
A sociologist on the international wealth-management profession - jdub
http://www.theatlantic.com/business/archive/2015/10/elite-wealth-management/410842/?single_page=true
======
parsnipsumthing
I really dislike the title, tone and dramatic quality of this piece.

I went to law school and got a job as a tax attorney. I don't consider my work
or world particularly secretive. The barriers to entry are not peculiarly high
and lawyers as a profession are a little too happy to talk about themselves.

There's a great comment on the Atlantic that states this better than I can

 _" If by secret, you mean extraordinarily complex, then yes. But... that's
not the definition of secret._

 _It 's not secret. There are many classes on this (albeit from professional-
level degrees) and it's all based on public statutes and court cases. All of
which are freely available to any person._

 _A large part of it being "secret" has to do with people's willingness to
listen and understand. I'm a tax attorney, I understand these deals, and I can
explain them rather well so even someone unfamiliar with tax law will
understand it. However, it still does take a bit of active listening on behalf
of an unfamiliar (as in, unfamiliar with tax law) listener to actually
understand what I'm talking about, regardless of how much I simplify it."_

The most disappointing thing about international tax is how little even
professional journalists understand it, or care to. It is simply easier to
assert that international tax is a scam and since the general public can
barely count to 10 using both hands, there's no way to disprove them.

~~~
gozo
The title is, as usual, editorialized by the newspaper. The original title, as
per the title tag, is "How Wealthy People Protect Their Money".

There's a pretty big difference between being a tax attorney and being an
offshore consultant where secrecy is one of the selling points. It's not a
coincidence that voluntary corrections of tax statements go up significantly
when new information sharing agreements are made.

And again she's not a journalist, she has a PhD in Sociology from Harvard and
is an associate professor of economic sociology.

~~~
Nrsolis
Secrecy isn't necessarily an indicator that there is law-breaking involved.
Sometimes secrecy is desired for someone who has had negative attention
focused on them by the general public for no other reason than they present a
fat, juicy target for lawsuits.

Many people I know who have significant assets bemoan the challenges that
present themselves when trying to engage in anything resembling a negotiation
involving finance. If one side KNOWS you have the capability to pay more, then
you're at a disadvantage.

And don't get me started with the lawsuits. People who have money seem to
attract lawsuits the same way that children catch colds from kindergarten. As
they say: "You know you're rich when you're finally sued frivolously."

~~~
vanderZwan
> Secrecy isn't necessarily an indicator that there is law-breaking involved.

So? Abusing loopholes in the law is also by definition perfectly legal, but
still dubious practice. In fact, that's exactly what this sentence from the
article alludes to:

> _By the same token, when Oxfam estimates that just 1 percent of the world’s
> population will own more than 50 percent of the world’s wealth by 2016, it’s
> important to realize that such a state of affairs doesn’t just happen by
> itself, or even through the actions of individual wealthy people. For the
> most part, the wealthy are busy enjoying their wealth or making more of it;
> keeping those personal fortunes out of the hands of governments (along with
> creditors, litigants, divorced spouses, and disgruntled heirs) is the job of
> wealth managers._

> _Given the little that is known about the profession and its role in global
> inequality, it seemed imperative to learn more about how wealth managers
> pull off this sleight of hand: Without breaking any laws (for the most
> part), they enable their clients to sidestep many laws and
> policies—especially those designed to prevent the kind of neo-feudal
> concentrations of wealth emerging now._

You're right on all other points of course.

~~~
Nrsolis
I'll make you a deal: let's stop using tax policy to try and create certain
social outcomes. That way, you can get rid of all of the loopholes that
everyone hates.

------
jasonkester
I find myself looking forward to reading the article that this author
describes. But then it never appears.

The author spends several pages telling us how clever and interesting he is,
with his unique method of infiltrating this secret world, putting him in such
company as [some important famous journalist we would be familiar with were we
as educated and worldly as the author] and gaining the insight and ability to
write this masterful piece of journalism that you, Reader, are about to
witness.

And then he spends a paragraph or two saying "it's secretive, and offshore".
And we're done.

