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

[Elixir]

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.

Instead of paying taxes on income, the very wealthy borrow against non-liquid assets. They accrue and save up losses against the day when they must pay back those loans. But for most of their lives, they don't have to - sometimes for generations. They can just keep extending the loans as long as their "worth" keeps increasing. For pocket money, they can cash in a little, paying little or no tax on the income, because they're deducting loan interest...

It's not a cheat, it's just extremely unfair to actual taxpayers. And there is no simple remedy AFAIK that wouldn't also impact some people who are not "taking advantage".

 

[Loren Pechtel]

The car I just won and had to pay taxes on dropped 20% as soon as I drove it off the lot. How is that any differant?

Why is it a ridiculous idea?

It's different because you put only 5 bucks into this lottery ticket.
In case of stock, you bought stock on $1000 it went up to $11000, then IRS made you pay $3000 (30% on unrealized gain), then next year it goes back to $1000, and you are suddenly out of real $3000.

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.

And when they are renumerated in stocks that is treated as income. Which is taxed, as other income is.

However, three of those simply own the stock from creating the company.

 

[Loren Pechtel]

Based on what each of these billionaires actually contribute to society, I would tax Musk the least and Bloomberg the most. After all Musk may save all of humanity and Bloomberg is just a financial money changing leach. The actual rates paid above are actually the opposite. Which strongly indicates that tax rates between billionaires themselves are not even fair!

You've been watching too many science fiction movies. Musk could save the planet today with his wealth. He could reverse global warming. He could end hunger.

We've been down this road before. You're off by some orders of magnitude.

 

[Loren Pechtel]

Note the number they are comparing it to is "total wealth growth". Three of these four have the vast majority of their wealth in shares of their company (not addressing the fourth, I simply don't know.) Taxes are only due when those shares are sold, pretending that that's their income is being very deceptive.

It's not very deceptive, since they can translate wealth gains into cashflow by borrowing against their holdings (which you'd know if you'd read the article).

The mark-to-market rules already apply to people in certain positions who derive a substantial amount of their income from intangible assets. Extending them to certain large shareholders, or insiders, could be done to address the issue.

Borrowing means paying interest and that borrowing will have to be repaid some day.

It makes sense directly if you have highly appreciated stock and are close to death. Otherwise it only makes sense if you expect the stock to grow faster than the interest rate, or if you don't want to give up the votes that go with the stock.

 

[Loren Pechtel]

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?

Bankers won't take stock as collateral, but brokers will. It's called a margin loan.

 

[Loren Pechtel]

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.

I prefer my approach which gets rid of the tax return entirely but accomplishes the same thing:

Split the currency into the investment $ and the regular $. The I$ is entirely electronic. The business world operates on the I$, people are paid in I$, but you can only spend $. You pick a bank and tell the IRS what bank it is. When you spend money the bank converts I$ to $, applying the consumption tax. They normally make this even across the year based on your spending history, fix it up at the end. Houses are bought with I$. Used goods are sold for $.

The IRS never even sees your income, your only interaction with them is registering which bank (which you can change, although it will cause a short delay while the records are transferred) to ensure that you have only one account doing the conversion.

This provides a progressive consumption tax with very little recordkeeping. It does force some sole proprietors to make business entities, but if they would get rid of the crap they apply to businesses in the name of making money this shouldn't be a big deal. (Reality: Due to the way the laws work here at one point it was necessary for my wife to be her own business entity even though she would be inside another business. Setting up the paperwork took a day of running around to several departments and some hundreds of dollars in government fees. The same stupidity applies to a lot of people with professional licenses here that are de-facto employees but the law won't let them simply be employees--it's just a money grab.)

 

[ZiprHead]

Based on what each of these billionaires actually contribute to society, I would tax Musk the least and Bloomberg the most. After all Musk may save all of humanity and Bloomberg is just a financial money changing leach. The actual rates paid above are actually the opposite. Which strongly indicates that tax rates between billionaires themselves are not even fair!

