Pro-Publica Tax Article on the 25 Richest Americans

[astonmartin708]

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

ProPublica has obtained a vast cache of IRS information showing how billionaires like Jeff Bezos, Elon Musk and Warren Buffett pay little in income tax compared to their massive wealth — sometimes, even nothing.

www.google.com

I realize the title is click-batey, but I highly recommend this article on the lack of an adequate tax structure for the ultra wealthy in the US. They did a good job framing the difference in the tax burden on the growth in wealth of these 25 rich people over a period of time vs what the tax burden would be on the number of people (14.3 million) it would take to account for the same amount of wealth growth during the same period of time if all of those people were standard tax payers making a median income. The disparity is astounding.

Pro Publica also did a very good job outlining how and why Billionaires use the tax avoidance tactics that they do, and why it’s important that something change.

It really highlights for me, the need to alter how we as a nation define income, and how we assure that taxes are paid on the assets which Billionaires use to borrow against. (They don’t sell their stock so they don’t have to realize their stock gains, but they still are able to utilize the every growing wealth by borrowing billions against the stock, then they get a tax break for the loan interest on the taxes they take out.)

 

[astonmartin708]

BTW, I know that people like to throw around the statistic that the top 1% earned ~20% of all US income but they paid ~ 40% of the total income taxes, but in reality, that 20% number is skewed drastically downward by the fact that the extremely wealthy typically make their incomes look significantly lower than than their level of wealth acquisition would imply (and the amount of money they can get by borrowing against that wealth).

I’d be interested to know what the top 1%’s incomes in any given year would be if they realized a given percentage of their stock gains every year. I.E. if they were paid a sizeable salary by the corporations they run, which is essentially what should occur.

 

[watu05]

The article certainly explains how so much wealth was accumulated in so few hands. Bezos, Buffest, Musk, etc all had years when their wealth increased by billions and they paid zero income taxes, and Bezos even got a child credit refund. So we have Amazon paying zero taxes for years, and Bezos doing the same while both were increasing in value by billions.

The real issue is 'income tax' vs a wealth tax. 14 mullion people earning median incomes would be paying 25+% in taxes on income while equity and carried interest owners would be only paying on what they elected to take currently which allows the rest to accumulate without taxation. So middle class American's pay 20+% on their increase in wealth yearly while Buffet, Musk, etc pay about .01% to 3% of their increase in wealth annually. Buffet has said taxes should go up, but he's doing a good job of avoiding them.

One rationale for taxing capital gains at time of sale is that it links the need to pay taxes with the ability to have the cash to pay them. It also encourages long term investing which is the reason behind the different tax rates for long term and short term capital gains. It all makes sense until it doesn't.

 

[lawpoke87]

Curious….are you guys suggesting the increase in the stock price one owns is a taxable event ? Interested to hear how this would work?

 

[astonmartin708]

Curious….are you guys suggesting the increase in the stock price one owns is a taxable event ? Interested to hear how this would work?

When you are taking the stock increases instead of an actual salary, I would say at least some portion of the stock increases would be income. I think you could work out some sort of metric with regard to the following variables:

Overall percentage ownership in the company,
Overall increase in stock value over the year (on some sort of weighted average basis)
The company’s market cap.

Those combined should get you close to a valuation of what the Executive’s Salary would have been if he had taken a salary from the company for the work he did. You can’t just argue that “I didn’t take a salary so I didn’t have income beyond dividends” because clearly you did have income, but instead of paying capital gains at a rate of +20% you’re only paying a quickly maturing loan at a low interest rate of 3% or 4% as long as your business keeps doing moderately well, you will win. Moreover, it’s harder for regular folks to use these types of loans because the current laws restrict the ability of people to borrow against tax deferred retirement accounts which is where many have their largest market accounts.

www.fool.com/amp/investing/2017/11/19/wall-streets-hottest-loan-product-borrowing-agains.aspx

Not only that, but they’re using the wealth generated by their assets (via securities based loans) to fund more wealth acquisitions as the market fluctuates and properties become more financially attractive for purchase. www.barrons.com/amp/articles/future-returns-wealthy-investors-seize-the-day-with-securities-based-lending-01587481760

 

[URedskin54]

Always glad to see people practice tax avoidance no matter their wealth

 

[astonmartin708]

Always glad to see people practice tax avoidance no matter their wealth

Why? It just means that the soldier protecting your state has a few fewer bullets and instead the billionaire has a few more monopoly houses to let you take a mortgage out on, so you can give home even more money.

