IRS knowledge breach reveals Little America's richest tax fee technique

The unprecedented leakage of personal federal tax data from thousands of Americans has fueled the debate about US wealth inequality and a deeper public understanding of how wealthy people avoid taxes. Advocates tax reforms that will lead to tax restructuring in the United States.

The data leaked to the non-profit journalism organization ProPublica includes detailed information on the tax returns of thousands of the richest people in the country for over 15 years.

This week, ProPublica used this data to examine for the first time the extent to which the richest people in the United States can live exceptional privileges and lives of luxury without paying low or no income taxes. .. ..

File Amazon founder Jeff Bezos will speak at the JFK Space Summit at the John F. Kennedy Presidential Library on June 19, 2019 in Boston.

According to Forbes magazine, Amazon founder Jeff Bezos, the richest person in the world, didn't pay federal income tax in 2007 and 2011 and has other household names. Millionaires – Warren Buffett, Mark Zuckerberg, George Solos, Michael Bloomberg, Carl Icahn, and others pay little or no taxes to the federal government over billions of dollars in wealth. It was.

Income vs. Wealth

From a tax point of view, the difference between “income” and “assets” must be observed. When an individual files a tax return, the government measures income, interest, and income from business activities. Wealth, on the other hand, is not only money that is saved from labor and interest income, but also capital stocks (stocks, bonds, real estate), which can increase in value significantly, but only generate income when they are sold. ) is also included.

The data shows that the 25 richest people in the United States saw their total wealth increase by $ 410 billion between 2014 and 2018. However, during that period they paid only $ 13.6 billion in taxes, or about 3.4% of that increase. That's because they were only taxed on the money they counted as income. It mostly accounts for only a small percentage of the increase in their total net worth over that period.

In contrast, the median household in the United States pays about 14% of its annual income in taxes each year. In the same five years, the average American middle-class family's wealth has increased by about $ 65,000, largely due to rising home prices, according to a ProPublica study. But that increase in wealth was roughly the same as the family's $ 62,000 tax payments in those years.

File Oracle Co-Founder and CEO Larry Ellison waits to meet then-Japanese Prime Minister Shinzo Abe at the Prime Minister's Office in Tokyo on April 8, 2014.

Monetize Unrealized Profits

ProPublica data shows how very wealthy people can keep their income to a minimum while still spending their time in luxury.

Put simply, the strategy is to borrow money that is backed by your assets. For example, Oracle founder Larry Ellison has a $ 10 billion line of credit backed by the same amount of Oracle stock that he owns. Ellison pays no tax on the money withdrawn from this line of credit as it counts as a loan rather than income.

In theory and perhaps in practice, experts say that Ellison and other companies can carry on their debts for life by paying the interest cost of their loans but not selling their underlying assets.

Shocking, but not so shocking

The information released by ProPublica was shocking, unless the personal tax information was kept very strictly by the Treasury and virtually never made public. The extent to which very wealthy people can avoid taxes and what methods they use to do so was not particularly surprising for the tax lawyers.

Zachary D. Riscoe, Associate Professor at Yale Law School, said, “We already knew. If they sell, it's public information (their stocks) and they don't sell very well. Still, they live in this extravagant lifestyle, which suggests that they are renting. "

"I think that's a big wake-up call," said Steve Wamhoff, director of federal tax policy at the Washington Institute for Taxation and Economic Policy.

"It tells us that tax professionals have known for a long time, but we don't usually see that many details, a certain name," said Wamhoff. “We know that really wealthy people have all sorts of ways to avoid taxes, but when we look at the real name and number, we focus more clearly and people. There is something that makes us think about what the problem is and what we can do to fix it. "

Reasons not to sell

It is very clear why owners of large paper real estate would not want to realize their profits by selling their inventory. Rising stocks are taxable and will soon wipe out a significant fortune.

File- In this Nov 11, 2019 file photo, Democratic presidential candidate Elizabeth Warren (D-Mass.) Said: Senator for Files Elizabeth Warren (D-Mass.), Then a Democratic presidential candidate, campaigned on November 11, 2019 in Exeter, New Hampshire. Warren has proposed a wealth tax that conflicts with some of Wall Street's richest people.

However, if a wealthy person holds shares until death, that person's heirs can inherit the shares at present value – a practice known as stepping up in base – this is imperative. Eliminates all tax obligations towards highly valued stocks now to represent the deceased.

In this scenario, the heir sells a portion of the stock with little or no paper gain and uses the proceeds to pay off unpaid real estate loans and inheritance taxes and start the whole process over. I can.

Policy implications

According to economists Emmanuel Saez and Gabriel Zucman of the University of California at Berkeley, the richest Americans have $ 2.7 trillion in unrealized capital gains.

Federal revenue can exceed $ 1 trillion when there is $ 2.7 trillion in unrealized capital gains that could in any way be subject to income tax, especially at the marginal tax rate of 39.6% set by the President's administration Joe Biden is supported. Will be.

"That's the bulk of the federal budget," Liscow said. "The range of funds that can be raised or the range of taxes that can be lowered for middle-class families is huge."

Tax proposal

However, it is not clear how to get the money. The type of wealth tax that many leftists are interested in has proven hopelessly complex in other developed countries like France.

Another option – taxing the wealth of the wealthy that they receive through loans – requires extensive changes in tax law.

Most proponents hope the ProPublica reveal will give momentum to the impetus to scrap the reinforced bases of ultra-wealthy heirs. The Biden government has proposed such a step alongside budget demands.

FILE- This photo dated April 13, 2014 shows the headquarters of the Internal Revenue Service (IRS) in Washington. Agency... File headquarters of the Internal Revenue Service in Washington.

"At least all of this will be taxed on Biden's suggestion, which is the least we can do to counteract it," said Wamhoff.

Pessimistic comments

However, Risco said he suspects the reveal would spur other major reforms in tax policy.

In May, he and Edward G. Fox, assistant professor at the University of Michigan Law School, conducted a survey of approximately 5,000 people to evaluate support for repatriating US taxes on investments. Publication of a documented draft paper. The results show that systems that only benefit after taxation are widely supported.

Even when a scenario was presented that mirrored the ProPublica report that wealthy individuals would borrow for large unrealized gains, the majority of respondents did not support the idea of ​​taxing debt. ..

He said personally that very wealthy people should pay more, but Risco said, “Do you expect this to actually move the needle? No, it isn't. "It was.

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