How the Rich Avoid Taxes (for Dummies)

James Kwak hit the nail(s) on the head about our corrupt tax system that mostly benefits the very rich. Here are three tax avoidance strategies that he brings to light --- and says these three tax schemes top his list for the ones most in need of tax reform...

1) Ending the "step-up in basis" at death for capital gains taxes (evading the capital gains tax completely), by leaving unsold assets in an inheritance, but also by avoiding the estate tax by setting up a trust fund for their beneficiaries.
2) Ending the "carried interest" loophole [Mitt Romney's tax strategy of choice].
3) Ending the "529 tax plans" for college savings accounts, that mostly benefit the wealthy.

Posted at The Atlantic: The Rich, the Poor, and Whether Tax Policies Live or Die (by James Kwak on January 29, 2015) -- "Tax reforms that benefit the middle class at the expense of the wealthy will never pass. When push comes to shove, what politicians care about most is defending tax breaks for the rich. All it takes is a few crumbs for the 'middle class' to provide symbolic cover for policies that largely benefit the wealthy. This is one reason why real tax reform is almost impossible today."

Then he goes on to describe in detail about the "529 tax plans" (for college savings accounts, that mostly benefit the wealthy). He also links to his other article below (which is fascinating).

Posted at Medium: The Tax Loophole (Almost) Everyone Should Want to Close (by James Kwak on January 28, 2015) -- "In his latest round of tax proposals, President Obama finally called for what is probably the single most obvious change that should be made to the tax code: an end to the step-up in basis at death for capital gains taxes."

Then in his excellent and well-explained post, he describes "step-up in basis for capital gains". And at the end of his article he concludes:

"In short, the step-up of basis at death is a tax loophole that rewards one thing: dying with lots of assets that you never needed to sell. How could this loophole possibly survive in a democratic, supposedly meritocratic society? Well, we’re about to find out  — because it’s going to survive at least until the Democrats have sixty votes in the Senate, which may be never."

As an aside: The Republicans call the estate tax the "death tax" — but as Jon Stewart (or was it Stephen Colbert) once pointed out, dead people don't pay taxes. And neither does a trust-fund baby on their first inherited $10 million ... but grandma at the diner must pay tax on all her tips.)

James Kwak had also said, "The other candidate for 'single most obvious change' is eliminating the 'carried interest' exemption that allows fund managers to pay capital gains tax rates on their labor income —  managing people’s money."

From the Economic Policy Institute: Emmanuel Saez just released a preliminary update to 2013 of the national top income time series, and noted that the 3.2% fall in income at the top is due to high income earners shifting income from 2013 to 2012 in an effort to reduce their tax liabilities in anticipation of higher tax rates. The capital gains tax rate went up from 15% to 23.8% beginning on January 1, 2013 — that was when the Bush tax cuts expired. I can only imagine their tax attorney calling: "Sorry to bother sir but, the tax rates are going up next year. Would you like me to move $500 million into your Cayman account?"

From the BCC: Apple just made the record-highest quarterly profit ever (in the entire history of the World) — the highest ever reported for a publicly traded corporation. (Trickle down baby!)

From the New Yorker: Critics of Oxfam’s Poverty Statistics Are Missing the Point: Comparing income can make a rich (but unemployed) heir to a fortune (held in an offshore tax haven) seem poorer than a fast-food worker. And comparing consumption, which usually involves looking at purchases of household staples, makes rich people and poor people look more similar than they really are. Donald Trump doesn't drink more milk or eat more bread than anybody else. (Even though his mouth is bigger than most.)

Billionaire Nick Hanauer, in a speech at TED University, agrees: "There can never be enough super-rich people to power a great economy. Somebody like me makes hundreds or thousands as times much as the median American, but I don't buy hundreds or thousands of times as much stuff. My family owns three cars, not 3,000. I buy a few pairs of pants and shirts a year like most American men. Occasionally we go out to eat with friends."

The Republican's response: "We don't give a rat's @ss! The super-duper rich are getting another tax break, regardless! Don't ya' know? Our aim to starve those dirty beasts!"



Why work or earn when you can envy?