Our country could be at its best if the rich weren't dodging taxes because they can, and our poor were dodging taxes because they fundamentally can't afford them. It's become trickle-up (or more accurately 'vacuum') economics where the movement of wealth mainly flows in one direction and it's not towards the bottom.

 

[lawpoke87]

Stock bonuses are taxed as ordinary income. Stock options are a little more complicated due to vesting but are typically taxed as ordinary income when exercised and a capital gain when sold. I’ll ask again….why are we wanting to treat increases in stock prices as a taxable event? Are we talking only about options?

 

[astonmartin708]

Stock bonuses are taxed as ordinary income. Stock options are a little more complicated due to vesting but are typically taxed as ordinary income when exercised and a capital gain when sold. I’ll ask again….why are we wanting to treat increases in stock prices as a taxable event? Are we talking only about options?

The stock they acquire early on in the life of the company they built is almost never exercised. The gains are never realized nor taxed, though they keep using them to borrow against as the company's value rises, and then upon their death, they play tax tricks with trusts to dodge estate taxes.

Let's look at Zuckerberg. His compensation at facebook is $1 salary. 0 in stock options. 0 in stock. 0 in bonus and ~23 million in other types of compensation (likely the use of cars, planes, etc...).

But he owns 29.3% of the entire company compared to 28% at IPO. The growth of the company is financing his ability to increase his wealth via these security backed loans which allow him to bypass needing to sell even a small percentage of his facebook stocks to fund his lifestyle or his investments in other assets and also allow him to not need to take a salary. So he bypasses the tax on his salary. He bypasses the stocks on his capital gains and he uses the interest deduction from his securities loans to decrease his overall tax burden resulting from his "other" compensations. He just has to sell enough of his other (non-facebook) assets to look like a net loss (or a comparably infinitesimal gain) considering his interest payments. It ends up looking like he's making nothing, when in reality our tax code is allowing him to not need to show much if any "income" despite living like he does have income. You might think that in some way his revenue growth was being taxed in the form of corporate taxes, but we know the tech giants do as much as they can to pay 0 in corporate taxes too.

Instead of taxing the profits prior to them being realized, I suppose we could always outlaw securities based personal lending... but then these guys would just try to do it through shell corps and other tax strategies. Seems like the most effective way would be to figure out how to tax stock gains when the person holding the stock has over an xyz% stake in the company.

I only see a few avenues of fixing this and some of them would mean waiting decades to recoup the lost tax revenue.

A) figure out how to tax the stock gains, at least at some rate that mainly effects massive stock holders, and do so without killing legitimate corporate investment firms and tanking the economy.

B) figure out how to effectively close off securities based loans (both private and corporate) which are ultimately benefitting single individuals

C) fix the estate tax system (including limiting trusts) to insure that assets are appropriately taxed upon death and that the assets don't reach heirs without appropriate redistribution.

 

[lawpoke87]

I have more of a problem with the tax shelters these large corporations use than executive compensation or lack thereof. Why…because salary and bonuses including stock is a corporate expense and a direct deduction to taxable income of the corporation. Thus, if Zuck doesn’t take compensation in the above forms then those dollars are taxed at the corporate level instead of the personal level. We still collect the tax revenue provided FB id paying tax which gets us back to the original point.

I don’t disagree that we have a problem with tax avoidance (hate that term) from the ultra rich. Our tax code is much too complicated and caters to those who hire tax attorneys. Simplify the code and do away with complex tax reduction strategies…and tax attorneys. There is nothing wrong with following the law to reduce ones tax bill. The problem is the law not the application. The entire code needs to be scrapped and re-written.

My problem with taxing unrealized gains is normal people often can’t afford to pay said tax. Not to mention the prospect of getting those tax dollars back the next year when the stock price goes down. Just an accounting nightmare for middle America.

 

[noble cane]

So... if the value of your house/land/minerals/metals goes up and you borrow against that value to improve your asset standing, should you be taxed?.. what if the asset loses value.. can you take a loss on your taxes without a sale?

