (materials are very very expensive today). The LOC is unsecured, but if my stock (really net worth) dropped by some percentage (this isn't well defined by my banker); my LOC could be reduced or cut off. I think that it would be problematic to figure out how much I should be taxed on it. Finally, as you can probably see, if my taxes would go up, I'd simply cancel the LOC and figure out another way (probably a HELOC on my house).

You're just a peon, not someone like Jeff Bezos. I've seen no wealth tax proposals that would apply to you.

I can't believe the number of people who are defending people accruing more wealth than that of kings as if it's an attack on small investors.

The larger issue is that I really don't like federal wealth taxes for the following reasons: 1. the federal gov dosn't have authority to do this now. It would be quite the political gift to give to the Trumpsters if the dems tried to implement it now! 2. I think that taxing wealth should be more open to the states. The states have much more of a cash flow issue than the fed as they are required to balance their budget yearly. 3. Wealth taxes will just incent people to cheat or figure out loopholes. Firstly, there will be fewer companies going public (there is a public advantage when private companies go public which is another subject). Some people will simply move to other countries that are more favorable to them. Wealth taxes will encourage people to liquidate (or hide) there assets. This could cause massive excess liquidity in the market and inflation. And of course, what happens when people sell, the value of these assets will go down. If you want more tax dollars, a much simpler method would be to simply tax consumption on luxury items.

 

[jonatha]

I will point out that "taxing margin loan proceeds" is not the same thing as a wealth tax....

 

[Harry Bosch]

So, you think that appreciating stock value should be taxed but not appreciating real estate?

I don't see a conceptual problem with taxing gains that are effectively realized (e.g., by taking a loan against the underlying appreciated property, rather than selling it). This would include HELOCs, which have already been limited to a substantial degree.

Details of rates, threshholds, and exemptions can be haggled over...

Secondly, would you favor allowing people to deduct decreases in stock value on their taxes?

If you'd like to suggest a mechanism by which decreases in the value of stock that is not sold can cause outward cashflow I'll consider it. (Although I did mention above the possibility of getting around the subject problem by having certain large shareholders and/or insiders adopt the mark-to-market rules, which would in fact allow them to apply unrealized losses against unrealized gains, even, I suppose, to the point of showing a loss on their tax return.)

ETA - I suppose I should have said this "could" include HELOCs. Borrowing against equity that was created by paying down a loan is not the same (I think) as borrowing against equity created due to an increase in the home's value above its initial purchase price...

Again, taxing values in real estate for Heloc loans would be a very large tax increase on the middle class (and anyone who utilizes the equity in their home for purchases). This would be wildly unpopular. And most people would simply reduce their consumption. That might not be a terrible thing (not a good idea to buy short term assets using long term assets). But again, republicans would love this. I don't understand Mark-to-Mark, but will study it later.

 

[jonatha]

I don't see a conceptual problem with taxing gains that are effectively realized (e.g., by taking a loan against the underlying appreciated property, rather than selling it). This would include HELOCs, which have already been limited to a substantial degree.

Details of rates, threshholds, and exemptions can be haggled over...



If you'd like to suggest a mechanism by which decreases in the value of stock that is not sold can cause outward cashflow I'll consider it. (Although I did mention above the possibility of getting around the subject problem by having certain large shareholders and/or insiders adopt the mark-to-market rules, which would in fact allow them to apply unrealized losses against unrealized gains, even, I suppose, to the point of showing a loss on their tax return.)

ETA - I suppose I should have said this "could" include HELOCs. Borrowing against equity that was created by paying down a loan is not the same (I think) as borrowing against equity created due to an increase in the home's value above its initial purchase price...

Again, taxing values in real estate for Heloc loans would be a very large tax increase on the middle class (and anyone who utilizes the equity in their home for purchases). This would be wildly unpopular. And most people would simply reduce their consumption. That might not be a terrible thing (not a good idea to buy short term assets using long term assets). But again, republicans would love this. I don't understand Mark-to-Mark, but will study it later.

