
Accidental Tax Break Saves Wealthiest Americans $100 Billion - apaprocki
http://www.bloomberg.com/news/2013-12-17/accidental-tax-break-saves-wealthiest-americans-100-billion.html
======
jere
>Covey studied the law and found an even bigger loophole. “The change that was
made to stop what they thought was the abuse, made the matter worse,” he says.

>Covey, 84, a Missouri native and former U.S. Marine Corps basketball player
who earned a law degree from Columbia Law School in 1955, uses the words
“romantic” and “beautiful” to describe the most elegant tax maneuvers.

 _This guy_ is a hacker.

~~~
lesterbuck
Yes, it's a beautiful hack of the tax laws.

What I've always wondered is why people don't load the tax code into the
automatic proof systems and let it do some goal seeking. The idea of putting
money into a trust and then taking it out took a while to occur to Covey. All
the "useless" edge cases would be explored by a goal seeking system. There are
probably a large number of these hacks out there already discovered, but
taking it all the way through to a tax court decision is the real trick. I
also vaguely remember a legal principle that if a transaction was entered into
soley for the purpose of lowering taxes, and with no other business goal, it
can be disallowed unless that was the intent of Congress.

There have been a number of conferences over the years on the general topic of
AI and the law. I once read in a general book on business strategy about how a
contract can be either a sale or a lease, but that it is often extremely
valuable to make a sale appear to be a lease, and vice versa. Lawyers will
craft twenty pages of dense legalese to hide the facts from the casual reader.
Someday a sophisticated text processing system will ingest a contract and give
the answer, along with the chain of inferences from the obfuscated language
(to show the judge).

------
dm2
I assure you that it was NOT accidental.

This is nothing more than yet another case of legal treason by congress.

In my opinion, ALL loopholes for the super-wealthy and companies (Double
Irish) should be closed.

Reducing taxes should not be an option. If you make huge amounts of money or
want to transfer huge amounts of money in the United States then you should
pay tax on it to the United States government. There shouldn't be the option
to hire people to find sneaky ways to "legally" (but unethically) reduce that
tax without any consequences.

~~~
thaumasiotes
Seconding sanswork. The ability to tax retroactively is the ability to jail
anyone and confiscate everything they have for any or no reason. But I guess
ignorance of the future is no excuse?

~~~
tomp
> The ability to tax retroactively is the ability to jail anyone and
> confiscate everything they have for any or no reason.

Any arguments why?

~~~
breischl
1\. Decide who you don't like.

2\. Create a massive, retroactive tax on something they did. Make sure it's
big enough that they can't possibly pay it.

3\. Why stop at retroactive taxes? Add in retroactive penalties and fees for
late payment.

4\. Confiscate whatever they have to pay the tax bill.

5\. Charge them with tax avoidance for not paying those taxes, then throw them
in jail.

It's pretty insane, but if you're going to allow laws to be changed
retroactively then you're already into that territory.

~~~
dm2
Isn't this why you would hope that congress would be a diverse group of
rational and ethical people?

All I'm proposing is a discussion on closing loopholes and how to prevent
people from actively trying to take advantage of the United States
unreasonably complex tax system. If you are suppose to pay X% of the income
you make from transactions in the US or money transferred to heirs then you
should pay that X%.

The law says that you have to pay X% when passing money to heirs. If my
lawyers and accountants discover a way to reduce that amount because of a
technicality, then why should that hold up in court?

If there was a loophole in the law that allowed me to murder someone if X
conditions are met, should I be allowed to go free?

I see your point about why retroactive laws would be a slippery slope.

~~~
breischl
I don't disagree, but the problem is that writing laws is really damned hard.
There is a _lot_ of complexity in the real world, a whole lot of special cases
to think about, and also a lot of people who stand to make a lot of money if
they can find the holes. Intuitively you would think that writing a really
simple law like "each person must pay X% of income in taxes, no exceptions"
would work, except that that's how we got the almost-universally-despised
Alternative Minimum Tax. This is also why laws also tend to have lots of
unintended consequences.

