Tax Evasion at the Top of the Income Distribution: Theory and Evidence (2021) [pdf]
nber.org
nber.org
Just because somebody keeps his money offshore and hides it from his government, doesn't necessary mean that it's illegal (Google and co are great examples of not hiding).
Most people want to follow the law, they just want to optimize taxes.
Real estate property based taxation has a long history of supporters as the most fair tax there is.
Both of them are very unpopular with the people who have to pay them, because they force you to find productivity increases and you might be a retiree. Or just a landlord who refuses to develop an empty lot in the middle of a city.
You make more money with a bunch of nickle and dime taxes. 20% to the feds, 10% to the state. 5% sales, 1% property, a litany of $10-1000 fees for interacting with government, etc, etc than you do with a single big tax that is easy to rally against even if the nickle and dime solution is lossy.
Only the big, powerful, faceless individuals — corporations — will own land.
Is this plausible? I’m just winging it here :)
Most proposals for land value tax are also revenue neutral, so you essentially pay rent to society/government for the land you use, but keep more of your income.
I'm not saying it's nice / fair, but this is reality. It's similar to putting a buffer overflow bug in a C/C++ code on purpuse, but hiding it in a nice function.
But nobody wants to see a big explicit carve out like that because of the obvious unfairness (it's a huge advantage to multinationals over smaller companies), so they try to make it less obvious.
The best way to prevent this is to use taxes that can't be avoided through transfer pricing, e.g. VAT. The company can move their headquarters wherever they like; the tax is paid to the jurisdiction where their customers are.
But the other dirty little secret is that this would have to be government revenue neutral (just an increase in fairness), because if it actually increased the amount of taxes being paid on net then consumer prices would go up or retirement accounts would go down or both, because the money has to come from somewhere. So doing the thing that increases fairness has to be done without help from the people who want government to spend more money or you'll be impacting ordinary people who won't like it.
In general, it's probably better if things have to be proven illegal. I'd rather that my life wasn't limited to only doing those things which have been pre-approved. If there's a problem with something, then it should be explicitly prohibited; not the other way around.
Gray area means that small loopholes in legal language don't instantly balloon into carte-blanche to commit all kinds of crime, without them all it takes is a clever reading of the law to break its spirit.
Practically, this means the government cannot regulate complex industries and situations. Things like "food safety" which are the bedrock of all modern countries are usually not possible without these sorts of gray areas.
Imagine that I'm trying to disallow a particular type of fraud that's difficult to define. I might spend years or decades trying to write down the perfect law of what some unethical finance people shouldn't do all while they get away with a thousand variations of the "I know it when I see it" crime.
Implied by this, we have to choose between:
1. Very frequently updated laws everywhere (multiple orders of magnitude faster than today)
2. Criminals get away with crimes that could totally be prevented with "gray area" laws.
(1) does not seem compatible with democracy and (2) is not politically viable in any country. Things like food safety scares require immediate and effective action by government or bedlam follows.
This generally works by giving a government agency the ability to frequently redefine the placeholders in the laws
> does not seem compatible with democracy
Democracy is inherently a poor choice whenever expertise is needed. It's better to let experts do their thing and then hold them accountable for the results.
1. Agencies necessarily have limited scope and tools available.
2. In practice, not all complex topics can be handed wholly to agencies in a democratic system, inevitably people and legislators want a say on some of the bigger issues (housing, healthcare, etc.)
It's worth noting that agencies today are heavy users of gray area laws and still often find themselves overburdened with policy decisions. Iterated gamesmanship can only make that load heavier.
To continue this analogy, I think the problems are, the process to fixing it is arduous and difficult, as much as writing it to begin with, bugs become expected behavior and have to continue being supported, and the "business case" executives have too much say in writing it.
How does the average person avail these optimisation schemes? Do they also get to lobby for the loopholes?
The Wall Street Journal often runs articles on various aspects of the tax laws, like how to do a Roth IRA conversion. I'm sure there are plenty of books on the topic, too, just check Amazon.
None of them are easy and usually require taking on financial risk, but they are there if you want them.
But for the "average person", you're looking more at investment opportunities - real estate using a 1031 exchange, investing in Opportunity Zones, etc.
You may not be able to avoid taxes on W2 income, but you might be able to shift around when that income is recognized and reduce your overall tax rate.
