If you didn’t already know that the loophole-ridden mess we call the federal tax code lets the ultra-rich pay a fraction of what they should, you could figure that out from this recent ProPublica headline: The Great Inheritors: How Three Families Shielded Their Fortunes From Taxes for Generations. Or, better yet, this one: How Susquehanna’s Jeff Yass Avoided $1 Billion in Taxes.
Of course, if you’re just a regular Joe or Jill who thinks federal tax law has loopholes for you too, think again: If You’re Getting a W-2, You’re a Sucker.
ProPublica’s latest tax exposé — on billionaire Jeffrey Yass — offers us a crystal clear picture of just how our federal tax loopholes actually work. These loopholes essentially distort our tax law and let marginal and arbitrary differences in facts give rise to markedly different tax outcomes. Tax avoidance planners seize on these distortions to wash away their clients’ tax liabilities.
The Yass tax lawyers seized upon the arbitrary difference between long-term and short-term capital gains. If you sell an asset after 365 days or less, your gain gets taxed at the same rate as income from a job. But if you hold the asset for 366 days or more, then your gain gets taxed at barely half that rate.
How did the Yass tax-avoidance crew exploit this arbitrary difference? Team Yass established a fund that would bet for and against the same stocks. These tax lawyers wouldn’t know which bet would win and which would lose. And they didn’t care. They knew the gains and losses would be about equal, and they knew they could sell one position for a short-term loss before the 365 day mark and the other for a long-term gain one day later.
Income-wise, the bets basically score a net zero. Tax-wise, the same bets generate a huge gain — because the Yass short-term losses from these offsetting bets would erase the massive gains from his short-term trading. The long-term gains would be taxed at a much lower rate, with the net effect to functionally cut his tax rate about in half.
You may be thinking at this point that there ought to be a law against all this. There is, sort of. Courts have long held that a transaction entered primarily for tax purposes will be disregarded. But applying that rule can be subjective. Taxpayers and their advisors often can add just enough window dressing to their transactions to get past this requirement.
That sort of distortion ends up tailor-made for someone like Yass, whose billions in stock-trading gains all come in the short-term, often on positions he holds for mere seconds. If any billionaire trader should ever not qualify for long-term capital gains rates, that would be Yass. But our tax code gives the rich and powerful their way more often than not, no matter how things should work out.
In other words, rather than accept his lot in life and paying normal income tax rates on his billions in earnings, Yass and his pals have systematically pumped big profits out of a simple loophole.