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

[jonatha]

To buy that yacht he had to pay 37% income tax, then luxury tax, then sales tax and now he is paying annual property tax.
Not to mention he has to pay for maintenance, salaries to the crew. Thanks to that yacht, a lot of people have jobs now.

Now if you want to take that yacht and divide among all the people in US I doubt you will get more than 1$ for each one of them.
You can of course add a bunch of other billionaires and get maybe $50 total, but that's about it.
Billionaire's personal spending is the least of your problem.
Corporate tax loophole is the real problem and it seems they finally decided to do something about it.

No, I don't want to take his yacht. I have to pay property tax and sales tax too. I want him to pay federal income tax on his income just like everybody else. Just because his income is in the form pf stocks and not cash should make no difference. If I win a car on The Price Is Right I have to pay tax on it as if it was income.

But this is just incorrect. Or maybe it's a misunderstanding. His income comes from when he converts some of his stocks to cash. He's not taxed until conversion because stocks are not cash. They are approximate estimations of cash value on a particular day. But it isn't cash. You can't buy a car with Amazon stock. You pay property taxes on your house at the state level, not at the federal level.

His cashflow comes from when he borrows against his stock, an act that results in no taxable income (and indeed results in a deduction for the interest he pays on the loan).

(You're a banker, Harry, surely you know how this works...)

 

[jonatha]

But this is just incorrect. Or maybe it's a misunderstanding. His income comes from when he converts some of his stocks to cash. He's not taxed until conversion because stocks are not cash. They are approximate estimations of cash value on a particular day. But it isn't cash. You can't buy a car with Amazon stock. You pay property taxes on your house at the state level, not at the federal level.

But they have value just like the car in my example. The car isn't cash but a tax is still due on it as if it was. Banks seem to think those stocks have value since they will loan money on the value of those stocks. And who says I can't buy a car with Amazon stock? Are you saying no one would be willing to trade a car for stocks? And I'm not the one who brought up property taxes.

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

Stock given in remuneration is considered income and is taxed (although not always in the year it is received and not always at ordinary income rates).

According to the article, the main way the protagonists acquire flotillas without generating income is by borrowing money from banks using their stock as collateral...

 

[barbos]

That's a differant situation than what is being discussed in the OP. The people in the OP are being remunerated in stocks, not cash. They didn't buy them as an investment.

It makes no difference. Bezos could have sold all his stock to himself and claim cash enumeration and avoid all your proposed "founders" tax.
The fact that he arranged certain amount of stock for himself as a founder, virtually for free, makes no difference.

The best you can do is to have small wealth tax. Basically make everybody to give government certain and very small percentage of their stock.
Tax on stock price fluctuations is not going to work. It would destroy the stock market.

1. You're justifying tax loopholes by making more loopholes?

No, I am just pointing out your theory is asking for loopholes.

2. So now you're for a wealth tax.

I am not against it. Wealth tax on billionaires is fine with me. If you can collect it.

 

[ZiprHead]

But this is just incorrect. Or maybe it's a misunderstanding. His income comes from when he converts some of his stocks to cash. He's not taxed until conversion because stocks are not cash. They are approximate estimations of cash value on a particular day. But it isn't cash. You can't buy a car with Amazon stock. You pay property taxes on your house at the state level, not at the federal level.

But they have value just like the car in my example. The car isn't cash but a tax is still due on it as if it was. Banks seem to think those stocks have value since they will loan money on the value of those stocks. And who says I can't buy a car with Amazon stock? Are you saying no one would be willing to trade a car for stocks? And I'm not the one who brought up property taxes.

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

Stock given in remuneration is considered income and is taxed (although not always in the year it is received and not always at ordinary income rates).

According to the article, the main way the protagonists acquire flotillas without generating income is by borrowing money from banks using their stock as collateral...

Yes, I quoted that point in the OP to highlight it and have pointed it out several times in responses.

 

[Harry Bosch]

But this is just incorrect. Or maybe it's a misunderstanding. His income comes from when he converts some of his stocks to cash. He's not taxed until conversion because stocks are not cash. They are approximate estimations of cash value on a particular day. But it isn't cash. You can't buy a car with Amazon stock. You pay property taxes on your house at the state level, not at the federal level.

His cashflow comes from when he borrows against his stock, an act that results in no taxable income (and indeed results in a deduction for the interest he pays on the loan).

(You're a banker, Harry, surely you know how this works...)

I'm an ex-banker! Now I'm part of the evil capitalist empire! Yea, I know some about banking (was a commercial lender). But I never did private banking (which is more like what you are describing). However, it's my experience that banks don't take a lien on stocks. It's more that they evaluate a borrower for their cash flow and personal assets. If someone has sufficient assets (like a Bezos); they can get an "unsecured LOC". And yes, you get this loan and buy a boat or whatever, if you want. However, you can't use the value of your stocks to make the monthly payments. Banks want cash. Stocks are not cash. Stocks are just estimated wealth. For example, if you get a HELOC on your home, you borrow against the value of your home. Then you buy something. But are you suggesting the equity in your house should be considered income since you are using it as collateral for a loan?

