The recent ProPublica article, “The Secret IRS Files: Trove of Never-Before-Seen Records Reveal How the Wealthiest Avoid Income Tax”, by Jesse Eisinger, Jeff Ernsthausen and Paul Kiel, shows that the wealthiest US persons pay a true-tax rate of just around 3.5%. We can grumble about it, sure. As middling income or poor people, we pay lots more in taxes.
But how does it work that wealthy people manage their lives when you still need money to purchase things like food?
This is how it MIGHT work.
A wealthy person has assets, not cash. They own companies, shares of companies, land, buildings – things that are worth money, but aren’t able to be broken down. You couldn’t, for a silly example, take a piece of a building and hand it to the IRS or the state. They cannot sell these assets, or they would owe more taxes to the taxing authorities. So, in order to both avoid taxes and have cash to manage a year’s worth of needs/wants, they take the list of their assets to an accountant, usually sometime in the late summer or early fall of the year before.
“Here,” they say, “is a list of what I own. Do an audit and tell me what all that is worth.”
The accountant takes the list, goes through all the records from every item. They look at each company, each share of a company, each piece of land and the buildings. They look at the evaluation done LAST year. And they come up with a number, usually quite large – at least 7 or 8 or 9 or even more figures to the left of any decimal point. Just to get people on the same page, 7 figures is millions, 8 figures is tens-of-millions, 9 figures is hundreds-of-millions and 10 figures is billions.
And even though they are WORTH all this, they have no ready CASH. No way to pay for things like food.
So they then take this evaluation to a bank. A good, large bank that has worked with them and will work with them again. The bank even might invite them to come. “Come here,” they smile. “We will give you a loan against your assets at a really reasonable rate.”
Which the wealthy person will happily take. This way, they are getting liquidity to manage all their needs during a year for the low interest rate of maybe just 2 or 3 percent.
What they are getting is basically a MORTGAGE on what they own. And this is not income, its a bank loan that is already getting ‘taxed’. The bank is collecting that 2 – 3 percent every month.
Now let’s take an example. Say Mr. Moneybags has assets valued for this year at 2 billion dollars. Last year he asked a bank for 15 million to cover his needs, plus paying bank the bank he did business with the year before. He pays 9 million of this year’s loan to that bank to cover last year’s loan, plus interest, and is left with 6 million to cover this year’s needs. This he parcels out to various items – food, travel, clothing, entertainment – maybe he needs to also pay for school for his children (private schools or college and the like), or maybe he’s paying for services such as groundskeeping on a house and property, or housekeeping on that property (or multiple properties), and certainly he is paying accountants and lawyers to help him figure out all this. Maybe he’s paying for elder care for a parent, or is paying alimony and child care from a divorce. Whatever is needed, that money he gets from the bank is paying for it. And next year he will go to another bank, do the same thing, and ask for something like 25 million to cover his needs plus the 15 million dollar loan (plus interest – say another $500,000, which is piddling on that much money). As long as he has assets that are valued at that 2 billion dollar mark or something near it, he can probably get the yearly loan to cover his liquid needs.
Banks love these transactions. They know they will get income from it, no matter what happens to the person during the year. If they have a bad year – say they invest in something and it goes bad – they might need to sell off an asset to pay for the bad investment, which triggers taxes owed to the IRS. Which leaves them in an even more problematic state. They still need to pay the loan they took, plus its interest. And now they also need to pay the taxes on the sold asset, to both the federal and state agencies.
This is when banks can get greedy. They know Mr. Moneybags wants to keep them on his side. So they make deals. Big deals. A new loan, at a higher interest rate, but still lower than what they might need to pay in taxes, and the stipulation that should things go badly, the bank will get ownership of at least some of Mr. Moneybags assets. Which they can then sell off to pay his debt to the bank.
It sounds like a vicious cycle. And it can be. If Mr. Moneybags wants to gain even more assets, he has to gamble on investments. He can buy another company, or enough shares of a company to become a part-owner. If that company does well, all is good. If that company does badly, or is wiped out somehow, he could owe even more money to other owners or investors. He can purchase land and build businesses on it, creating new assets. Any income from those assets in the form of rents paid are much smaller than the asset itself, and carry smaller taxes, especially if the income is then put into another investment that puts that income out of the reach of taxing agencies.
Living like this is out of the reach of 99% of us. We have income from jobs. We don’t have assets we can draw money from. Even taking out that ‘second mortgage’ on a home we live in to pay for things like college for our children, or maintenance on that home, is sometimes out of reach. Banks don’t like to lend at good rates to people whose only asset is a home. They will lend, but the rates will be higher and less favorable. Many of us don’t even own a home of any sort. We pay our taxes based on income, and we pay much higher rates.
Changing the tax rules could stop this. It would mean closing any and all loopholes. Assets would need to have taxes paid on them, no matter what they are. Personal tax rates of 3.5% – no more. A 15% tax rate would yield taxes of 300 million. Even a 10% tax rate would yield 200 million. That’s a nice chunk. And getting that kind of tax payment from both individuals and companies could pay for things like Medicare for all, infrastructure upgrades such as expanded internet, a high-speed national train system, child and elder care.
The wealthy 1% have shown that they don’t pay taxes, they live their lives off of loans gotten based on asset values. And they pay piddling interest amounts to banks rather than taxes to the federal or state governments. The rest of us would very much like to stop this practice.