For the Wealthiest, a Private Tax System That Saves Them Billions

You say it as if it was intentional. This was in the heat of the fiscal cliff on new years of 2013[0]. Hard to claim that it was very much a rational, deliberated decision.

[0] https://en.wikipedia.org/wiki/United_States_fiscal_cliff

Of course, this loophole would not exist if investment income and regular income were taxed the same way. In fact, the more you simplify the fax code the harder it is to game it.

The direct tax clause of the original constitution, even as modified by the sixteenth amendment, probably forbids such a thing at the federal level. So it'd likely take a constitutional amendment.

That said, I'm not quite as pessimistic as you. Between consumption taxes and estate taxes (which are about the only wealth tax we have) we could get at most money if we had the will to do so. The estate tax is filled with holes because Congress wants it to be, not because of any inherent complexity or definitional difficulties.

There is an ultimate tax avoidance strategy of renouncing citizenship and living and consuming abroad. I would impose a lifetime ban on entry on renouncers, but beyond that I think it is fair game. If you aren't an American we shouldn't be taxing you.

I find it hard to hold a grudge against wealthy individuals who minimize tax liability. It's perfectly legal and it's in their best interest.

[0] https://en.wikipedia.org/wiki/FairTax

Wealth has many of the same problems. Unless you're going to try to tax someone's global holdings (how?), it's much easier for a hedge fund billionaire to park (and enjoy) his money in Chilean wineries and Dubai-registered jets than it is for a mere millionaire. Sure, you can buy a little plot in the south of France or a condo in the Caribbean, but it will cost you a much larger fraction of your income to keep it up and travel to enjoy it.

And trusts can shield wealth just as well as they can shield income.

It's effectively impossible to make the top few hundred taxpayers pay an effective rate much higher than 15%. But other than some appeal to fairness, who cares? They're already paying thousands of times over what the median taxpayer is.

Canada addresses the personal/corporate problem with an integrated tax system: To a first approximation, individuals who receive corporate dividends get a refund of the taxes which the dividend-paying corporations paid on that income. It never works out exactly equal, but as long as I've been running Tarsnap the difference between "pay a bonus" (employment income for me, deductible for the corporation) and "pay a dividend" (dividend income for me, paid by the corporation with after-tax dollars) has been less than 1%.

I really don't understand why other countries don't use the same system.

I understand what you're saying. If you make $50,000,000 per year, then at some point it's worth spending $500,000 on an accountant who will manage to avoid you paying $10,000,000 in taxes. The math clearly works out, and that's why people do it. I get it.

But man, does it really need to be that way? Is it really so bad to "only" gain $40,000,000 per year instead of $49,500,000? Can you really not get by without that $9.5MM? We've got crumbling infrastructure, cash-strapped schools, students loaded with debt, and the fallout from a housing bubble, but Mark Zuckerberg really needs that new yacht.

Anyway, I can't say I wouldn't do the same in his situation. I understand the motivations. I'm just griping.

* Numbers all fabricated to illustrate my point.

#ProblemSolved

And wealth managers often charge fees based on a percentage of assets (at least for $1/2+ million accounts). So there is precedent for such a system.

The political reality of expanding on this is a different matter. Any change would have to be gradual, because taxation is a huge intervention in market forces. i.e. to just suddenly stop taxing income, and tax wealth or tax consumption would very abruptly change the dynamics of the economy. But we don't have a political system that incentives 10, 20, 50 years down the road sorts of end goals. We have a system that favors the catch phrase of the week.

As someone who's a partner at a consultancy and in the highest marginal tax bracket, I'd be more than happy to pay my fair share if companies like Apple and Exxon didn't use countries like Ireland to avoid remittance taxes to the tune of 250 billion dollars a year, effectively putting the burden on the rest of us. (Well that and if we stopped spending 5x the aggregate of the next most-heavily invested countries re: defense, and re-allocate even 5% of that money to national education, STEM programs for innercity kids, the arts, and the NSF but again, fat chance of that happening.)

