I know it sounds preposterous. How could Harry Reid claim that Mitt Romney paid no taxes for 10 years? How impossible is that?
Well, as it turns out, it’s not that impossible. The richer you are in America the less liable you are to federal income taxes. This country has a crazy tax code that rewards the most predatory and unpatriotic among its citizens and plunders the purses of the hard-working middle class.
You probably know about offshore tax havens and Swiss bank accounts by now, but you don’t even have to send your money abroad to protect it from the tax man. Uncle Sam provides ample tax dodges for the stay-at-home billionaires.
I’m sure you’ve read how gigantic global corporations like General Electric take advantage of tax code loopholes to pay the IRS nothing – and in some cases to actually receive tax credits from the government. But you might not be aware that the loopholes don’t just favor corporations; they’re available to individuals, too.
Consider this passage from an article by Jesse Drucker in Bloomberg Business Week:
For the 400 U.S. taxpayers with the highest adjusted gross income, the effective federal income tax rate—what they actually pay—fell from almost 30 percent in 1995 to just over 18 percent in 2008, according to the Internal Revenue Service. And for the approximately 1.4 million people who make up the top 1 percent of taxpayers, the effective federal income tax rate dropped from 29 percent to 23 percent in 2008. It may seem too fantastic to be true, but the top 400 end up paying a lower rate than the next 1,399,600 or so.
One reason for this disparity is that top tax rates on dividends, estates and gifts have been lowered by decades of effective lobbying.
The Business Week article explains:
Much of the income among the top 400 derives from dividends and capital gains, generated by everything from appreciated real estate—yes, there is some left—to stocks and the sale of family businesses.
But that’s not the whole story. The rich can afford to hire lawyers and accountants to mine the tax code for loot. Their techniques involve “loans” that never get repaid, for example.The Business Week article cites this example:
From 2003 to 2008, Los Angeles Dodgers owner and real estate developer Frank H. McCourt Jr. paid no federal or state regular income taxes, as stated in court records dug up by the Los Angeles Times. Developers such as McCourt, according to a declaration in his divorce proceeding, “typically fund their lifestyle through lines of credit and loan proceeds secured by their assets while paying little or no personal income taxes.” A spokesman for McCourt said he availed himself of a tax code provision at the time that permitted purchasers of sports franchises to defer income taxes.
And here’s another scenario cited by Business Week:
An executive has $200 million of company shares. He wants cash but doesn’t want to trigger $30 million or so in capital-gains taxes.
1. The executive borrows about $200 million from an investment bank, with the shares as collateral. Now he has cash.
2. To freeze the value of the collateral shares, he buys and sells “puts” and “calls.” These are options granting him the right to buy and sell them later at a fixed price, insuring against a crash.
3. He eventually can return the cash, or he can keep it. If he keeps it, he has to hand over the shares. The tax bill comes years after the initial borrowing. His money has been working for him all the while.
Just in case, you, too would like to take advantage of those loopholes, the article lists strategies used by rich Americans to avoid contributing to the cost of running the country in which they prosper so extravagantly. In addition to the techniques described above, the list includes:
- Partnerships that let property owners liquidate without liability
- Leaving future stock earnings to your kids
- “Freezing” the value of an estate
- Using stock options to calibrate the taxes on executive compensation
- Using, but not unloading, underwater stock shares
- “Selling” property to a partner
- Investing in life insurance
- Converting traditional IRAs to Roth IRAs
- Putting a chunk of pay in a deferred-compensation plan
So what are you waiting for? To find out how to use these convenient tax dodges, click here.
