It’s good to be a billionaire, even when it comes to paying income tax
If you’ve been thinking about your Income Tax, here’s something else to mull over. Dozens of people with enormous wealth are paying relatively little — or nothing — in taxes. Billionaires — and those with fortunes in the hundreds of millions — are able to legally avoid taxes by using loopholes that aren’t available to the rest of us.
Income Tax is for those who work. The same goes for payroll taxes, which salaried employees and their employers pay into Social Security and Medicare (in the US) week after week. Payroll tax and Income Tax reach practically everyone who has a job.
Also read: How the Ultra-Rich Use Smartphone Apps to Avoid Millions in Taxes
Then there are the super rich. They live under another set of rules. The richest people in the United States pay taxes on a tiny portion of their income, and some avoid income taxes and payroll taxes altogether, says Ray Madoff, a tax expert at Boston College Law School.
Much of their impressive wealth—assets such as cash, stocks, bonds, gold, art collections, houses, yachts, and every other valuable possession they have ever accumulated—is under-taxed, she claims.
Madoff wrote a persuasive book, “Second Estate: How the Tax Code Made an American Aristocracy.” She says billionaires in the United States can be virtually tax-exempt, like the French aristocracy before the 1789 revolution.
Some billionaires manage to avoid income tax completely, she says. And everyone is little affected by the payroll tax because income subject to this tax is limited to US$184,500 annually.
“There are two classes of people in the United States today,” she said in a long phone conversation. “Those who pay taxes, of which we are the majority, are the ‘wealth class’” — an elite that perpetuates itself, transmitting little-taxed wealth from generation to generation.
The tax code, she said, helped create a new “hereditary class” that takes advantage of obscure rules that are difficult for most people to fully understand.
Taxes are for workers
Salaries are heavily taxed, writes Madoff. So perhaps the most critical move in the billionaires’ “standard tax evasion playbook,” she adds, is “avoiding these traditional earnings.”
At first glance, this seems a little strange. After all, traditional earnings are all I’ve ever had. I always assumed there weren’t enough. And if I ever retire, most of the money I’ve saved in tax-advantaged retirement plans and individual retirement accounts will be taxed in the traditional way when I start spending it.
But if I were a billionaire, it would be better. The super-rich don’t need to worry about salaries or social security withdrawals. There are much better ways for them to minimize taxes and perhaps avoid paying them altogether.
Consider that The New York Times has been publishing, for 18 years, annual surveys of the remuneration of the highest paid CEOs in the United States, based on data from Equilar.
These lists often missed some of the richest people in the corporate world — billionaires like Jeff Bezos, Warren Buffett, Steve Jobs, Mark Zuckerberg, Peter Thiel and, for a time, Elon Musk.
Why were they left out? These billionaires paid themselves little or nothing in salaries, accumulating wealth primarily in stocks and options. (Still, Securities and Exchange Commission rules have led to the disclosure of occasional gigantic stock grants.)
For day-to-day expenses, not to mention yachts, planes and private islands, billionaires have excellent options, from a tax point of view, for raising money.
The most direct way is to sell assets. Even if you sell hundreds of millions of dollars in stocks or other assets such as art collections, you will be taxed at a low federal rate for long-term capital gains—a perk often touted by economists as an investment incentive. But this preferential treatment makes an already unequal situation even more unfair.
“Capital gains are taxed at much lower rates than earned income,” writes Madoff. “Because of this difference in tax treatment, someone who earns $50,000 working pays more taxes than someone who earns $50,000 selling an investment.”
The truly wealthy may never need to sell their assets. Instead, banks and private credit companies will be happy to lend money at favorable rates, using wealth as collateral. And as long as their wealth grows at a rate greater than the interest charged on the loan, they become richer, tax-free.
In addition to everything else they reveal, the millions of pages of documents released by the federal government in Jeffrey Epstein’s files shed light on this tax strategy of the super-rich.
They show how Epstein helped Leon Black, former CEO of private equity firm Apollo Group, live in luxury while minimizing his taxes. Black was able to spend hundreds of millions of dollars, obtained through low-cost bank loans, using his art collection as collateral.
As John Hyatt reports in Forbes, the collection’s value grew from about $1 billion in 2014 to $1.4 billion in 2017.
Generations of untaxed wealth
There is a strategy for billionaire families seeking true, intergenerational wealth to avoid taxes forever. It is known as “buy, borrow, die”.
Suppose you are already rich, have accumulated assets and have taken out loans against them. This covers “buying” and “borrowing.” Now comes the unpleasant part. Even billionaires die.
The inheritance tax was once intended to prevent the creation of an American aristocracy by taxing wealth as it was transferred to heirs. But Madoff says this important tax today is practically harmless.
Labeled the “death tax” in a hugely successful public relations campaign funded by wealthy families, it can be completely avoided if you are rich enough to hire the best lawyers, she claims.
Billionaires can transfer these assets to their heirs without ever having to pay taxes on their earnings. And, for heirs, the valued value of assets becomes the basis for measuring future gains and losses.
Over the course of an American billionaire’s lifetime—and even after his death—taxes on investments “are not only less burdensome, but effectively optional,” Madoff writes.
The wealth of families like the Waltons, the Kochs, the Mellons and the Rockefellers persists for generations. The tax system didn’t stop this, she says. He helped make this possible.
What should be done?
Wealth tax proposals have been highlighted in California, New York, Paris and Copenhagen (Denmark). But these ideas are not simple.
Wealth taxes are levied on what you already own, while income taxes are levied on the money you receive.
Property taxes are a form of wealth tax. More comprehensive wealth taxes could require payments on a portion of everything you own, not just real estate.
And these taxes face a fundamental problem in the United States: The Supreme Court may very well find them unconstitutional.
Meanwhile, Madoff has another suggestion: tax inheritances and donations, with the beneficiary footing the bill. It would maintain significant exemptions that today protect most people from gift and inheritance taxes, as well as exempt family farms and moderate-sized businesses.
But when a billionaire dies or transfers his wealth to his daughter or son, the heir would owe the government a large tax bill. Perhaps as much as a third of “all transferable wealth is made up of unrealized gains,” she writes, citing a recent Brookings Institution study.
This proposed change to the tax code has a long — albeit unsuccessful — bipartisan history. Presidents Richard Nixon and Barack Obama defended it. It would make a difference, although certainly not immediately.
Major changes to the United States tax code occurred in reaction to wars, depressions, and, in other countries, revolutions.
It may be too much to ask to expect the United States to find ways to tax the super-rich gently and peacefully without first experiencing profound disaster. But I certainly hope they can.