>> If you are suppose to pay X% of the income you make from transactions in
the US or money transferred to heirs then you should pay that X%.

Just for fun, let's see if I can avoid that tax... 1) What if I transfer the
money overseas, put it in a trust, then transfer control of the trust to my
heirs? It's not a transaction in the US.

2) What if I create a tiny, worthless company, give my heirs all the stock,
pay the miniscule taxes on that value, and then contrive to make the company
worth more? eg, lend it a bunch of money at no interest, or buy a bunch of
stock, or purchase a lot of whatever it ostensibly makes?

3) How about if I just buy a ton of life insurance on myself with my heirs as
the beneficiaries? Sure, it'll cost a lot, but as long as the overhead is less
than the tax bill it's a net win.

That's off the top of my head. Pay me a few millions bucks to do this and I
guarantee I can do better. :)

------
viggity
Judging by the other responses, I'm probably a bit of a contrarian, but all in
all: "meh". I honestly don't care.

Wealth is not a zero sum game, and all talk about the horrors of wealth
inequality are completely ignorant of that fact. I think gift taxes are
bullshit. If I earned and paid taxes on income/capital gains, I should be able
to give the balance to whom ever I wish. Double taxation is bullshit.

~~~
swalkergibson
What if you earned the money through a company using the Double Irish Dutch
Sandwich tax shelter and didn't pay your fair share when you earned it? That
is why wealth inequality is a problem. Our government is owned by the people
that can afford to make donations, which are the same people that benefit from
these tax games.

~~~
viggity
If you have a problem with a double Dutch sandwich, then lobby for fixing
that, but don't hose a hard working farmer and his family by nailing them with
a 40% estate tax. There are a lot of millionaires who have paid taxes on every
penny they've made.

~~~
mikeyouse

        but don't hose a hard working farmer and
        his family by nailing them with a 40% estate tax.
    

Cute, but the estate tax has exemptions for both farms and family-owned
businesses.

The Tax Policy Center found 20 (!) farms in the country that would have to pay
any sort of estate tax, and the average tax paid by those 20 (out of several
thousand farms) would be under 5%.[1]

\- See Myth 5 -
[http://www.cbpp.org/cms/?fa=view&id=2655](http://www.cbpp.org/cms/?fa=view&id=2655)

------
powertower
Option A - Give money to your children (as much of it as you can).

Option B - Give money to a government who spends $5 to be able to spend $1.
Then waistes that $1 (on polices that you don't agree with).

Option C - Give money to people who hate you for having money (a.k.a "trickle
it down", "guaranteed minimal income", "anyone off the street can be a CEO",
"lets retroactivly tax the rich", etc).

I know what I would do.

~~~
wavefunction
Option D - Get merc'd when the rest of us have had enough.

Option E - Realize that we have enough food and resources so that noone should
have to do without, and create a society that reflects that.

Funny how these last two options contain the one option that will solve this
problem permanently, and the one option that humanity always ends up at.

~~~
powertower
So your options are to -

1\. Murder them out of spite.

2\. Make them shelter and feed the poor of the world, so the poor
multiplies/reproduces geometrically, and requires geometrically more resources
to shelter and feed.

~~~
lukeschlather
No, they need to educate, shelter, and feed the poor of the world. Experience
shows us that educated and healthy populations actually start to shrink as
time goes on without intervention.

You're making the mistake of assuming malice, while we're just talking about
cold hard fact: people who amass a lot of power always lose it, if not by
choice or natural death, then violently.

------
gergles
Yet the punitive AMT still exists and ensnares basically everyone making
between 150-400K and who lives in a high-tax state (which, conveniently, are
where most of the jobs paying that amount are.)

But don't worry, as usual, if you're rich enough, you play by a different set
of rules and can hide your money in shell trusts and schemes and pay nothing.
Disgusting - give us the FairTax already.

~~~
minikites
10 times the U.S. median income isn't "rich enough"?

