
For the Wealthiest, a Private Tax System That Saves Them Billions - tysone
http://www.nytimes.com/2015/12/30/business/economy/for-the-wealthiest-private-tax-system-saves-them-billions.html
======
rayiner
> > Two decades ago, when Bill Clinton was elected president, the 400 highest-
> earning taxpayers in America paid nearly 27 percent of their income in
> federal taxes, according to I.R.S. data. By 2012, when President Obama was
> re-elected, that figure had fallen to less than 17 percent

The article talks a lot about "loopholes" and a "private tax system" but fails
to mention the fact that in 1992, the long term capital gains tax rate was
28%, and in 2012 the highest rate was 15% (enacted 2003). That's not a
"loophole" or a policy enacted in private. It's a conscious policy decision,
one which was a part of Bush II's economic platform, and one which was
publicly debated at length both when it was enacted and when Obama effectively
made it permanent in 2013, except for raising the top bracket to 20%.

~~~
snowwrestler
And it's worth remembering, as people will try to make it a partisan argument,
that Ronald Reagan signed a tax reform bill in 1986 that matched the top
capital gains rate to the top income rate. It's been ratcheting back down ever
since.

~~~
themartorana
It's often said that if he lived today, Regan would be a Republican pariah.
While I'm of the group of people that thinks Trickle-Down Economics is one of
the worst policies enacted in my 37 years on this planet, it's been so
manipulated and abused as to render it almost nothing like what Regan was
after.

------
chollida1
I wrote a bit about this in an earlier comment as to how hedge fund employee's
shelter their taxable income here:

[https://news.ycombinator.com/item?id=10457725](https://news.ycombinator.com/item?id=10457725)

The fact is that this is going to happen because there just isn't a "one size
fits all" tax code that would work.

If you tax income, then people will take their compensation in a corporation.

You tax corporations, then people will take their compensation in a deferred
format, like options.

YOu tax that and people will just move their money making operations off
shore.

You tax that and people will start to use charities, ala the famous Walton
family charity tax shelter...
[http://www.bloomberg.com/news/articles/2013-09-12/how-wal-
ma...](http://www.bloomberg.com/news/articles/2013-09-12/how-wal-mart-s-
waltons-maintain-their-billionaire-fortune-taxes)

And now it becomes very obvious why the tax code is so convoluted. If you make
8 figures year then it's worth your while to spend alot of money to structure
your finances so you pay as little tax as legally required.

Someone like Mark Zuckerberg never needs to earn another dollar or get another
option grant again. He can just let his capital gains appreciate and loan
against it such that he doesn't have to ever pay income tax again.

As an accountant once told me unless you tax wealth then you can't fight
this... and good luck getting an annual tax against wealth passed into law.

~~~
coldpie
> If you make 8 figures year then it's worth your while to spend alot of money
> to structure your finances so you pay as little tax as legally required.

I understand what you're saying. If you make $50,000,000 per year, then at
some point it's worth spending $500,000 on an accountant who will manage to
avoid you paying $10,000,000 in taxes. The math clearly works out, and that's
why people do it. I get it.

But man, does it really _need_ to be that way? Is it really so bad to "only"
gain $40,000,000 per year instead of $49,500,000? Can you really not get by
without that $9.5MM? We've got crumbling infrastructure, cash-strapped
schools, students loaded with debt, and the fallout from a housing bubble, but
Mark Zuckerberg really needs that new yacht.

Anyway, I can't say I wouldn't do the same in his situation. I understand the
motivations. I'm just griping.

* Numbers all fabricated to illustrate my point.

~~~
dcherman
I don't make nearly that much (I wish!) but as a middle-class taxpayer in CT,
here are my feelings on the matter.

I am most certainly not opposed to the idea of taxes since society cannot
function without the government providing some essential services. That said,
I am opposed to paying a dime more than entirely necessary as it stands today
because I see so much of my tax contributions being wasted.