Mark-to-market basically means "you pretend you sell everything you hold at the end of each year and recognize the gains and losses and adjust your basis". You also pay taxes as though a fixed percentage of the gain/loss is long term and the remainder is short term (I think it might be 60-40).

And, as I said, you'd only tax (at whatever rate, with progressive rates and some sort of standard exemption) the amount of the HELOC proceeds that represents an amount by which your house has appreciated since you bought it, not the amount that represents equity you've built over time by paying down the loan...

Or you could say "the problem is only with Jeff Bezos et al borrowing against the $30 billion in additional market value they've 'earned' over the past year, so we'll only apply this to margin loans on appreciated securities."

 

[Harry Bosch]

I don't see a conceptual problem with taxing gains that are effectively realized (e.g., by taking a loan against the underlying appreciated property, rather than selling it). This would include HELOCs, which have already been limited to a substantial degree.

Details of rates, threshholds, and exemptions can be haggled over...



If you'd like to suggest a mechanism by which decreases in the value of stock that is not sold can cause outward cashflow I'll consider it. (Although I did mention above the possibility of getting around the subject problem by having certain large shareholders and/or insiders adopt the mark-to-market rules, which would in fact allow them to apply unrealized losses against unrealized gains, even, I suppose, to the point of showing a loss on their tax return.)

ETA - I suppose I should have said this "could" include HELOCs. Borrowing against equity that was created by paying down a loan is not the same (I think) as borrowing against equity created due to an increase in the home's value above its initial purchase price...

Again, taxing values in real estate for Heloc loans would be a very large tax increase on the middle class (and anyone who utilizes the equity in their home for purchases). This would be wildly unpopular. And most people would simply reduce their consumption. That might not be a terrible thing (not a good idea to buy short term assets using long term assets). But again, republicans would love this. I don't understand Mark-to-Mark, but will study it later.

Mark-to-market basically means "you pretend you sell everything you hold at the end of each year and recognize the gains and losses and adjust your basis". You also pay taxes as though a fixed percentage of the gain/loss is long term and the remainder is short term (I think it might be 60-40).

And, as I said, you'd only tax (at whatever rate, with progressive rates and some sort of standard exemption) the amount of the HELOC proceeds that represents an amount by which your house has appreciated since you bought it, not the amount that represents equity you've built over time by paying down the loan...

Or you could say "the problem is only with Jeff Bezos et al borrowing against the $30 billion in additional market value they've 'earned' over the past year, so we'll only apply this to margin loans on appreciated securities."

Oh, you're responding to the wrong person! I'm not bothered in the least by someone being able to buy a bigger boat than mine by using his net worth. 1,000 bigger wouldn't bother me. I might be open to the government breaking up Amazon due to it's market cap. However, we all have a choice. If you don't like Amazon, don't buy from them.

 

[Elixir]

Again, taxing values in real estate for Heloc loans would be a very large tax increase on the middle class (and anyone who utilizes the equity in their home for purchases).

Then let it only apply to such virtual income in excess of $[whatever wouldn't piss people off].
Yes, it's targeting the rich. No need to effect the ... poor people. (Poor people and uber rich will include almost everyone soon, or so it seems.)
There's no way to EVER make the American tax system fair without targeting the rich. You just can't get there from here.

 

[Swammerdami]

Most of the European countries that had wealth taxes abandoned them after discovering they didn’t raise enough money to justify the administrative headache of assessing a bunch of hard-to-value assets, such as private companies and art. Or the economic distortions that resulted when wealthy people started trying to avoid the tax, for example, by investing elsewhere, or keeping their companies private.

The unintended consequences of what you propose are what worries me.

Ruth

Charging a tax on the borrowings is unnatural; and taxing wealth has disadvantages. But, if the wealth has the form of shares in a profitable corporation, then there is a simple approach which achieves a similar end without these problems. Simply place a 12% surcharge on the corporate income tax already in place. If the company is being taxed 8%, increase that to 8+12 = 20%. This VERY ROUGHLY may act like a one-time (NOT annual) 12% tax on wealth.