 

[astonmartin708]

I have more of a problem with the tax shelters these large corporations use than executive compensation or lack thereof. Why…because salary and bonuses including stock is a corporate expense and a direct deduction to taxable income of the corporation. Thus, if Zuck doesn’t take compensation in the above forms then those dollars are taxed at the corporate level instead of the personal level. We still collect the tax revenue provided FB id paying tax which gets us back to the original point.

I don’t disagree that we have a problem with tax avoidance (hate that term) from the ultra rich. Our tax code is much too complicated and caters to those who hire tax attorneys. Simplify the code and do away with complex tax reduction strategies…and tax attorneys. There is nothing wrong with following the law to reduce ones tax bill. The problem is the law not the application. The entire code needs to be scrapped and re-written.

My problem with taxing unrealized gains is normal people often can’t afford to pay said tax. Not to mention the prospect of getting those tax dollars back the next year when the stock price goes down. Just an accounting nightmare for middle America.

I can agree with most of this. As to the last point, that's why I was trying to add a qualifier that would only apply to people who owned large stakes large publicly traded companies. I would also point out, given previous discussions regarding proposed changes to corporate tax structures, that corporate evasion has an effect beyond just the money we would expect to collect from the corporations themselves. It also effects what we would expect to collect in unaccounted for income taxes from the ultra wealthy.

 

[astonmartin708]

So... if the value of your house/land/minerals/metals goes up and you borrow against that value to improve your asset standing, should you be taxed?.. what if the asset loses value.. can you take a loss on your taxes without a sale?

Maybe it should be in certain (not necessarily all) cases. Specifically when you are getting a loan against the asset's equity and not reinvesting that money into the asset. I think people should be able to improve their home's value through a home improvement loan for example Similar things could be said about reinvesting loaned capital into further mineral assets.

I think there should be a distinction somewhere between tangible / extractable / concrete assets and market securities which aren't recoverable if the company / government entity completely fails like a home would be. Making that distinction might just drive the wealthy to another tax avoidance scheme though.

 

[aTUfan]

income is relative and can be manipulated. ie Ted Kennedy lived the high life under the umbrella of a billion dollar trust, and senate freebies but only had to pay taxes on his senate salary.

 

[URedskin54]

I don’t disagree that we have a problem with tax avoidance (hate that term) from the ultra rich.

Always glad to see people practice tax dodge ball

 

[aTUfan]

you can thank congress for all the corporate loopholes in the tax code. ie hrc, biden, harris, sanders, warren,

 

[HuffyCane]

I think a few people at Pro Publica may be needing criminal attorneys before this is all over with.

 

[URedskin54]

Why? It just means that the soldier protecting your state has a few fewer bullets and instead the billionaire has a few more monopoly houses to let you take a mortgage out on, so you can give home even more money.

Can't say that I'm persuaded by this. When I was in we spent over 600 billion a year on defense and I still spent more time in mandatory EO trainings than I did putting rounds down range. Now that we're turning the military into one giant HR department under the new administration, doubt that'll change no matter how much you tax Bezos and Musk.

 

[astonmartin708]

you can thank congress for all the corporate loopholes in the tax code. ie hrc, biden, harris, sanders, warren,

Suuuure

Can't say that I'm persuaded by this. When I was in we spent over 600 billion a year on defense and I still spent more time in mandatory EO trainings than I did putting rounds down range. Now that we're turning the military into one giant HR department under the new administration, doubt that'll change no matter how much you tax Bezos and Musk.

I agree with you that it wouldn’t be likely to be used there. It was just an example of where the money that the government should be getting is being used. Honestly the extra money should be going to cyber security and infrastructure or shoring up things like SS, producing increased access to healthcare etc...

 

[astonmartin708]

I think a few people at Pro Publica may be needing criminal attorneys before this is all over with.

I agree. Though I appreciate them bringing things to light.

 

[watu05]

I agree. Though I appreciate them bringing things to light.

It will be interesting to see. The article cites a previous, similar release, their correspondence with the IRS, and that the IRS did nothing.

 

[Gmoney4WW]

you can thank congress for all the corporate loopholes in the tax code. ie hrc, biden, harris, sanders, warren,

You just put up the same names every time, and blame them for everything under the sun. Seeing as how Harris wasn't a congressmen until 2016, she had absolutely nothing to do with the loopholes. As far as the congressman who created said many number of bills, and who vote for these bills, both republicans and democrats formed and voted for these loopholes over the last 50 -75 years.