~~~
moron4hire
My wife and I together make $150k in the DC suburbs. I'm trying to convince
her that we need to move so we could afford to live on one income and maybe
have kids some day.

For sure, we aren't hurting. The only debt we have is the one-bedroom condo
next to a highway and in the flight path of an airport we live in (well, and a
car, but we could pay it off in cash tomorrow if need be, which would be
stupid because the APR on the loan is less than 1%). But it's extremely
frustrating that this condo would translate to a 5 bedroom house with an acre
of land where I grew up a mere 3 hours from here.

And that's really only because, for the first 15 years of our careers we've
lived within our means and have not had children. $150k is not what it's
cracked up to be. If one of us lost our jobs, we would definitely have to
move. Unfortunately, hers is tied to this area, so if it were me to lose the
job, we'd be royally screwed.

~~~
justinsteele
I don't think "royally screwed" is the phrase you are looking for. There may
not be comparably nice homes for cheaper in the area near your wife's work,
but there are millions living on < 150k near you.

~~~
moron4hire
Yes, quite near me, as there is a Section 8 housing zone just two blocks from
us.

And you have to define your terms here. What do you mean by "living"? If you
mean, "able to feed themselves and live under a roof", that's not living,
that's subsisting. I'm talking about being more than just a serf and actually
making forward progress in life. Sure, the bartender at the insanely
overpriced place a few blocks from us probably only makes $60k, but he also
probably lives with a roommate in a tiny apartment, still owes money on a 7
year old car, has no assets, has no savings, has no health insurance, has no
chance of retiring at ANY age.

At this point, I don't think there is anything within our current distance to
her job (20 minutes) that A) we would be eligible for, and B) would be
cheaper. I telecommute. If we both had to drive an hour to work, then we'd
have to buy a second car and the increased transportation costs would
certainly eclipse any savings in housing.

Mind you, an hour away in DC is 15 miles on a good day. There _are_ people who
work here for half of what we make, and they commute 2 hours to work every
morning. I hope you're not suggesting that that is a livable scenario. "Well,
it is for them." _Maybe_ for them (I'd argue they are sending themselves to an
early grave, but I digress), but not for society as a whole.

At that point, if we're living 2 hours away, we might as well be working for
less where we lived. Thus my point: we can't live and work here for much less
than we're already making.

------
frogpelt
I guess I don't understand why people just LOVE, LOVE, LOVE the U.S.
Government so much. They do not manage money, personnel, or any resources
efficiently. The allocation of federal funds is subject to the whims of
whatever lobbyist or political trend happens to be going on at the moment. If
they want to use the 40% they take from your estate to fund NSA spying, deal
with it.

I understand that some poor and middle class people think it's unfair for rich
people to keep increasing in wealth but the government is many times more
corrupt than the average multi-millionaire or billionaire. First-generation
wealthy people got that way by innovation, hard work, and filling a necessary
role in the marketplace.

In summary, I don't think the solution to "income inequality" is to let the
government have half of our money. They have proven time and again that they
do not have the right solutions.

~~~
001sky
The people that "love the government", are the lobbysist and political donors.
They are the ones that receive the benefit of from this tax dodge, from the
cash left over.

Make sense now?

------
driverdan
There shouldn't be an estate tax. You're taxed on your income when you earn
it. Why should there be a special tax just because you died? If anything those
who inherit it should just have to file it as income and pay income / cap
gains tax on it.

~~~
swalkergibson
It is exempt up to 5.25 million for individuals and 10.5 million for couples.
Is between 5 and 10 million not enough? For hitting the sperm lottery? Large
amounts of generational wealth is a net negative in a democratic society as it
further exacerbates the income gap.

~~~
bedhead
I can assure you that meager transfer payments in the form of SS, Medicare,
etc will do absolutely nothing to reduce the income gap. Do you really think
that giving money to the government is going to magically make people
wealthier?

While generational wealth of the magnitude we have today certainly isn't
productive, it doesn't actually do anything to impede peoples' ability to earn
more for themselves, and forcing the wealthy to fork over money when they die
is basically purely symbolic, because even when taken cumulatively it has zero
effect.