I want my ten minutes back.

~~~
sciurus
I suspect the authors hope is that you'll buy their upcoming book.

------
lordnacho
Well there's various degrees of tax optimization. Here's some things I've come
across:

\- In most countries you can set yourself up as a company. This means you can
write off certain things and adjust the proportion of revenue that ends up as
salary, which has implications for various types of tax. For instance in the
UK NHS contributions are dependent on salary, so you can give yourself a
minimal salary and lots of dividends. This is a pretty standard play, probably
done by everyone in the country who has a business, eg. doctors and plumbers.
I don't think there's anything wrong with this.

\- At some point a guy will phone you. He finds your name on lists of likely
people. He shows up at your office draws you a box diagram of corporations,
with lots of little arrows. He quotes tax legal terms you won't understand,
but they are always some sort of loophole. In one case I was offered to do a
company with P Diddy (or whatever he's called now) in which I was to critique
his new music. I had to produce evidence that I'd spent at least 10 hours a
week or so on this. Now keep in mind I can't even read sheet music, have zero
appreciation of Diddy's genre, and generally have no interest in him as a
musician. I suppose this was mutual, as I've never heard of him being
associated with quantitative developers either.

\- A friend told me about what he'd been offered. Along similar lines, he'd
been told there was an opening in poetry. Another box diagram with arrows, and
it boils down to that you can get a tax benefit if you publish your own book
of poetry. The guy in question was an old school Essex local (shoutey trader).
I doubt he'd spent much time reading Sylvia Plath. So anyway, the organisers
had all their City connections write crappy (who am I to judge?) poetry, print
up a few hundred books, and distribute it to everyone.

\- I never did any of these last two schemes. If something sounds ridiculous,
you know it's a tax dodge. They tend to end up in court, where they are
decided on arcane points if tax law, eating up the productive time of many
people. If it goes wrong, you lose the money, a long while after you thought
you had it. If it goes right, you are abusing the law in some sense. The other
way you can tell is there are some plays every accountant in the whole country
will tell you. Other will require a somewhat more entrepreneurial accountant,
one that requires a sales operation.

~~~
joosters
Why do you think that there is nothing wrong with the first example?

~~~
saiya-jin
It's considered OK by system in most, if not all european countries. Some
rules apply, some places are more restrictive than others, but at the end,
this is all legal and supported by law. So yes, there is legally nothing dodgy
or wrong there. Quite large parts of populations are employed in this way.
More work, more reward.

Now why people need to resort to these practices to get more fair share of
their brutto income is completely different topic, something around "voting
with your taxes" about how public cash is spent (usually pretty badly). FYI, I
don't do it anymore, got a perm job, but when I was doing consulting this way,
I had all the possible support of my local tax office when something was
unclear.

~~~
_delirium
Some European countries handle this by allowing it to be legal, but designing
the tax rates so that you pay the same tax either way, so it's not really a
tax dodge. In Denmark, for example: marginal income tax rate on salary/wages
for higher earners is around 55% (including all the payroll taxes and such).
Marginal rate if you pay yourself dividends instead: 23.5% corporate income
tax up front, plus 42% personal dividend tax on the paid-out amount, or
effectively... 55% again. In fact I believe the dividend tax level was chosen
precisely to make it come out the same overall. (The story comes out similarly
if you look at effective instead of marginal tax rates, e.g. for $100k income,
it's about 40% effective tax either way.)

------
ZenoArrow
Sharing this in case anyone is interested.

[http://taxodus.net](http://taxodus.net)

It's a game that let's you play out the role of a company engaging in tax
avoidance. The tax dodges in-game are meant to mirror those available in the
current business world.

~~~
NKCSS
Thank you so much for posting this comment; I actually posted an Ask HN a
while back to get that url, but I couldn't find it for the life of me.

~~~
ZenoArrow
You're welcome. I found it after watching this documentary:

Taxodus - Playing The Global Tax Avoidance Game

[https://www.youtube.com/watch?v=tvlLO_pTmeY](https://www.youtube.com/watch?v=tvlLO_pTmeY)

------
draysmatter
Also, see UK non-domiciled status.

\- Suppose someone has significant assets in, say, Canada.

\- They move to the UK and claim non-domiciled status on their taxes, which
means they only need to pay taxes on income which is moved into the UK.

\- They stay in the UK for 7 years, leaving their assets in Canada.

\- They then move back to Canada

Because the assets were never moved into the UK, there is no need to pay UK
taxes on the capital gains/income, under the non-domiciled rules of the UK.

Because they were non-Canadian residents, there is no need to pay Canadian
taxes on the capital gains/income. (Only the US taxes non-resident citizens)

In other words, they get 7 years of gains/income which get 0 taxes.