I've gone pretty deep on the real estate research front. We have short term rentals but (fortunately) they do well enough that we can't show paper losses even with depreciation. We're both well employed so real estate professional status is off the table (which is why we started with short term rentals - schedule C vs. E)
1031s and opportunity zones don't do anything to change when your W2 income is recognized or reduce your overall tax rate, the only tax benefits are around the capital gains with the property. Both require upfront investments with post tax money.
It just feels a little disingenuous to say there are "plenty of tax optimization schemes for the average person" because showing paper losses on real estate with one spouse getting real estate professional status, is the only strategy I've seen consistently mentioned.
That doesnt reflect IRS data.
Just capital/gains losses is 20%, then self-employment income is another 20%, real estate or S-corp is another 10%, etc
Sure there is overlap, but it’s not 100% across all those. And its not like if youre not taking advantage of those things now you cant in the future.
I think we are mostly in alignment, I have just been focused on "how to lower taxes on W2 income" where your point is that anyone can diversify their income streams and find opportunities with lower tax rates.
Anyway, I appreciate the info you shared. Cheers.
For example for me just moving to Switzerland made both my tax percentage lower and more legal, salary much higher, and cleaner streets from those lower taxes than anywhere else I lived before. Somehow the government was able to afford professional cleaning machines from those lower taxes.
i.e. ; Should we expect full transparency of billionaires, but not minimum wage workers?
US Tax Code is horrific, and corrupt.
But, what do?
Change the political operating system from the top. It cannot be reformed from within. The perpetual failures of campaign finance reform proves this. The only path forward is nonviolent mass mobilization. Never give in to learned helplessness.
I'm not sure how the recent Washington State capital gains tax is the result of capture by the very rich.
Combine this with public records of company officers and large shareholders. Problem solved.
Wall Street would love this. No bargaining advantage for retail investors via funds. Every need for liquidity and rebalancing requiring a cascade of trades. And the introduction of a chops-like system to enable M&A.
https://www.seattletimes.com/seattle-news/homeless/seattle-s...
Source: I am a Gov employee.
Simply nobody cares about it.
https://www.npr.org/2021/05/19/997961646/the-pentagon-has-ne...
And all of that goes completely counter to the science of learning how to learn, so what if we start with that?
It’s not enough that they tax your income, but they tax every dollar you spend, then they tax the assets. Then if you sell those assets the same dollar is taxed a fourth time.
It’s theft, no different than being a medieval serf. I bet serfs had lots of good arguments why the king needed to steal the products of their labor too.
More rules disproportionately benefit those with the resources to navigate said rules.
Blaming emergent patterns on the behavior of individuals never works. We know that shaming people into avoiding sugar doesn't decrease obesity, and shaming tax evaders won't stop tax evasion. Emergent behaviors are downstream of the systems that enable them. The humans within it are no more than blind chickens following the smell of food. Civic duty can serve as a counter-flywheel levee for a bit, but give it sufficient time and it's simply a matter of when the levee breaks. sorry
At the risk of sounding like a naïve libertarian: Have a small set of tall walls. Enforce those ruthlessly. Once inside, don't sweat the details. This doesn't low taxation or removal of all nuance. It means more streamlined collection. The budget can encode all the nuance afterwards. That way, each group that avails a 'tax break', has a clear $ value associated with it in the budget, instead of an unobservable 'opportunity cost' for money that was never collected in the first place.
Having said that, it is naïvely libertarian, because exposing the true subsidies that certain protected groups get in the form of a $-value, immediately makes it politically unattainable due to voter dynamics. Democracy is truly "the worst form of government" – except for all the others that have been tried .
You need a tax professional (or even a semi-pro); in the interim, I'd suggest solely relying on what you read on the IRS website.
Generally speaking, by default you are likely cash-basis -- but yeah, this income & especially with "high variance", get with a professional. If nothing else, figure out whether you actually need a loan or not before applying/asking for one...
IANAL/IANA-tax-pro -- but you almost surely do not need a loan.
A payment recieved at the end of a quarter would be included in the ETP due 2 weeks later.
Generally in the US individuals are taxed on income when actually received.
Note to other reply: estimated tax payments are made during the year. While you can net out expenses, if income is distributed unequally during the year this can result in penalties/interest if you underpay in one quarter based on the liability as calculated after the year ends (to complicate things, there are multiple ways to estimate tax payments during the year to account for these situations).