Substantially every business owner you know -- the ones with top line revenues of $100k, $1 million, $10 million, and $100 million -- employ 0.05 to 100+ full-time accountant equivalents for the same purpose.

I am on uncomfortably good terms with my friendly local tax office and they're all but begging me "Mr. McKenzie, it will be easier for all of us if you just get a pro to do it for you this time." (Tax agencies essentially delegate surveillance duties to CPAs; a Japanese CPA signing off on my return means the Meguro tax office doesn't have to trouble their heads about how Japanese tax law interacts with an American LLC owned by a Japan-resident American covered by a really complicated treaty.)

The basic idea with a charitable lead trust is that it's organized for a certain term (a number of years, or life of a specific person or some combination) and during that term, the charity will get specific payments (subject to the trust remaining solvent), and when the trust ends, a beneficiary will get the remainder. If the trust is properly constructed, when the trust is funded, the present value of the remainder is determined and used as the gift/estate tax value for the gift to the beneficiary; if you can make that zero, while also investing assets in the trust in such a way that the remainder is not actually zero, then you've avoided gift/estate tax. I believe the donor also gets a charitable tax deduction for the present value of the payments to charity, spread over 5 years, and subject to clawback in some cases.

I'm not really sure how the private placement life insurance plays in, it's likely a way to avoid income tax for the trust (a charitable lead trust is subject to tax on its income), as life insurance proceeds are generally untaxed.

It could well be that current taxes rates are at a point on the Laffer Curve where increasing tax rates would increase revenue.

The article you linked quotes anywhere from 20% to 70%.

There is no evidence the tax income "curve" has a single turning point (given multiple differing sources of of income that are earned in different ways this is almost self evident). Even if that assumption about a single turning point holds there is no evidence that the US are on the right-hand side of the curve.

The Laffer curve was used by the GOP in the 1980s to intellectually legitimize[1] the policy of cutting taxes.[2] They said cutting tax rates on the wealthy would increase tax revenue (!) and the benefits to the wealthy would "trickle down" to everyone else through increased investment, etc.

The results were simply that the wealthy had more money. The federal government developed a massive deficit and while the economy has grown since the 1980s almost all the resulting wealth has been acquired by the wealthiest; incomes of 'everyone else' have stagnated since then.

IIRC, the Laffer curve was never taken seriously by any but partisan economists, and was widely discredited.

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[1] You'll note that all parties love to create 'research' that provide intellectual ballast to their predetermined policies. They know what sells to the intellectual crowd, who see something that looks like legtimate research but certainly don't have the time to study the issue themselves. The parties have pet think tanks that produce studies for them; for example, the Heritage Foundation is a prominent example for the GOP.

[2] As evidence for note #1: Consider whether the GOP ever would consider a higher rate the appropriate level for taxation. Of course not. The results of the research are predetermined by the desired policy. The Democrats do it too, but I don't think they take it to the extremes of the GOP: Climate change denial, the evidence for the Iraq War, not regulatng the housing market before the crash, fighting finacial regulation after the crash, etc. (People want to be 'even-handed' and say it's balanced, the same on both sides, but really it would be a surprise if any situation worked out that way. I'm not partisan, I support any route to more pragmatic and less crazy policies.)

What a joke! The media OCCASIONALLY reports on their activities. But most of the time they just don't. NYT has become moderately more adversarial in recent years, though not consistently. Most of the press not counting explicitly left-wing outlets operate as uncritical stenographers, the credulous, fawning tech press especially.

Second, people will always avoid tax, period. If one can spend $1 to save $10, then people will, no matter how low the tax rate is. The bare existence of tax avoidance is not a sufficient indication that the tax rate is too high.

Third, no one wants the "taxman" to lose money trying to reclaim taxes. There are obviously more options than the two you are strawmanning: A) lose money trying to reclaim taxes and B) lower the tax rate.