~~~
swalkergibson
I disagree that it doesn't actually do anything to impede peoples' ability to
earn more for themselves. If someone handed you $50 million of tax-free money,
you wouldn't go volunteer somewhere or travel or whatever instead of going
into the office? Maybe ever again?

~~~
bedhead
Something is getting lost in translation here. How does some kid inheriting a
bunch of money adversely effect my or anyone else's ability to earn a better
living? As distasteful as it may be that someone can win the genetic lottery,
the reality is it doesn't preclude others from creating more wealth for
themselves. This is one of the biggest economic misconceptions in the
world...it's _not_ a zero-sum game.

~~~
swalkergibson
Oh, I thought you meant that inheriting the money did not impede their ability
to create more wealth. I understand now.

However, I still disagree with you. On a micro level, that is absolutely true,
there is absolutely enough wealth to be created from different places that it
is not a zero-sum game. That said, on a macro level, it is a zero-sum game.
Your wealth had to come from someone somewhere else. Sheldon Adelson's came
from people staying and gambling at his hotel. Mine comes from clients, and
theirs comes from their customers. Your wealth is determined by the amount of
money you can collect from other people. As far as I know, nobody is
collecting wealth from a source that is not another human being. Well, except
for the Federal Reserve, but that is a totally different topic.

~~~
bedhead
The rules cannot (and in fact do not) work differently on a macro and micro
level. Your argument means that no one ever becomes wealthy over time because
we are collectively stuck. The wealth is fixed, it just sloshes around from
one party to the next. I hope it's self-evident that this is not reality.

Wealth can be created, destroyed, or transferred. You seem to be confusing
"collecting" and "creating". Wealth is created by people _doing_ things that
manage to satisfy demand...it's the right combination of labor and capital.
This can take many forms, whether it's a guy building a casino or a starting a
social network or a law firm. These are forms of creation, not transfer (or
what you seem to be referring to as "collecting"). Transfer is entirely a
governmental endeavor, a social mechanism for redistribution of the wealth
that's actually been created. There is no labor, capital, ideas, or hard work
behind it.

~~~
swalkergibson
You are right about the macro/micro point. That occurred to me during the
writing of that post, but I decided to leave it in there because I was wrong
and I did not want to confuse anyone else interested in the discussion.

You are correct, obviously, that wealth is created by people doing things that
satisfy demand. For the purposes of our discussion, wealth is measured in
dollars. Let's say there are two people on earth. One has 100 dollars, the
other has 0 dollars. The person with zero dollars creates some widget that the
dude with 100 dollars wants and charges the other guy 80 dollars for it. Guy 1
now has 20 dollars and guy 2 now has 80 dollars. Guy 2 created his wealth (his
80 dollars) by doing/building/whatever something that guy 1 wanted. Am I
thinking about this too simply? How is it possible that wealth (measured in
dollars) is introduced into an economy without it coming from another
participant in the market?

~~~
bedhead
I admit it's a bit abstract but here goes.

Guy 2 (inventor) had to employ himself, other people, and capital in order to
create the widget. He has to pay those people and the owners of the capital,
and in turn they now have income which they do "stuff" with. Some of it's
consumed (spent) and some is saved (invested), in each case having yet more
downstream effects. Maybe Guy 2 realizes he can sell more widgets to more
people but needs to employ more labor and capital in order to do so. Multiply
this sort of ripple effect by a kajillion, every second of the day, and that's
sort of how it works. It's never stagnant, and the more activity there is,
generally speaking, the more wealth creation is taking place.

But in a capitalist world, nothing is stopping anyone from being Guy 2, which
is kind of my original point.

~~~
swalkergibson
I see what you are saying, and after some additional reading on the subject
can now see your point.

