Why doesn't someone start a company to democratize tax loopholes? | Hacker News Reader

Why doesn't someone start a company to democratize tax loopholes?

31 pointsbeatpanda18 comments

For those of you who work in financial technology -- what's to stop a company from amassing money from a lot of people who wouldn't normally be able to afford the kinds of tax benefits available to the wealthy[1], and then using that money to do the same kinds of tax-dodging maneuvers, returning the tax savings to the users?

I know very little about tax law or the technology that would be involved in doing this, but it seems like it's worth a shot. If the wealthiest people in this country don't pay their taxes, why the hell should I?

[1] http://www.nytimes.com/2015/12/30/business/economy/for-the-wealthiest-private-tax-system-saves-them-billions.html?src=longreads&_r=0

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This is basically the market TurboTax and H&R Block are going after. Each taxpayer's circumstances will be different, so it would be impossible to hire a single company to perform blanket tax-dodging maneuvers for an entire class of taxpayers, and if they did it individually, the payoff wouldn't be large enough unless they charged an amount that would be too high for lower income tax payers to justify or afford. However by taking the complex tax code and distilling it into a series of user-friendly questions, TurboTax is able to scale up to a mass-market offering that is feasible because the time spent by the filer is inexpensive enough to justify. The market in between is the market local accountants typically fill.

Well, the short answer is that it doesn't work that way.

As an example of a loophole, investors can buy stock in a company, hold it for five years, and currently get 0% capital gains on the appreciation.

You don't need an intermediary to do this; you can do this right now.

It's just that most regular people don't have the money to invest, and if there's no money to invest then there's no money to apply toward loopholes.

And then you have to pick winners.

Same thing with putting company investments in Roth IRAs. This tax loophole would be idiotic for any normal person, but with somebody who's not planning on using the Roth for retirement it makes perfect sense.

But, you have to pick winners or Joe sixpack just lost his retirement savings.

Just to clarify for those who might misinterpret what you said, the top long-term capital gains tax rate is 23.8%. The only people eligible for 0% long-term capital gains tax rate are people in the lowest tax brackets.

I believe the parent is referring to Qualified Small Business Stock. New issues of stock (meeting certain requirements: certain date ranges, company must be valued at less than $50M, keep all it's assets in "productive" investments, not passive such as real estate or other stock) can be completely excluded from long term capital gains tax.

https://blog.wealthfront.com/qualified-small-business-stock/ has a nice summary.

Or: http://www.jeremytunnell.com/posts/a-guide-to-section-1202-t...

You don't have to pick winners - but you do need enough up-front to both diversify and take the liquidity hit.

Because of diminishing returns.

The tax burden follows the Pareto Principle as much as income does. When you read that rousing NYT headline, what you have to keep in mind is, these taxpayers may have well "saved" a substantial fraction off their tax bill, but it still was a mere fraction. For example, in the UK, the top percentile contributes a third of the overall income tax[1].

When you have a tax bill for a few dozen million US$, it is not that difficult to justify paying a team of accountants and lawyers who bill $1k/h each to shave 20% off the top. When your tax burden is in the thousands, you will be best served by a chartered accountant who can shave the same 20% for you, but in your case that will be several hundred dollars.

There are no "loopholes" in the tax code in the sense that the Congress didn't foresee tax avoidance techniques, or the courts are somehow ill-equipped. There are (1) tax incentives, (2) bribery, and (3) notoriously underfunded IRS. (1) scales pretty well, whereas (2) and (3) don't.

[1] http://www.thisismoney.co.uk/money/news/article-2107031/UK-B...

Because the vast majority of people pay so little taxes that the "standard" loopholes dominate any savings you might find with esoteric tax engineering.

For the average person who pays federal taxes, properly filling out their existing deductions is much more beneficial. That is already a huge business with well funded players & lots of competition.

There was an article that made it to HN a few months ago about a village in Wales where the local businesses were doing this. I think it may have been part of a TV show but it's definitely an idea who's time has come. http://www.independent.co.uk/news/uk/crickhowell-welsh-town-...

Beat me to it! Haha! Here are some previous HN discussions on that topic:

https://news.ycombinator.com/item?id=10545626 https://news.ycombinator.com/item?id=10600338

I think it's also the case that a good amount of the 'loopholes' apply to income that most Americans don't have, e.g. capital gains, capital loss harvesting, etc.

Because you need substantial income flows (B2B or B2C sales), preferably not all coming from the same jurisdiction. And a reason to do something ("economic substance", i.e. come up with a good story why you need to route that money through the BVI).

Every situation is different, and offers different opportunities. Technology companies can use different techniques when compared to a retailer. Some "loopholes" have genuine reasons to exist and are hard to fix. Something as simple as corporate interest deduction comes to mind, which can be used to help grow a business through debt financing (the way most companies use it). However, if you set it up properly, it can also be used to strip earnings away to a different jurisdiction. But whether you want to use this technique depends on how your corporate structure is set up and capitalised. What works for an american company might not work for a UK company, for example.

Think of building an extremely complex custom system (where if you mess it up, you get a huge bill a few years down the line); that's essentially what tax optimisation is at the multinational level.

I wondered the same thing when reading that article! From what I gathered, though, a lot of the reason why it's not more popularity has to do with the fact that you need to actually defending your claims to the IRS or in court:

  Operating largely out of public view — in tax court,
   through arcane legislative provisions and in private 
  negotiations with the Internal Revenue Service — the wealthy 
  have used their influence to steadily whittle away at the 
  government’s ability to tax them. The effect has been to 
  create a kind of private tax system, catering to only several 
  thousand Americans.

That doesn't sound like the sort of easily scalable thing that makes sense to folks who might save a few grand a year. In fact, it sounds very expensive.

They are paying their taxes, it's just that "their taxes" aren't primarily based on income. The article specifically says this.

Nothing stops you from doing it. Just reduce your income and your income taxes will drop. To make up the difference, you don't need money; you need the services that money was previously paying for.

Instead of needing income to buy a car, start a business that owns the car and takes a tax deduction for it, but allows you to use the car at no charge (reminds me of the contractor I knew who had his carpentry business buy a Corvette as his "work vehicle"). Ditto for your house, etc: a friend of mine bought a 3-family house, rented out all the rooms on the second & third floors and lived on the first floor herself while tenants paid the mortgage and she got to take any expenses as deductions.

Now, you might find out that in the end it's not worth it to you to do that, but there's nothing illegal about it, it's just business.

Not to defend these loopholes, but if you allow me to proselytize a bit... Why bother with those fancy tricks with your modest income when you can get tax-free gains anyway?

OK, I exaggerate a little, but you can probably open a tax-free savings/investment account (Roth IRA (US), TFSA (CA), NISA (UK)). These usually have enough contribution room to meet your savings goals (you'll probably exceed them, but you can put those savings somewhere else, like a pension account or tax-deferred account). You can put a low-cost (< 1% of assets, per year) fund in them that owns every publicly traded company in your country/planet[0]. Now you're investing rather than getting around taxes, but your interest, dividends, and capital gains are now tax free.

0 - Vanguard's total-market ETFs, for example

You can call it "KickBacker" (that one's for free)

I think you meant KickBackr

Great idea.

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