 

[Harry Bosch]

Stock given in remuneration is considered income and is taxed (although not always in the year it is received and not always at ordinary income rates).

According to the article, the main way the protagonists acquire flotillas without generating income is by borrowing money from banks using their stock as collateral...

Yes, I quoted that point in the OP to highlight it and have pointed it out several times in responses.

However, in the US, collateral is not considered income. It is not taxed. Collateral can be converted to cash, but it is not as easy as people make it seem to be.

 

[ZiprHead]

Stock given in remuneration is considered income and is taxed (although not always in the year it is received and not always at ordinary income rates).

According to the article, the main way the protagonists acquire flotillas without generating income is by borrowing money from banks using their stock as collateral...

Yes, I quoted that point in the OP to highlight it and have pointed it out several times in responses.

However, in the US, collateral is not considered income. It is not taxed. Collateral can be converted to cash, but it is not as easy as people make it seem to be.

The point is that banks agree the stocks have value but to the government there is no value until they are cashed in.

 

[jonatha]

But this is just incorrect. Or maybe it's a misunderstanding. His income comes from when he converts some of his stocks to cash. He's not taxed until conversion because stocks are not cash. They are approximate estimations of cash value on a particular day. But it isn't cash. You can't buy a car with Amazon stock. You pay property taxes on your house at the state level, not at the federal level.

His cashflow comes from when he borrows against his stock, an act that results in no taxable income (and indeed results in a deduction for the interest he pays on the loan).

(You're a banker, Harry, surely you know how this works...)

I'm an ex-banker! Now I'm part of the evil capitalist empire! Yea, I know some about banking (was a commercial lender). But I never did private banking (which is more like what you are describing). However, it's my experience that banks don't take a lien on stocks. It's more that they evaluate a borrower for their cash flow and personal assets. If someone has sufficient assets (like a Bezos); they can get an "unsecured LOC". And yes, you get this loan and buy a boat or whatever, if you want. However, you can't use the value of your stocks to make the monthly payments. Banks want cash. Stocks are not cash. Stocks are just estimated wealth. For example, if you get a HELOC on your home, you borrow against the value of your home. Then you buy something. But are you suggesting the equity in your house should be considered income since you are using it as collateral for a loan?

I might suggest that the portion of the increase in the equity in your home used as collateral be taxed.

(Actually, I am increasingly in favor of a tax on cashflow rather than a tax on income. There are way too many complications in defining "income", which is why I think all the "flat tax" proposals are simplistic to the point of self-parody.)

 

[Treedbear]

...
I might suggest that the portion of the increase in the equity in your home used as collateral be taxed.
...

Like when retired folks have reverse mortgages? And in addition to local property tax increases?

 

[KeepTalking]

I might not be opposed to some sort of tax on wealth or unrealized gains, at least as an alternate when it would be higher than the income tax. A disadvantage of this is that new accounting rules (and opportunities for tax fraud) would arise.

That's the thing though, by calling it an unrealized gain makes it seem like it has no value when in truth it's extremely valuable. It should be considered income based on its value the day it was given, the same as the car in my post above.

Just because it's valuable does not mean you should tax it. I mean, you can, but you should not.
From economical point of view what is important is economic activity, not accumulated wealth. And taxes should be related to economic activity-consumption. You can make it progressive if you want but wealth tax is bullshit.

Taxes are considered a penalty and burden. Why would you want to penalize and burden the thing you are trying to encourage (economic activity) and not the thing you are trying to discourage (wealth hoarding)?

 

[Jimmy Higgins]

1. You're justifying tax loopholes by making more loopholes?

No, I am just pointing out your theory is asking for loopholes.

2. So now you're for a wealth tax.

I am not against it. Wealth tax on billionaires is fine with me. If you can collect it.

Taxing wealth is difficult because it is unrealized value. However, if someone uses their wealth to create a loan, then that is realized value and should be taxed as income.

We can't tax Bezos or Musk based on their stock based wealth because it isn't in hand money. However, once they use that wealth to put money in their hand, that should be taxed (and as income). Interest on such loans should not be deductible.

 

[barbos]

Just because it's valuable does not mean you should tax it. I mean, you can, but you should not.
From economical point of view what is important is economic activity, not accumulated wealth. And taxes should be related to economic activity-consumption. You can make it progressive if you want but wealth tax is bullshit.