You've been watching too many science fiction movies. Musk could save the planet today with his wealth. He could reverse global warming. He could end hunger.

We've been down this road before. You're off by some orders of magnitude.

Estimates of how much money it would take to end world hunger range from $7 billion to $265 billion per year.

...depending on the particular causes in the locality.

https://www.globalgiving.org/learn/how-much-would-it-cost-to-end-world-hunger/#:~:text=Estimates%20of%20how%20much%20money,to%20%24265%20billion%20per%20year.

 

[ZiprHead]

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.

Why can't it be considered income? All it would take would be a little change in the tax code.

 

[ZiprHead]

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.

See above.

 

[ZiprHead]

[YOUTUBE]https://youtu.be/6isLI3yKdvg[/YOUTUBE]

 

[Toni]

Whether or not these individuals have dramatically amassed huge increases to their wealth, and whether or not they take full advantage of the differences between wealth and income, it beggars belief that they have no taxable income or that their net tax burden is zero.

That is a huge issue.

The other issue is that we have set up our society so that these four individuals have amassed such tremendous wealth that easily exceeds the wealth of many nations. Sufficient wealth to take private trips to space. Surely no one believes that those trips to space will not be to better position Bezos and buddies to further amass wealth, while avoiding any responsibilities to financially pay their fair share to support the society and infrastructure that has allowed them to amass such wealth. Have they effectively become so wealthy that societal rules and expectations no longer apply to
them? Should society allow such accumulation of wealth and power?

 

[Derec]

it beggars belief that they have no taxable income or that their net tax burden is zero.

Whatever they spend they earn as taxable income. If they do not realize any capital gains in one year, it is because they are still spending realized, and taxed, capital gains from the previous year. In other words, look at the overall picture, instead of cherry picking years. How much federal income tax did Bezos pay over the last 10 years? It is over a billion of of dollars. How much did Musk? It is probably over a billion too.

The other issue is that we have set up our society so that these four individuals have amassed such tremendous wealth that easily exceeds the wealth of many nations.

Sure. Jeff Bezos is wealthier than Serbia, but he is less wealthy than Slovenia, according to this list. Note that both are pretty small countries though and have been formerly communist, which impeded their economies for decades.
Somebody like Michael Bloomberg is only wealthier than Turkmenistan.

Sufficient wealth to take private trips to space.

Doesn't take 11 or 12 digit wealth to do that. Dennis Tito flew to the ISS for a pocket change of $20M back in 2001.
Jeff Bezos is not taking a ride with the Russians though. He (and Musk too) is building a private space company - something that will very likely benefit humanity in the long run. He is planning to take a ride in his own spacecraft, which is pretty cool. You take his wealth and distribute it equally among all Americans you get $562 per person, if you do your math right (which admittedly, many can't). I think having Blue Origin and Space X in the world is better - and note that they employ a lot of people too.

Surely no one believes that those trips to space will not be to better position Bezos and buddies to further amass wealth,

If he is successful with the space venture, why should he not get to make a profit from it?

while avoiding any responsibilities to financially pay their fair share to support the society and infrastructure that has allowed them to amass such wealth.

You don't think paying over a billion in federal income taxes (in addition to all the other taxes) is their fair share?

Have they effectively become so wealthy that societal rules and expectations no longer apply to
them? Should society allow such accumulation of wealth and power?

Of course rules still apply to them. But how would you disallow accumulation of wealth? Confiscatory wealth taxes or just outright expropriation?

 

[jonatha]

Whatever they spend they earn as taxable income.

No, they don't.

They spend the proceeds of loans against their portfolios.

 

[jonatha]

Bankers won't take stock as collateral

Well, Credit Suisse certainly wishes they were a bank then...

 

[barbos]

Whatever they spend they earn as taxable income.

No, they don't.

They spend the proceeds of loans against their portfolios.