* Medicare ineligibility to negotiate rates

* Military projects that are vastly over budget

* Government budgeting practices that promote blowing your entire budget at the end of the year so that it's not cut the next

* Excessive and abusive pension amounts for public employees

* Refusal to appropriately discipline public employees (police) for wrongful conduct

I can keep listing more, however before I am asked or required to send in
another penny to be spent, I personally would expect at least some of these
issues to be addressed, at least where spending is concerned. Until progress
is made in these areas, then I will continue to be staunchly opposed to any
tax increases and will do whatever I can to lower my own tax bill. If I feel
my money is being wasted, then I may as well be the one wasting it rather than
the government.

~~~
coldpie
While I think the amount of government waste is vastly overstated, I do
understand what you're saying. But I was specifically addressing people who
take so much income that they bother with these complicated tax-avoidance
schemes. At that level of wealth, the difference between $40MM and $49.5MM of
income is not appreciable. I was just griping that it'd be nice if they didn't
try so hard to keep every cent of their massive income, so we could simplify
the tax code and possibly improve our public services given the increased
revenue.

(To be ultra-clear, I know this is in the realm of fantasy-land and I
understand why.)

~~~
dennisgorelik
You do not need consent from the wealthiest to simplify tax code. They have
very few votes.

------
andriesm
I agree with many of the sentiments here, as a non-American coming from a
dispotic regim. I spend months in the US to explore setting up my startup here
and to talk to investors and possible clients -

 __* I was put off by the tax system. __*

The taxes are too high, and too complex.

With such high taxes I'm surprised the gov has so much debt.

Sure there are places with higher taxes.

But I thought America was the land of opportunity, the mecca of Capitalism.

It stil was all that - I would love to have the option to stay there - an
amazing experience - the quality of life and the level of consumer choice is
fantastic.

However America should consider copying the tax codes of places like
Singapore, Hong Kong or Taiwan.

The biggest challenge is of course the federal system which imposes taxes
seperately at the state and central gov/federal level - making things
complicated - but of course in return creates stronger local alignment and
more choice. (Better for democratic freedom)

But especially business taxes need to top out at lower level at the federal
level.

In my opinion, as an outsider.

We ended up NOT registering our business in the US and would only do so if
forced by investors - but we'll be bootstrapping for a while so not a
consideration.

The US as a place to register a startup for an outsider, is a seriously
unattractive proposition.

\- On top of this the US has this batshit crazy policy of double taxation for
international people.

Most other countries have double taxation treatiea so that you aren't taxed
twice on the same income!

The US does not.

~~~
iheartmemcache
Everyone is put off by the tax system. It's a product of 300 years of
cronyism. Want your tax break? Pay lobby Firm Jones and Smith, LLP on K-street
a few million dollars, and in goes your clause as a subsection of an anti-gun
hysteria bill passed right after some white elementary school kids in
Connecticut get massacred. Like for-profit-prisons, there are too many people
who count on the existing tax framework to see any actual alteration of it.
The defense department needs their billions, as do the sub-contractors who
make money charging 4x the market rate for because they're part of some GSA
Alliance contract vehicle; the tax attorneys at Skadden depend on it being
complicated, the hundreds of thousands of CPAs do too, as do the people
employed by the IRS. If you change the tax-code to something like HK, all of
those economic sub-sectors fall apart.

As someone who's a partner at a consultancy and in the highest marginal tax
bracket, I'd be more than happy to pay my fair share if companies like Apple
and Exxon didn't use countries like Ireland to avoid remittance taxes to the
tune of 250 billion dollars a year, effectively putting the burden on the rest
of us. (Well that and if we stopped spending 5x the aggregate of the next
most-heavily invested countries re: defense, and re-allocate even 5% of that
money to national education, STEM programs for innercity kids, the arts, and
the NSF but again, fat chance of that happening.)

------
hackuser
Societies where money strongly influences politics breed corruption and lose
productivity: You can buy political influence with money, of course, but also
it works vice-versa: You get money from political influence, by controlling
law and policy, rather than as a reward for economically productive activity.
The business of the nation, or at least a major industry, becomes corruption.