Taxes are considered a penalty and burden. Why would you want to penalize and burden the thing you are trying to encourage (economic activity) and not the thing you are trying to discourage (wealth hoarding)?

Completely opposite is true. Taxing consumption creates incentive (for the government) to increase and promote that consumption.
The same way taxing billionaires creates incentive to increase their numbers and wealth and ignore the rest, the very thing you all trying to reduce.

 

[laughing dog]

No, I am just pointing out your theory is asking for loopholes.


I am not against it. Wealth tax on billionaires is fine with me. If you can collect it.

Taxing wealth is difficult because it is unrealized value. However, if someone uses their wealth to create a loan, then that is realized value and should be taxed as income.

We can't tax Bezos or Musk based on their stock based wealth because it isn't in hand money. However, once they use that wealth to put money in their hand, that should be taxed (and as income). Interest on such loans should not be deductible.

Actually, instead of taxing income, consumption can be taxed with a progressive tax schedule.

Since income (Y) is either consumed (C), saved (S) or taxed (T), the simplest way to institute a progressive consumption tax is to use that identity Y = C+S+T or C= Y-S-T and have taxpayers file a consumption tax form with identifying their gross income (which they already do), how much they saved during the tax year, and how much they paid in taxes, do the arithmetic, and then apply the appropriate progressive tax rates.

Borrowing is negative saving. So taking out loans, all other things equal, increase the tax base.

Possible complications involve the treatment of durable goods which are a form of investment (especially housing), and which taxes (if any) should be deductible.

 

[Ruth Harris]

My concern, like Tigers!, is the fact that this tax information was acquired by non legitimate actors. I am not wealthy nor do I have that much that I want to keep private – but tax information is definitely something I consider to be non public information unless released by the person to whom it belongs.

I also agree that the basis they used for the reported tax rates is very misleading. It has nothing to do with actual tax percentages as calculated according to tax law. Sure, these wealthy people may take advantage of “tax loopholes” but let’s be honest – everyone does if they can. Let me give you an example; years ago, parents could take a tax credit for child care expenses but were not required to report who they paid. Guess who got most of that money? Typically family members. And they did not report it as income because the law did not say they had to report it since they were family and not a commercial operation. That changed with the tax reform law in 1988 when people taking the child care credit had to provide the caregivers tax id number, and boy you should have heard the outcry from people who thought they were being treated unfairly because they actually had to report income from this.

Now, on to your idea of taxing assets – have you ever owned any cryptocurrency? That is not a cash equivalent according to the IRS, but it still has an assessable value. I discovered quite a bit about cryptocurrencies after my son was given some as a premium for his user reviews with a software purchase he made. He was not interested in keeping as an investment, so he sold it. Of course, he showed a profit since he had not purchased it and had no cost basis. This is equivalent to an executive receiving stock bonuses in lieu of salary. If you had your way, my son would have had to pay taxes on the imputed value of the cryptocurrency when he filed his tax return for the year he received it, even though he actually had no cash in hand from it. He is not wealthy by any measurement you want to use so this would have cost him money even though he hadn’t actually made any money yet. It would also add considerably to the complexity of his tax return for both the year he received it and the year he sold it – and this should be of interest to any regular person out there who dabbles in cryptocurrency for the fun of it. No one wants to spend their time (or money if they pay someone to do their taxes) wrestling with calculating an asset’s basis and unrealized gain plus the increase or loss in unrealized gain from the prior year every year when they do their taxes. Since I do my son’s taxes, I can guarantee you that this is one person who would balk at having to do that every year. It was bad enough to calculate short term/long term gain and itemize the sales of his cryptocurrency acquired on various dates in the prior year.

I am not jealous of the mega-wealthy. I am not willing or able to do what they do so I don’t feel like I can judge them for having so much more than I do. I am content with what I earn and what I own. If I wasn’t, I would be working at improving my earnings and owned items, not fuming over what someone else has.

Ruth

 

[Jimmy Higgins]

No, I am just pointing out your theory is asking for loopholes.


I am not against it. Wealth tax on billionaires is fine with me. If you can collect it.

Taxing wealth is difficult because it is unrealized value. However, if someone uses their wealth to create a loan, then that is realized value and should be taxed as income.

We can't tax Bezos or Musk based on their stock based wealth because it isn't in hand money. However, once they use that wealth to put money in their hand, that should be taxed (and as income). Interest on such loans should not be deductible.

Actually, instead of taxing income, consumption can be taxed with a progressive tax schedule.

Since income (Y) is either consumed (C), saved (S) or taxed (T), the simplest way to institute a progressive consumption tax is to use that identity Y = C+S+T or C= Y-S-T and have taxpayers file a consumption tax form with identifying their gross income (which they already do), how much they saved during the tax year, and how much they paid in taxes, do the arithmetic, and then apply the appropriate progressive tax rates.