 

[watu05]

You just put up the same names every time, and blame them for everything under the sun. Seeing as how Harris wasn't a congressmen until 2016, she had absolutely nothing to do with the loopholes. As far as the congressman who created said many number of bills, and who vote for these bills, both republicans and democrats formed and voted for these loopholes over the last 50 -75 years.

The 2017 Trump tax bill increased the number of loop holes for Republicans who voted for it. Real estate developers got one or two as well.

Republicans passed tax cuts — then profited

When the price of Apple stock hit a then-record high in October 2018, among the shareholders counting their gains were 43 Republicans in Congress, who collectively owned as much as $1.5 million worth of the tech giant’s shares. Apple’s stock jumped 37 percent in its run-up to that record...

publicintegrity.org

 

[lawpoke87]

You just put up the same names every time, and blame them for everything under the sun. Seeing as how Harris wasn't a congressmen until 2016, she had absolutely nothing to do with the loopholes. As far as the congressman who created said many number of bills, and who vote for these bills, both republicans and democrats formed and voted for these loopholes over the last 50 -75 years.

If we’re being honest, Congress doesn’t write the tax code….or at least the complex portion of the same. This portion of the code is written by the rich and powerful. Congress simply passes these laws. We all understand how this works. Unlike some on this board who looks to blame one party or the other both parties are bought and paid for when it comes to the tax code. Money buys politicians and has for decades….period. Regardless of the letter before their names. Neither party claims the high ground here.

 

[watu05]

Agree on rich and powerful, but the POT has long been the party of tax cut and loop holes. Clinton left office with a budget in balance and a growing economy. Bush immediately pushed for a tax cut and the deficit spending that resulted. More recently Trump and POT pushed through the 2017 tax cut despite objections about the size and the loop holes which did not deliver the benefits promised. Obama and now Biden have both tried to reverse the trend, and the we are witnessing the opposition by the POT. There is a huge difference in the parties on policy, particularly who benefits from tax cuts.

 

[URedskin54]

Tell me about SALT, who it primarily benefits, and who has tried to eliminate its cap

 

[TUMe]

The 2017 Trump tax bill increased the number of loop holes for Republicans who voted for it. Real estate developers got one or two as well.

Republicans passed tax cuts — then profited

When the price of Apple stock hit a then-record high in October 2018, among the shareholders counting their gains were 43 Republicans in Congress, who collectively owned as much as $1.5 million worth of the tech giant’s shares. Apple’s stock jumped 37 percent in its run-up to that record...

publicintegrity.org

First, the author does admit that Democrats took the tax cut as well. But amazingly he listed the riches of the Republicans item by item. But I must have missed the same table for the Democrats. Did Pelosi file for bankruptcy? Is the Senate majority leader getting evicted from his home. Does any Democrat own stock. Did the Democrats fillabuster the tax bill?

 

[lawpoke87]

The article was published in partnership with Vox. Shocking that it has a partisan slant.

 

[watu05]

First, the author does admit that Democrats took the tax cut as well. But amazingly he listed the riches of the Republicans item by item. But I must have missed the same table for the Democrats. Did Pelosi file for bankruptcy? Is the Senate majority leader getting evicted from his home. Does any Democrat own stock. Did the Democrats fillabuster the tax bill?

The point is who created and voted for these tax cuts. Are you saying Pelosi voted for them? No Democract in the House or Senate voted for the 2017 Trump tax bill. As for the fillibuster, it was passed under reconciliation; no filibuster allowed.

 

[watu05]

I think a few people at Pro Publica may be needing criminal attorneys before this is all over with.

Garland is going after the leaker.

 

[lawpoke87]

The point is who created and voted for these tax cuts. Are you saying Pelosi voted for them? No Democract in the House or Senate voted for the 2017 Trump tax bill. As for the fillibuster, it was passed under reconciliation; no filibuster allowed.