~~~
dogma1138
Name a single society in history where money didn't strongly influence
politics.

~~~
jdimov10
This is where all the commies are dying to say "communism", but even they
don't have the eyes for that.

~~~
levosmetalo
Growing up in an communist country I saw much less corruption than after we
were liberated by democracy and liberal capitalism has been introduced. As a
consequence of the system change, the corruption throughout the country rose
to the unforeseen levels.

But of course, since communism lost, at least for now, it is an easy target
for snarky comments.

~~~
dogma1138
My parents grew up in soviet Russia they ran out in the late 80's if they
would've waited and survived the turmoil they would most likely have become
Oligarchs but it wasn't a good time to be a prominent Jew in Russia and they
tell quite a different story.

Every institution was corrupt to the bone, if you wanted to send a package
somewhere and for it to actually arrive at it's destination you had to bring 2
loafs of bread and a jar of home made pickles with you to the post office.

Communism like most dictatorships was more or less clean and organized on it's
surface. One of the scariest things about authoritarian regimes is just how
normal and calm they seem to many people that live under them. Heck martial
law is quite commonly regarded by many to be quite "nice", all crime stops,
the streets are clean, no one bothers anyone ofc if any trouble ensues all
parties tend to be lined up against the wall and shot but other than that it's
almost utopic.

------
seibelj
It just amazes me that you could spend your whole life working as a tax panner
in a family office, when you aren't even related to that family. An entire
career devoted to helping a single super rich family avoid taxes. What a life!

~~~
patio11
It's a career devoted to helping a very large enterprise with diverse
interests comply with a very complicated, fact-intensive, and generally
multinational set of regulations in the same manner as every tax professional
since Learned Hand: diligently paying the lowest amount consistent with the
law.

Substantially every business owner you know -- the ones with top line revenues
of $100k, $1 million, $10 million, and $100 million -- employ 0.05 to 100+
full-time accountant equivalents for the same purpose.

I am on _uncomfortably_ good terms with my friendly local tax office and
they're all but begging me "Mr. McKenzie, it will be easier for all of us if
you just get a pro to do it for you this time." (Tax agencies essentially
delegate surveillance duties to CPAs; a Japanese CPA signing off on my return
means the Meguro tax office doesn't have to trouble their heads about how
Japanese tax law interacts with an American LLC owned by a Japan-resident
American covered by a really complicated treaty.)

~~~
ahh
Why don't you contract to a CPA then? I wouldn't think you'd be opposed to
hiring a professional for his specific skills.

~~~
patio11
I have a really good CPA in the US. I simply have not been able to locate one
in Japan yet, because my requirements are rather esoteric: table stakes is
"bilingual; you need to know the difference between on-premises and off-
premises software or be able to retain a working model of that difference
after having it explained to you once; you must be comfortable working in the
intersection of Japanese and American tax law; you need to be comfortable
doing business over email and Dropbox; please don't charge me $2k per hour as
that will eclipse the profits of the business before my taxes get filed."

I don't know who best fits these criteria in Tokyo yet but would welcome an
introduction. I have a strong suspicion that I was the best qualified person
in Gifu.

Hence me trudging down to the tax office a few times a year with a notebook, a
stack of forms, and a highlighted copy of a National Tax Agency publication
with the query "So I've got an odd one for you..."

------
elbigbad
I was interested in some of the mechanisms that they use specifically. Here
are some examples from the article:

1.

Mr. Loeb, for example, has invested in a Bermuda-based reinsurer — an insurer
to insurance companies — that turns around and invests the money in his hedge
fund. That maneuver transforms his profits from short-term bets in the market,
which the government taxes at roughly 40 percent, into long-term profits,
known as capital gains, which are taxed at roughly half that rate. It has had
the added advantage of letting Mr. Loeb defer taxes on this income
indefinitely, allowing his wealth to compound and grow more quickly.

2.