I guess it breaks down for me when you actually bring dollars into the model.
You are absolutely right, widgets made of resources come from the combination
of those resources and ingenuity. However, in modern society, refined
resources are quantified in terms of dollars and once dollars are part of the
equation, it must be zero-sum because people cannot just create dollars for
themselves to buy stuff. They must create stuff to convert into dollars so
they can buy other stuff. You can absolutely create stuff from nothing, but
that does not mean that anyone is going to buy it, which would convert it into
dollar wealth.

~~~
bedhead
The introduction of dollars is irrelevant...you're overthinking it. There is a
banking system that deals with the money supply, but that's another (possibly
confusing) matter. Wealth is not not fixed, that is the only idea you need to
get for this. Me being wealthy, even extraordinarily wealthy, does not
therefore mean that you cannot be. If you get this concept you're already
ahead of 95% of the world in terms of economic literacy.

~~~
swalkergibson
What if I built my wealth exploiting child labor in Malaysia? What if it
wasn't half a world away, but there was a source of similarly cheap labor in
my neighborhood? I suppose that you are saying that the people working 12
hours/day for maybe 1 USD are getting more wealthy themselves than before, so
a rising tide is lifting all boats?

~~~
bedhead
Well, this is starting to drift from the original point, but it's all just
supply and demand, my man. The guy taking a job for a pittance wage is
presumably doing so because the alternative is worse, otherwise why take the
crappy job? Is it really "wealth" as we know it? I suppose not, but it's still
a better alternative, as uncomfortable as that might seem sometimes. But life
isn't always all sunshine all the time.

Wealth is not fixed...repeat that 1,000 times. That's all that matters here.
Capitalism is a system that allows people - anyone - to create wealth. Hell,
look no farther than all these crazy tech companies coming public, the saas
and social media revolutions or whatever. Why are they almost always US
companies? Why isn't this stuff happening in Romania? We have a system that
lets people create wealth for themelves no matter how rich others are, and it
attracts talent and hard work and all that stuff, and it becomes a big
virtuous circle.

Anyway, my point is just that wealth in this country isn't a real problem. It
is not suppressive. It's the opposite, actually.

If there is one problem though, and this is something more recent, it's that
with technology we all seem to have our faces rubbed in others' wealth. This
is sort of a real problem...sort of. There are tons of really interesting
behavioral economics studies that deal with this and show how it makes people
feel worse about themselves. A topic for another day I suppose...

~~~
swalkergibson
I suppose what this boils down to is that you and I fundamentally disagree on
what makes someone wealthy. The below is an interesting take on the old
parable of the fisherman and the investment banker. Capitalism is not the be
all, end all of economic systems. It is certainly the system that best enables
federated wealth-building, but it is not like everybody benefits equally. For
real-life proof, have a look at the Banana Republics from the early 20th
Century that profiteers created in Latin America.

[http://blog.figuringshitout.com/the-parable-of-the-
fisherman...](http://blog.figuringshitout.com/the-parable-of-the-fisherman/)

~~~
bedhead
Hmm, how do I put this gently? Let me try.

I hate to break this to you, but you dont have the ability to "fundamentally
disagree" on something like this. Put simply, you dont know what you're
talking about. You obviously dont know anything about economics, and to the
extent that you've read something it's clearly been selective in order to fit
your worldview. You can disagree with me and be wrong if you insist on it,
because these things you're saying are fundamentally and demonstrably wrong.
You might as well tell me the sun rises in the west.

------
eloff
And the government remains powerless to close this loophole? They really do
seem to be owned by the wealthy and corporate interests. That's sad. The
wealthy are little more deserving of their wealth than the poor are deserving
of their situation. In fact, if we really do have no free will as science
seems to suggest, then the only thing separating the rich from the poor is
luck. Then the current inequality is particularly sick.

------
rayiner
Relevant (Thomas Jefferson's explanation of the nature of inherited wealth):
[http://www.economist.com/blogs/lexington/2010/10/estate_tax_...](http://www.economist.com/blogs/lexington/2010/10/estate_tax_and_founding_fathers).