You still need to pay loan up with real money on which you pay income tax.
And I seriously doubt Bezos pays his bank $500/month for his boats.
Bezos has to have at least $30mil/year income to support his lifestyle. This moves him well into 37% bracket.

 

[Swammerdami]

Hull predicted that tax avoidance would become common. The ruling opened a gaping loophole, Hull warned, allowing industrialists to build a company and borrow against the stock to pay living expenses. Anyone could “live upon the value” of their company stock “without selling it, and of course, without ever paying” tax, he said.

Hull’s prediction would reach full flower only decades later, spurred by a series of epochal economic, legal and cultural changes that began to gather momentum in the 1970s. Antitrust enforcers increasingly accepted mergers and stopped trying to break up huge corporations. For their part, companies came to obsess over the value of their stock to the exclusion of nearly everything else. That helped give rise in the last 40 years to a series of corporate monoliths — beginning with Microsoft and Oracle in the 1980s and 1990s and continuing to Amazon, Google, Facebook and Apple today — that often have concentrated ownership, high profit margins and rich share prices. The winner-take-all economy has created modern fortunes that by some measures eclipse those of John D. Rockefeller, J.P. Morgan and Andrew Carnegie.

Carnegie's fortune in 1901 was merely $50 billion (if we normalize 1901 dollars to the present-day based on the changed price of gold). However the U.S. economy was much smaller then: Carnegie's wealth was a larger percentage of the total U.S. economy than the percentage held today by Bezos, Gates, Zuckerberg and the Walton family all added together. The Rockefeller family was even richer than Carnegie.

But, despite their huge wealth and power, the great barons 120 years ago had far less pernicious effect on the American economy and society. What did they do? Hasten the use of oil and steel? Bezos' creation has transformed the world, not necessarily for the better. Zuckerberg leads an institution which is literally destroying democracy.

It is this power that is most worrisome. If we squeezed Zuckerberg out of all his wealth, what would we get? $1000 per household? Many households would just squander that on guns, MAGA clothing and junk food. (And a new Disgracebook would rise up to take its place, if we could somehow destroy Facebook.)

The robber barons ruling America in 1900 made a mistake (or so they thought) when they let Teddy Roosevelt become Vice President. But at least he was the competent Governor of the largest state; the 21st century super-billionaires exerecised their huge power to bring us ... an incontinent and sociopathic TV host.

 

[Harry Bosch]

Whatever they spend they earn as taxable income.

No, they don't.

They spend the proceeds of loans against their portfolios.

If the democrats enacted legislation to tax loan proceeds and/or the economy would crash and the dems would be tossed out of office. There's no doubt. This would just kill the middle class. The average person just wouldn't be able to buy a house anymore.

 

[Jarhyn]

Whatever they spend they earn as taxable income.

No, they don't.

They spend the proceeds of loans against their portfolios.

If the democrats enacted legislation to tax loan proceeds and/or the economy would crash and the dems would be tossed out of office. There's no doubt. This would just kill the middle class. The average person just wouldn't be able to buy a house anymore.

Let's look at the reason that is.

I expect that the reason loan culture inflates the way it does is, the middle class can't afford a house because the class who organized their own army and gang sought rent for the land. Then when it came time to either let the land be sold or face revolution, they let it be sold only in such a way that their leveraged asking price still demands far more than the land is worth: the call of mammon to Leverage is just too strong.

So, loan culture is only necessary for the middle class to buy a home because loan culture has positioned itself between people and homes.

Other mechanisms are possible, but because no other mechanism profits and prevents harm for those who have the private army at their beck and call, nothing is going to change.

 

[Harry Bosch]

If the democrats enacted legislation to tax loan proceeds and/or the economy would crash and the dems would be tossed out of office. There's no doubt. This would just kill the middle class. The average person just wouldn't be able to buy a house anymore.

Let's look at the reason that is.