I use Canada in this example, but this works for a large number of source
countries. No wonder certain neighborhoods in London are filled with Russian
oligarchs...

~~~
Demoneeri
I'm not sure that will work, at least in Canada. In Canada, if you have
sizable assets, you will still be considered resident even if you leave the
country for many years. To be considered non resident in Canada, you need to
sell everything. Even having a storage locker could trigger you as a resident
because it means you are not leaving for real.

------
walterbell
Additional detail can be found in the author's 2012 paper in _Sociological
Forum_ , "Trust and Estate Planning: The Emergence of a Profession and Its
Contribution to Socioeconomic Inequality" (pdf).

[http://works.bepress.com/cgi/viewcontent.cgi?article=1001&co...](http://works.bepress.com/cgi/viewcontent.cgi?article=1001&context=brooke_harrington)

 _"... when knights of medieval Europe departed for the Crusades, leaving
their lands vulnerable to seizure by the church, the state, or rival
noblemen—some adopted the practice of putting their assets in trust. This
involved transferring legal ownership of the property to a trusted kinsman or
friend for the benefit of a third party: usually the wife and children of the
original owner, who had no legal standing to own property themselves and were
thus left vulnerable to dispossession."_

------
vixen99
Do you try to hold on to the money you make legally as against giving an even
higher proportion of it to an organization that's managed (in one case) to run
up a debt of $16 trillion rising.

------
Shivetya
Governments all over could circumvent this issue provided they are willing to
not use the tax code in a punitive means. By that I mean that so much of the
code is written to benefit and penalize that it begs abuse by both those
writing the code and those subject to it. Considering the number of pages of
the US tax code how can anyone reasonably be expected to adhere to it let
alone not circumvent parts of it even accidentally?

If you want the "rich" to pay their fair share; they already pay the bulk of
all taxes; then the tax system has to be fair. That means it has to minimalist
as possible so that everyone with standard education can comprehend it.

------
peter303
Drastic simplification should be the answer. I like Colorados one-rate, five-
line tax returns for all classes of income. Takes all of ten minutes to file
most years.

Legislatures like complex tax codes for political and social reasons. Lawyers
and computers can manage the complexity fairly OK so far at a cost.

I skimmed the Oct 27 new budget bill and it contains about 100 pages of
mysterious tax code changes. The language is very opaque with referring to
line changes in previous laws. I can gleen that farmers, drug makers,
hospitals, and hedge funds are the recipients of these changes. But lack the
time to figure them out.

------
pjlegato
The fundamental premise is flawed: inequality is not created by helping some
people aggregate more wealth, since wealth is not a zero-sum game. New wealth
is continually being created through economic activity.

------
chollida1
This happens on a smaller scale all the time with most professionals without
having to resort ot offshoring.

Anyone who works for a hedge fund will have their own company that will get
paid thier bonus. Companies have two nice traits.

1) Their end of year can be any month

2) They have a lower tax rate than most high net-worth individuals do.

So consider 2 fictional employee's.

The first one gets paid a bonus of $500,000 at the end of the year(2014). His
tax rate is 40% so he ends up with $300,000. He reinvests the $300,00 at his
hedge fund that returns 20% in the year 2015. As of December 31st 2015 he has
a net-worth of $360,000.

Individual 2 gets the same $500,000 bonus at the end of 2014 but she has a
company that gets the bonus. Now the companies year end is November so the tax
year on on that bonus isn't until November 2015.

That hedge fund also returns 20% so as of December 2015 she has $600,000
($500,000 * 1.2) and then owes tax of $120,00 (the corporate tax rate is 20%
on her $500,000 bonus) so she ends up with $480,000.

Now when she pulls the money out of her corporation to spend she'll have to
pay the dividend tax rate of %20. But she can let this money ride tax
sheltered for any number of years.

To recap, she essentially shelters her money in two ways:

1) her bonus is sheltered for 1 year from taxes allowing the full amount to
grow

2) she pays the corporate rate at the end of the year allowing her to hang
onto an additional %20 until she pulls it out for her own use.

Any one can do this, the only preconditions you need to make it worth while
are

1) a large bonus

2) a way to make the bonus money grow at a decent rate.

Among Doctors, lawyers, etc this is a common practice.

Now if you want t up the ante, you move your hedge fund to the Cayman Islands
where you don't pay any tax on the gains until you repatriate the money back
to the North America.

When Renaissance Technologies finally has a tell all book written about then,
their brilliance will be acknowledged but I'm going to guess that a very large
portion of their returns comes from not paying tax.

See: [http://www.bloomberg.com/politics/articles/2015-07-08/irs-
mo...](http://www.bloomberg.com/politics/articles/2015-07-08/irs-moves-
against-hedge-fund-maneuver-once-used-by-renaissance)

people worry about paying fees as a drag on their retirement earnings but
paying tax is the single largest drag on creating wealth that the wealthy
have. The above corporation sheltering is legal well tested under law and used
in a very pervasive manner in the North American and the UK, I don't know
anything about the rest of Europe but I'd imagine its the same.

~~~
yummyfajitas
In your example, Individual 2 gets paid $500k and manages to take out $320k
($500k goes into the corp, $100k is paid as income tax and then $320k comes
out after dividend taxes).

Assuming a 35% gross tax rate rather than 40% (I think that's the top marginal
rate), Individual 1 gets to keep $325k.

tl;dr; You aren't avoiding a lot of taxes.