We need not cover the details. Obviously the exact net tax (including the effect from the surcharge on market-appraised wealth) would not generally equal the total tax paid in other schemes. But that doesn't necessarily make this scheme wrong; and it may be a good starting-point.

 

[Loren Pechtel]

So ... You think Elizabeth Warren's 3% wealth tax is exactly the same as a 10% wealth tax. Where did you learn your arithmetic? At Trump University?

Over enough years you pay more in interest than you would in capital gains from selling.

Slow down, there; you may want to re-check your math.

IF the interest rate is LESS than the rate at which the stock appreciates THEN you do better borrowing EVEN IF THE CAP_GAINS TAX IS ZERO!

Exactly the same argument would apply to the average investor using margin to buy the stock. It's not something special about being the big fish.

 

[Loren Pechtel]

And the end effect is to take their companies away from them.

How does that work? Taking a small percentage of the increase in their wealth means taking to company?

You would make them sell it off bit by bit to pay that tax.

 

[Loren Pechtel]

This would just be a CPA's wet dream! There are 1,000's of people with unsecured loans (that are leant out in part due to their net worth). There's must be hundred's of thousands of HELOCs in the country. People refinance their homes and get cash out all the time. This might alleviate the growing inflation issue though as it would quite easily discourage buying anything with debt. But I guaranty you this, the average tax payer would absolutely hate it.

The subject was stocks, not home loans.

The subject was proceeds of loans. You meant to only tax the big fish, you didn't realize what would really happen.

 

[ZiprHead]

This would just be a CPA's wet dream! There are 1,000's of people with unsecured loans (that are leant out in part due to their net worth). There's must be hundred's of thousands of HELOCs in the country. People refinance their homes and get cash out all the time. This might alleviate the growing inflation issue though as it would quite easily discourage buying anything with debt. But I guaranty you this, the average tax payer would absolutely hate it.

The subject was stocks, not home loans.

The subject was proceeds of loans. You meant to only tax the big fish, you didn't realize what would really happen.

This is the quote I responded to. Your quote to be exact.

So you've fallen for the deception.

His stock went up. That's not income. It only becomes income if you sell it. Taxing the gain on stock you haven't sold causes all sort of problems for the business owner.

Do you see anything there that talks about home loans?

It was Harry B that brought up home loans, after my response to you.

That's when I said:

The subject was stocks, not home loans.

 

[Swammerdami]

So ... You think Elizabeth Warren's 3% wealth tax is exactly the same as a 10% wealth tax. Where did you learn your arithmetic? At Trump University?

Over enough years you pay more in interest than you would in capital gains from selling.

Slow down, there; you may want to re-check your math.

IF the interest rate is LESS than the rate at which the stock appreciates THEN you do better borrowing EVEN IF THE CAP_GAINS TAX IS ZERO!

Exactly the same argument would apply to the average investor using margin to buy the stock. It's not something special about being the big fish.

Hunh? What's this non sequitur? Your post and mine had nothing to do with fish, big vs small. You incorrectly claimed that the borrowers were losing money by their action; now I guess you're retracting that claim.

 

[Loren Pechtel]

Exactly the same argument would apply to the average investor using margin to buy the stock. It's not something special about being the big fish.

Hunh? What's this non sequitur? Your post and mine had nothing to do with fish, big vs small. You incorrectly claimed that the borrowers were losing money by their action; now I guess you're retracting that claim.

If it makes sense for him to borrow against his stock because it's going up faster than the interest it makes sense for any other investor with enough means to borrow in order to buy Amazon stock. He's not in a special position in this regard.

 

[Rhea]

I feel that we coud go a long way if we were more honest and standard about income.

If you have a value this year, and you didn’t have it last year, and it came from somewhere else - it’s income.

It’s income if you get a gift (over $10K currently)
It’s income if you inherit it
It’s income if it’s wages
It’s income if it’s gold coins, a valuable painting, a free plane ride, or a house that you didn’t pay for.
It’s income if it’s a hedge.
If you use it as collateral, it’s income as if you sold it.