Borrowing is negative saving. So taking out loans, all other things equal, increase the tax base.

Possible complications involve the treatment of durable goods which are a form of investment (especially housing), and which taxes (if any) should be deductible.

That seems a bit complicated and the IRS is already hopelessly outgunned by the wealthy. Obviously, what I proposed isn't exactly black and white either, and tax laws are almost exclusively created to make loopholes.

 

[laughing dog]

Actually, instead of taxing income, consumption can be taxed with a progressive tax schedule.

Since income (Y) is either consumed (C), saved (S) or taxed (T), the simplest way to institute a progressive consumption tax is to use that identity Y = C+S+T or C= Y-S-T and have taxpayers file a consumption tax form with identifying their gross income (which they already do), how much they saved during the tax year, and how much they paid in taxes, do the arithmetic, and then apply the appropriate progressive tax rates.

Borrowing is negative saving. So taking out loans, all other things equal, increase the tax base.

Possible complications involve the treatment of durable goods which are a form of investment (especially housing), and which taxes (if any) should be deductible.

That seems a bit complicated and the IRS is already hopelessly outgunned by the wealthy. Obviously, what I proposed isn't exactly black and white either, and tax laws are almost exclusively created to make loopholes.

iIt is no more complicated than the current treatment of taxable income. And depending on the specifics, it can be made much simpler.

 

[Loren Pechtel]

What is strange is a person pays a higher percentage on income earned with sweat and daily effort than people pay on income they get by doing nothing.

1) Social security taxes muddy the waters. Yes, they cut out at a certain point--but the benefit you get also cuts out. Investment income isn't subject to social security tax--but neither does it earn you any social security.

2) Otherwise, it's basically fair. Yes, investment is taxed at a lower rate than earned income--but investment happens over time. When you look at the value lost to inflation the average investment is taxed at almost the same rate as the earned $.

I already said it above:

And LP called your arguments "very deceptive" and he is right.

No--I said the article was being deceptive, not that he was being deceptive. He's not the one that included growth of net worth in the table.

 

[Loren Pechtel]

To buy that yacht he had to pay 37% income tax, then luxury tax, then sales tax and now he is paying annual property tax.
Not to mention he has to pay for maintenance, salaries to the crew. Thanks to that yacht, a lot of people have jobs now.

Now if you want to take that yacht and divide among all the people in US I doubt you will get more than 1$ for each one of them.
You can of course add a bunch of other billionaires and get maybe $50 total, but that's about it.
Billionaire's personal spending is the least of your problem.
Corporate tax loophole is the real problem and it seems they finally decided to do something about it.

No, I don't want to take his yacht. I have to pay property tax and sales tax too. I want him to pay federal income tax on his income just like everybody else. Just because his income is in the form pf stocks and not cash should make no difference. If I win a car on The Price Is Right I have to pay tax on it as if it was income.

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.

 

[Loren Pechtel]

I might not be opposed to some sort of tax on wealth or unrealized gains, at least as an alternate when it would be higher than the income tax. A disadvantage of this is that new accounting rules (and opportunities for tax fraud) would arise.

That's the thing though, by calling it an unrealized gain makes it seem like it has no value when in truth it's extremely valuable. It should be considered income based on its value the day it was given, the same as the car in my post above.

In other words, you bought their deception hook, line and sinker.

Nothing was given. The "income" they are pretending happened is he founded Amazon and holds a lot of shares of it. They are saying he receives "income" when the share price goes up.

The market has shot up, there has been a lot of this crap recently. Never mind that much of the gain is just the market recovering from the shock of Covid. Take a different window and you get a very different picture.

Bloomberg is obviously different--he has a much higher actual income. The other three simply hold a lot of their company stock.

 

[KeepTalking]

Just because it's valuable does not mean you should tax it. I mean, you can, but you should not.
From economical point of view what is important is economic activity, not accumulated wealth. And taxes should be related to economic activity-consumption. You can make it progressive if you want but wealth tax is bullshit.

Taxes are considered a penalty and burden. Why would you want to penalize and burden the thing you are trying to encourage (economic activity) and not the thing you are trying to discourage (wealth hoarding)?

Completely opposite is true. Taxing consumption creates incentive (for the government) to increase and promote that consumption.

How does the government increase consumption? I mean other than becoming the consumer, which would need to be done with taxes, thus defeating the purpose of increasing the consumption in the first place.

Why would the government need to promote consumption? If consumers are reluctant to buy because of burdensome taxes, how is the government telling them to spend more going to help?

The same way taxing billionaires creates incentive to increase their numbers and wealth and ignore the rest, the very thing you all trying to reduce.

How does the government incentivize people to become billionaires?

If that's the way it works, then raise them taxes and incentivize the hell out of me until I am a billionaire.