One aggressive strategy is to place income in a type of charitable trust,
generating a deduction that offsets the income tax. The trust then purchases
what’s known as a private placement life insurance policy, which invests the
money on a tax-free basis, frequently in a number of hedge funds. The person’s
heirs can inherit, also tax-free, whatever money is left after the trust pays
out a percentage each year to charity, often a considerable sum.

~~~
toast0
Not sure about the offshore reinsurer, but the charitable trust sounds like a
charitable lead trust, probably a non-grantor charitable lead annuity trust.

The basic idea with a charitable lead trust is that it's organized for a
certain term (a number of years, or life of a specific person or some
combination) and during that term, the charity will get specific payments
(subject to the trust remaining solvent), and when the trust ends, a
beneficiary will get the remainder. If the trust is properly constructed, when
the trust is funded, the present value of the remainder is determined and used
as the gift/estate tax value for the gift to the beneficiary; if you can make
that zero, while also investing assets in the trust in such a way that the
remainder is not actually zero, then you've avoided gift/estate tax. I believe
the donor also gets a charitable tax deduction for the present value of the
payments to charity, spread over 5 years, and subject to clawback in some
cases.

I'm not really sure how the private placement life insurance plays in, it's
likely a way to avoid income tax for the trust (a charitable lead trust is
subject to tax on its income), as life insurance proceeds are generally
untaxed.

------
djvu9
I think people should really talk more about how the government spends the
collected tax money instead of taxing those wealthy more.

~~~
rdudek
Doesn't matter. Money is created through debt on national level. Eliminate the
debt and you're running risk of deflation, not to mention other economic
issues associated with that, like job losses in public sectors.

------
cbeach
The Laffer Curve illustrates a sweet spot of taxation to produce maximum
revenue.

People will always avoid tax if it's too high. Either they'll pay millions to
accountants to avoid paying tens of millions to the taxman, or they'll simply
not bother working so hard and they'll stop fighting to realise their career
potential.

The answer is not for the taxman to spend tens of millions to reclaim tens of
millions of tax. The answer is to lower tax rates to the sweet spot of the
Laffer Curve and thus maximise revenue.

That's all too boring and technical for the media, though, and it won't sell
papers. The media aren't concerned with maximising Treasury revenue. Instead
they indulge people's instinctive grievances around inequality and demonize
the wealthy.

[https://en.wikipedia.org/wiki/Laffer_curve](https://en.wikipedia.org/wiki/Laffer_curve)

~~~
jbooth
So you're saying that if the tax were lower, people would fire their
accountants and pay more taxes out of the goodness of their hearts? A sense of
fairness?

~~~
viscanti
They would if the cost of hiring someone to help save money on taxes cost more
than it saved. It's not about a sense of fairness. If paying someone to save
on taxes is a bad investment, people stop doing that.

~~~
jbooth
So, if we're talking revenue of billions.. cut taxes to 0.0001% and that's the
peak of the Laffer Curve where we maximize revenue? That's the argument?

~~~
dennisgorelik
No.

Typical assumption is that the peak of Laffer Curve is somewhere between 30%
and 70%.

------
rmykhajliw
The higher income people must pay less taxes, because society cannot provide
enough services for their paid taxes. It seems as paradox but that's the
Truth. Otherwise the rich person will find a way to pay 0's taxes in one of
dozen tax-haven places like andora. As result government got nothing. That's
why the richest you're the lover taxes you have to pay.

------
tmaly
take a look at the loop holes added in the recently passed omnibus spending
bill. The tax code in the US just keeps getting patched. Would it not just be
easier to choose a flat tax for individuals and stick it to everything? Think
of all the paper work costs saved.

Another idea would be to go back to an apportioned scheme like we originally
had in the constitution. Maybe by congressional delegates than by state as RI
could not possibly match CA in tax contributions.

------
winstonewert
Democracy has failed.

Nobody likes what's going on here, yet, somehow despite democracy we cannot
produce change.

------
known
Tax Corporate Revenues, Not Profits; [http://news.yahoo.com/warren-buffett-
secretary-talk-taxes-22...](http://news.yahoo.com/warren-buffett-secretary-
talk-taxes-221442297--abc-news.html)

~~~
harryh
Then you put low margin companies out of business while high margin ones still
thrive.