I expect that the reason loan culture inflates the way it does is, the middle class can't afford a house because the class who organized their own army and gang sought rent for the land. Then when it came time to either let the land be sold or face revolution, they let it be sold only in such a way that their leveraged asking price still demands far more than the land is worth: the call of mammon to Leverage is just too strong.

So, loan culture is only necessary for the middle class to buy a home because loan culture has positioned itself between people and homes.

Other mechanisms are possible, but because no other mechanism profits and prevents harm for those who have the private army at their beck and call, nothing is going to change.

Well, I agree with you that home ownership is going to be a problem for working class people going into the future. Geez, in eastern Washington (forget California or NY) and average 1,500 SF home can easily be $350,000. How does a young working class family afford that? I can honestly care less about the wealth gap. Someone has more stock than me, great. Care less. If we force people into liquidating their wealth, they will just hide it and/or not go public with their companies. Secondly, all that liquidity flooding the market would create incredible inflation - further hurting the working class. The real problem is the income gap. People without technology skills (that changes yearly) are losing out. The issue is how to raise people up, not tear down the rich. Tearing down the rich dosn't help the economy, dosn't help the working class, and will only get the dems thrown out of office.

 

[ZiprHead]

NYT-The Real Tax Scandal Is What’s Legal

Wealthy Americans can save a lot of money by cheating on their federal income taxes, but that’s nothing compared with how much money they’ve been saving by following the rules.

In a revealing examination of tax records for 25 of the wealthiest Americans, the journalism nonprofit ProPublica reported Tuesday that some of the nation’s most prominent billionaires declared relatively little taxable income in comparison with the rapid growth of their wealth.

For tax purposes in the United States, income is basically defined as money. If an investment increases in value, that does not count as taxable income. The economists Emmanuel Saez and Gabriel Zucman estimated in April that the wealthiest Americans are holding about $2.7 trillion in wealth on which they have not paid taxes.

The logic of this standard rests on a tripod of assumptions that aren’t true.

The first is that an increase in asset value is in some sense unreal, or at least unusable. The Supreme Court established the standard in 1920, ruling that a woman who received some shares of stock didn’t need to pay tax on the value because the transfer of the shares “takes nothing from the property of the corporation and adds nothing to that of the shareholder.”

The reality, however, is that many wealthy Americans live lavishly by borrowing against the value of their assets. ProPublica provides the example of Elon Musk, who has pledged shares of Tesla stock worth $57.7 billion as collateral for personal loans. That provides Mr. Musk with plenty of spending money. Indeed, he apparently has relatively little need for conventional income. ProPublica reported that in 2018 he paid nothing in federal income taxes.

The second and very common falsehood is that people will eventually pay taxes on their wealth — that they get to determine the timing but they do not get to avoid the taxman.

This is risible. It is easy to accumulate wealth that is never taxed. Assets can be siloed in nonprofit foundations whose main beneficiaries may be the people who run them. Assets can also be passed on to children and grandchildren. Better yet, the government allows heirs to take ownership at the present value, erasing the accumulated tax liability.

Mr. Buffett is never going to pay taxes on the vast majority of his wealth. He is quite open about this, telling ProPublica that he believes it’s better for society for his fortune to be distributed as charity “than if it is used to slightly reduce an ever-increasing U.S. debt.”

The third objection is that taxing wealth is a bureaucratic nightmare. There are difficulties, such as fixing rules for determining the value of assets. There also are downsides, such as the possibility that someone might have to sell an asset to pay taxes. But we know it can be done because Americans already pay property taxes, and it seems to work fine.

Even for those who aren’t ready to jump onto the wealth tax bandwagon, the data obtained by ProPublica underscores the need for a significant overhaul of the system.

The federal income tax is designed to be progressive, meaning that those who make more money are supposed to pay taxes at higher rates. But the richest Americans don’t. Public data shows that in 2018, the most recent year for which data is available, the top 0.001 percent of taxpayers — roughly 1,400 households — paid a smaller share of income in taxes than the rest of the top 1 percent. The effective tax rate for that elite group was 22.9 percent.