All envy, all the time. There will always be people wealthier than you or I. Let's punish them, shall we? Let us assume a superior moral state by commanding them to surrender that which they own. It makes us feel wonderful! If they own it and it's more than I own, they must have stolen it. That just stands to reason, does it not? See how easy that is? They are thieves, I am a societal altruist. Me: morally superior. Everybody should be equal. That's what a democracy is, isn't it? And the founding documents state that we are a democracy....where? (hint: they don't)

You use an example like Mitt Romney. Mitt Romney affects you not one iota. It's only your own envy you feel. For every Mitt Romney, there are 2000-5000 sort of middle class workers who have managed to accumulate perhaps a million or two dollars over their entire working lives. And they wish to pass it on to their offspring. I know, I know, it really should go to you, shouldn't it? It's only fair. How did those assets accumulate so unfairly in the hands of just one person. It's wrong, you know, to have any more than a person could reasonably use or consume and certainly YOU are the adjudicator of that, aren't you? You know better! You have cool quotations from billionaires who give speeches at nerdy conventions you all paid $250 to attend. Very nice. They have lots of tips for you and you get to absorb their guilt for having accumulated their wealth. And you pay for it. Very smart.

So anyway, that middle class guy who worked his whole life and ended up living in a nice house worth well into six figures (of course he has to be white to live in such a neighborhood) and paid property taxes so his (and your) kids could go to school even though his kids left the nest 30 years ago....and then there's that stock portfolio he accumulated over his working career....maybe into six figures as well WELL BEYOND the amount of steak and potatos he might be able to eat in WHO KNOWS how many years....HE STOLE IT!!! I just know it! How do I know it? Because he has it and I don't.

The depth of your reasoning is about that of a third grader. Did that ever occur to you?

Every dime that worker put into the stock market....and paid his mortgage with...he paid taxes on those sums before they hit his hand, didn't he? He probably paid 35% to 45% state and Fed taxes on that income all his life. Well, what's so interesting, uncanny really, is that the Feds, outside their exlsuion, want to take 55% of it. So if I add 55% to 45% I get 100% using new math. So basically, there is a condition wherein the gov't takes 35% or 45% of your money while you are alive and 55% after you die. Is there something that distinguishes this from slavery?

But screw him, his family, and his heirs. Because they should have to liquidate that property and those stocks right after he dies so they can pay the government their due! The government owns it all, don't they? 35-45% while you are alive, 55% after you die. Man, it's so great to live in a free country!

That’s not envy: it’s reality.

AN UPDATE on my reply:

The Next New Deal: "The rich may imagine that blaming them for the struggles of the rest of us is driven by envy, but that’s their own conceit to make them feel good. Americans don’t resent the rich. While we might fantasize about winning the lottery, we are not consumed by jealousy. What most Americans understand is that they are struggling financially because the wealthy have rigged the economic and political system to benefit them at the expense of the rest of us. That’s not envy: it’s reality."


Despite your personal insults, in the future I might use your comment in its entirety at my personal blog to rebut all your arguments. But for now, I'll leave you with this:

When people like Paul Ryan (and yourself) talk about "envy economics", I imagine you all might be describing rich people who feel envy towards someone richer than they are (The Joneses vs. the Smiths). Did you every hear of yacht envy? Most poor people don't envy the rich; if anything, they emulate them and want to be rich themselves (and they watch their silly reality shows on TV). They don't hate rich people, they only feel anger towards a few rich people who would spend so much time, energy (and money) to deny others such things as a living wage (or food stamps when they can't find work). Why would someone with so much, deliberately go out of their way to deny others who have so little? Nobody was talking about stealing a middle-class worker's home or small business with an estate tax. I was talking about multi-billionaires like the Walmart heirs, who pay their employees so little, and yet receive tax subsidies and hire temp workers just to save a dollar. How many generations must they fund into the future at the expense of those who are only trying to survive today? If everybody were paid a fair and living wage, the rich wouldn't need to be taxed as much. But they don't want to pay fair wages OR fair taxes — they want it all, for nothing. If slavery were still legal, billionaires like the Waltons would probably use slaves (and in a way, they already do in Asian countries like Vietnam and Cambodia). But thanks for your comment ;)

NOTE: The original version of the article at Medium.Com I linked to had an incorrect example of using a trust to minimize taxes. You can use a trust to shield assets from the estate tax, but you don’t also get step-up in basis on those assets.