 _Now if you want t up the ante, you move your hedge fund to the Cayman
Islands where you don 't pay any tax on the gains until you repatriate the
money back to the North America._

In other news, the Old Monk corporation (sellers of delicious Indian rum,
mostly within India) don't pay American taxes either. There is a whole world
out there that isn't paying US taxes, oh noes!

~~~
chollida1
I either didn't explain things well or you didn't bother to read what I
wrote:)

You get tax sheltering two ways.

1) you get to collect gains on the amount you would have paid tax on
originally, so if you shelter $120,000 for a year, you get the 20% in gains on
that amount.

2) you don't pay the dividend rate until you pull out the money from the corp.
So you can leave it in the corporation for 20 years, allowing it to grow at
our imaginary 20% rate per year.

working through the example again individual 1 is still $360,000 his $500,000
- $200,000 from taxes(I'm Canadian), plus the 20% gains on his $300,000.

Individual 2 gets to shelter the entire $500,000 for the year allowing her to
get gains on the whole amount so she has $600,000(with 20% growth, we are a
hedge fund after all). She then has to pay the %20 corp tax on her original
$500,000($100,000) leaving her with $500,000.

She is then free to let that amount grow until she wants to take it out, at
which point its taxed at the 20% dividend rate.

If you compare the person who leaves their money in the tax sheltering corp
for 10 years vs the person who takes their bonus as income you'll find that
the corp comes out substantially ahead.

I've done the math and seen it play out in the real world:)

~~~
yummyfajitas
You are making a calculation mistake. If interest rates are 20%, then $1.20
next year = $1.00 this year.

In reality, the person who invests the money actually comes out worse. If his
investment had either profit or capital gains, he paid even more taxes. I.e.,
instead of getting $1.20 next year for every $1.00 he put in this year, he's
getting something less than that.

With the current taxation regime, the _only_ benefit to investment is shifting
consumption into the future. But you actually pay pretty dearly for that. You
can see a more detailed explanation here:
[http://www.themoneyillusion.com/?p=28842](http://www.themoneyillusion.com/?p=28842)

~~~
chollida1
:) The interest rate isn't mentioned, but its probably around 1%. The funds
capital gains were 20%.

I'll let you re-read my above posts to figure out where you went wrong. My
email is in my profile if you need help:)

~~~
yummyfajitas
The average investment will achieve average returns (== the interest rate to
use for this calculation) and as a result one loses NPV(consumption) by
investing.

Only a tiny fraction of Individual 2's actually manage to do what you are
describing.

------
Frothy23
I used to hear "we're talking about equality of _opportunity_ not of
_outcome_" when it sounded like people were trying to equalize incomes. Seems
like all pretense has been dropped now.

------
ucaetano
"it’s important to realize that such a state of affairs doesn’t just happen by
itself, or even through the actions of individual wealthy people"

Wait, wasn't that the biggest conclusion from Piketty's book? That inequality
will happen by itself due to difference between returns on capital and
economic growth?

~~~
yummyfajitas
Differences between returns on capital and economic growth _alone_ will not
result in any increase in inequality. If everyone achieves the same rate of
return, inequality can only remain flat - bignum x exp(rt) / smallnum x
exp(rt) = bignum / smallnum = const.

If some people have income and save it inequality will go down: bignum x
exp(rt) / smallnum x exp(rt) < (bignum x exp(rt) + k) / (smallnum x exp(rt) +
k).

All r > g directly implies is that the ratio of capital stock to income will
increase. I.e., we'll move from a situation with one factory (worth $1M)
producing $1000/month in income to a situation with two factories (worth $2M)
producing $1500/month in income. In this case, r=100% but g = 50%.

------
GPGPU
Of course, the United States contributes to this, too, by having the most
complicated tax code, and the highest corporate income tax rate in the world.

Combine this with a 30% ex-patriation tax* (yes, they tax you for giving up
your citizenship), it's no wonder people create and keep wealth overseas.

[https://www.irs.gov/Individuals/International-
Taxpayers/Expa...](https://www.irs.gov/Individuals/International-
Taxpayers/Expatriation-Tax)

~~~
sgc
Highest corporate rate, but far from the highest effective corporate tax,
Where much of Europe, Australia, Japan, etc. have higher rates.

[http://data.worldbank.org/indicator/IC.TAX.TOTL.CP.ZS?order=...](http://data.worldbank.org/indicator/IC.TAX.TOTL.CP.ZS?order=wbapi_data_value_2014%20wbapi_data_value%20wbapi_data_value-
last&sort=asc&display=default)

~~~
njharman
That's the point. USA "advertises" high corp tax so it sounds like government
is big and evil and taking all poor corporations profits. But the tax law is
so complex and full of holes. Corps actually pay very little. Rich people pay
little. The brunt is borne by the masses who don't have the assets/wealth to
take advantage of all the loopholes.

It's really rather ingenious.

~~~
GPGPU
For every additional dollar I earn, I am taxed at a rate (Federal and State
combined) of 52.9%. "Rich" people do pay taxes. In fact, they pay most of the
taxes.