~~~
viggity
there is a pay-wall if you click directly on the link. If you google "Estate
tax and the founding fathers You can't take it with you" it'll be the first
link and it will bypass the paywall.

~~~
rschmitty
Google is amazing, you are now the second result for that search term :)

------
rayiner
Better source for how these actually work instead of the handwaving in the
article: [http://taxprof.typepad.com/taxprof_blog/2013/09/wal-marts-
wa...](http://taxprof.typepad.com/taxprof_blog/2013/09/wal-marts-
waltons-.html).

~~~
jstalin
Thank you. This article also points out that the recipients still pay income
tax. The original Bloomberg link isn't very informative or accurate.

------
joecurry
For perspective - let's make them pay it all back, retroactively, from the
year 2000 as the article suggest. Now we will have (roughly due to
compounding) tackled 0.0058% of the current US deficit leaving us with
$17,133,947,996,837 or 99.994%.

For those who prefer a visual perspective -
[http://demonocracy.info/infographics/usa/us_debt/us_debt.htm...](http://demonocracy.info/infographics/usa/us_debt/us_debt.html)

I'm not convinced focusing on these tiny (relatively) loopholes on the
"world's richest", should be the focus of trying to fix the problem.

------
amalag
The Republican party has become the party of the rich. They really want to get
rid of the estate tax so they can build wealth across generations. $5 million
is excluded from the estate tax, but they don't think that is enough to pass
on when they die.

~~~
hnal943
What claim does the government have on the wealth those people created? Why is
the discussion always about how much the rich deserve to keep based on their
_own creation_ of wealth?

~~~
swalkergibson
The government has the same claim on their wealth as any other level of
income, as part of the social contract of living in the US. I am a little
confused on what your point is. Should people making $50k/year be exempt from
the government's claim on the wealth they created, too? What about people
making $25k/year?

------
rookonaut
"Accidental"? Classic!

------
swalkergibson
<rant>

How much fucking money does someone need? Seriously. What is the difference
between 7.9 billion (what he wants to leave) and 5.1 billion (less the
existing estate tax of 2.8 billion)? Clearly, his ego is huge given that he
watches the ranks of richest people closely. Honestly, what the fuck?
Congratulations man, you got really fucking loaded. Good work. Now, please
play fair.

</rant>

~~~
breischl
I see your point. The thing is, nobody trusts the government to spend their
money well, or at least not as that person thinks it should be spent.
Therefore everyone avoids taxes to the extent they can. I take every deduction
I can, I bet you do too.

Even the rich folks that aren't trying to pass on a huge inheritance, such as
Bill Gates and Warren Buffet, still aren't giving it to the government.
They're giving it all to charity, which is undoubtedly generous of them but
also lets them direct their wealth themselves rather than giving it to the tax
man.

~~~
swalkergibson
Warren Buffet has frequently said that he is perfectly willing to pay more
taxes, and that his secretary pays a higher percentage of her income than he
does. There are numerous reasons for government inefficiency, but how could
you run efficiently if there is always a target on your budget's back?

EDIT: You are absolutely right that the government spends money on stuff that
I don't want, like bombs and wars, and I think it is extraordinarily generous
that men like this give so very much to charity. However, I also believe that
if we as a society have decided that there should be an estate tax, then there
should be an estate tax and that the loophole should be closed.

~~~
breischl
The IRS does accept voluntary donations, but despite the rhetoric Mr Buffett
has not actually given more to the government than he has to. So I'm a little
skeptical of his claims. Also, part of the reason his secretary pays more is
because he has gone out of his way to avoid paying taxes (euphemistically, to
structure his businesses in a tax-efficient manner).

I'm not arguing that there shouldn't be an estate tax, or that people
shouldn't pay it. Just that I fully understand why they try to avoid it. I
would probably do the same thing in their situation, and I suspect many others
would as well.

~~~
swalkergibson
You are right. They are acting economically rationally, but that does not mean
that they are playing fair. That is why I am so viscerally opposed to the
Byzantine nature of the US tax code and the inability of our lawmakers to
level the playing field.

------
stupejr
[http://i.imgur.com/aYHte9Y.jpg](http://i.imgur.com/aYHte9Y.jpg)