If you gained something - it’s income. And it is taxed progressively.

 

[laughing dog]

Exactly the same argument would apply to the average investor using margin to buy the stock. It's not something special about being the big fish.

Hunh? What's this non sequitur? Your post and mine had nothing to do with fish, big vs small. You incorrectly claimed that the borrowers were losing money by their action; now I guess you're retracting that claim.

If it makes sense for him to borrow against his stock because it's going up faster than the interest it makes sense for any other investor with enough means to borrow in order to buy Amazon stock. He's not in a special position in this regard.

But you said banks don't take stock as collateral. So what is Mr. Bezos have that induces lenders to lend him funds?

 

[jonatha]

It’s income if it’s a hedge.

Is this a reference to "carried interest" or what?

 

[Swammerdami]

Exactly the same argument would apply to the average investor using margin to buy the stock. It's not something special about being the big fish.

Hunh? What's this non sequitur? Your post and mine had nothing to do with fish, big vs small. You incorrectly claimed that the borrowers were losing money by their action; now I guess you're retracting that claim.

If it makes sense for him to borrow against his stock because it's going up faster than the interest it makes sense for any other investor with enough means to borrow in order to buy Amazon stock. He's not in a special position in this regard.

Okay. Thanks for "connecting the dots" for me.
As you see, we're in agreement on that point:

The point is these guys get tax breaks unavailable to ordinary people and use them to pay no taxes to support the country they operate in.

I agree that extreme wealth and income inequality are bad, but this thread is very misleading. I do not think the low taxes paid by these multi-billionaires are due to special tax breaks. (Some fund managers get a special break, as has been mentioned, but does this apply to any of the mentioned billionaires?)

Unrealized capital gains aren't counted as income. When you sell a profitable stock it's not unusual to sell a loser the same year to eliminate the tax liability. These "tricks", if you want to call them that, are routinely used by ordinary Americans with small portfolios as well as by multi-billionaires.

Do you also agree with me on the following?

Most of the European countries that had wealth taxes abandoned them after discovering they didn’t raise enough money to justify the administrative headache of assessing a bunch of hard-to-value assets, such as private companies and art. Or the economic distortions that resulted when wealthy people started trying to avoid the tax, for example, by investing elsewhere, or keeping their companies private.

The unintended consequences of what you propose are what worries me.

Charging a tax on the borrowings is unnatural; and taxing wealth has disadvantages. But, if the wealth has the form of shares in a profitable corporation, then there is a simple approach which achieves a similar end without these problems. Simply place a 12% surcharge on the corporate income tax already in place. If the company is being taxed 8%, increase that to 8+12 = 20%. This VERY ROUGHLY may act like a one-time (NOT annual) 12% tax on wealth.

We need not cover the details. Obviously the exact net tax (including the effect from the surcharge on market-appraised wealth) would not generally equal the total tax paid in other schemes. But that doesn't necessarily make this scheme wrong; and it may be a good starting-point.

 

[Rhea]

It’s income if it’s a hedge.

Is this a reference to "carried interest" or what?

Yes. I’m open to learning details, but yes, I bring it up because this is something that is in the news about how certain people gain money from year to year without paying income tax on it.

 

[Rhea]

The big question is why is a stock given in remuneration not considered income but virtually everything else is?

Because stock price can go up and down. Are you prepared to give collected taxes back when stock went and stayed down?

Why is that different than the tax I need to pay if my mother gifts me with artwork worth $25,000?
I received something, its value is not fixed, and I have to pay a gift tax for receiving something of value. I now have wealth that I didn’t have before - taxes due. Indeed its value may go down as the people who admired her die off, or if a great deal of her art is dumped into the market at once, exceeding the number of true collectors in a buying moment.

But if my employer gives me stock options, then I get to wait, not pay taxes at the time of acquisition, and see what it’s worth later?

Can I recoup my losses on the gift (income by altruism) tax later?