The stated tax rates aren’t really the problem when it comes to the individuals identified by the original story now is it? Doesn’t really matter if those rates are 39%, 35%, etc.. when the taxable income on the return has been reduced by 90 plus percent by a smart tax attorney taking advantage of the current tax code. As I’ve said many times, for the ultra rich the stated tax rates are meaningless. Effective tax rates tell the story

 

[astonmartin708]

The stated tax rates aren’t really the problem when it comes to the individuals identified by the original story now is it? Doesn’t really matter if those rates are 39%, 35%, etc.. when the taxable income on the return has been reduced by 90 plus percent by a smart tax attorney taking advantage of the current tax code. As I’ve said many times, for the ultra rich the stated tax rates are meaningless. Effective tax rates tell the story

It's not even effective tax rates that tell the story. Effective tax rates just show that you say you had an 'income' of 1 dollar and that you paid 20 cents on that dollar, when in reality you actually had an "income" of several thousand dollars and you only paid 20 cents in taxes. (I shrank the numbers we were talking about to some proportion)

Neither stated tax rate or effective tax rate tell the story. Effective tax rate just tells what you paid out of your stated income. If your stated income is misleading, then the effective tax rate is also misleading.

 

[aTUfan]

for every new tax on the rich, taz accounts will find ten ways around it.

 

[astonmartin708]

for every new tax on the rich, taz accounts will find ten ways around it.

So that excuses them from paying taxes? Or us from trying to make them pay taxes? Good to know that after a certain point you’re too good to pay at the same rate as normal people.

 

[lawpoke87]

It's not even effective tax rates that tell the story. Effective tax rates just show that you say you had an 'income' of 1 dollar and that you paid 20 cents on that dollar, when in reality you actually had an "income" of several thousand dollars and you only paid 20 cents in taxes. (I shrank the numbers we were talking about to some proportion)

Neither stated tax rate or effective tax rate tell the story. Effective tax rate just tells what you paid out of your stated income. If your stated income is misleading, then the effective tax rate is also misleading.

I’m not disagreeing that stated gross income can be misleading. Curious as to where you believe these “taxpayers” are hiding income from their stated GI ?

 

[astonmartin708]

I’m not disagreeing that stated gross income can be misleading. Curious as to where you believe these “taxpayers” are hiding income from their stated GI ?

How much do you think these billionaires are living on each year? They report nearly net zero incomes, they take no salaries. Do you seriously think they are losing money year over year? How are they affording their multiple mansions? It’s not all from when they IPO’d.

 

[lawpoke87]

How much do you think these billionaires are living on each year? They report nearly net zero incomes, they take no salaries. Do you seriously think they are losing money year over year? How are they affording their multiple mansions? It’s not all from when they IPO’d.

I think they’re reporting GI but less TI and even less tax payable due to tax credits. There’s an extensive shopping list of tax credits being marketed by CPAs and tax attorneys. You have a total (fed and state) tax rate of say 40%. You invest in a $1M tax credit product at a cost of $200k. You just halved your tax bill. There are no dollar limits to most of these credits that I’m aware.

I didn’t address the selling of certain assets which results in capital losses to offset any capital gains as this tactic is obvious. The purchasing of tax credits is something I’m guessing most on this board hasn’t heard of.

The IRS will generally require a business owners salary to be reasonable as defined by industry standards. I can post some IRS cases and rulings if anyone has an interest. That said….it’s up to the IRS to enforce these standards.

 

[aTUfan]

So that excuses them from paying taxes? Or us from trying to make them pay taxes? Good to know that after a certain point you’re too good to pay at the same rate as normal people.

so you just pay your taxes on your gross amount

 

[Gmoney4WW]

so you just pay your taxes on your gross amount

As long as you don't put any blame on pubs, need more blame to lay on dems. You are just arguing to argue.

 

[astonmartin708]

I think they’re reporting GI but less TI and even less tax payable due to tax credits. There’s an extensive shopping list of tax credits being marketed by CPAs and tax attorneys. You have a total (fed and state) tax rate of say 40%. You invest in a $1M tax credit product at a cost of $200k. You just halved your tax bill. There are no dollar limits to most of these credits that I’m aware.

I didn’t address the selling of certain assets which results in capital losses to offset any capital gains as this tactic is obvious. The purchasing of tax credits is something I’m guessing most on this board hasn’t heard of.

The IRS will generally require a business owners salary to be reasonable as defined by industry standards. I can post some IRS cases and rulings if anyone has an interest. That said….it’s up to the IRS to enforce these standards.

I don’t think the difference between their GI and their TI are that astronomically large. Without seeing them, I couldn’t prove that though.