In one way excruciatingly detailed by the Times, however, Mr. Trump and his sire [Fred Trump] are nothing new under the sun. Nobody in their right mind from the compulsive accumulator class pays the punitive federal estate tax. From an early age, such people make sure their lifetime achievements are not sucked up and splattered away in 15 seconds of federal spending. Bill Gates, Jeff Bezos and Mark Zuckerberg, all apparently in the pink of health, have been working for years to shield their assets from the taxman. Sam Walton, the saintly founder of Walmart , in his autobiography advised: “The best way to reduce paying estate taxes is to give your assets away before they appreciate.”
Because politicians find it useful to appease both the envious and the wealthy, the IRS code features both an estate tax and ways to avoid it. A loophole the Times accuses the Trumps of using is a so-called grantor-retained annuity trust, described as “one of the tax code’s great gifts to the ultrawealthy.” Unsurprisingly, it also happens to be a favorite of the Sulzberger family, which owns the New York Times.
This is from Holman W. Jenkins, Jr., “Dogs Bite Men and Trumps Duck Taxes,” Wall Street Journal, October 5, 2018 (October 6 in print edition.)
I checked his 15 seconds of federal spending number. The feds spent approximately $4.171 trillion in Fiscal Year 2018. That amounts to $7.94 million per minute, which is just under $2 million per 15 seconds. So Holman is exaggerating, actually more than I expected before doing the calculation. If Bill Gates’s estate were worth $100 billion on his death and he didn’t play estate tax avoidance games or leave anything to charity, the tax, at a 40% rate, would be approximately $40 billion. So that would fund the feds for a little over 3.5 days.
I’ve spent part of the weekend catching up (only a little) on the last few weeks of my print Wall Street Journals. The article above, by the WSJ columnist I find most insightful, is a gem.
Another great paragraph:
We should always applaud journalistic enterprise even if the Times devotes considerable resources to a tax story that will surprise exactly no one. More interesting in their way are questions like who dumped a decade’s worth of private Trump tax documents in the paper’s lap and why doesn’t the Times devote similar energy to finding out what’s in the secret appendix of the Justice Department inspector general’s report on the strange doings of James Comey in the 2016 race? The press continues to treat Mr. Trump’s election as a terrible accident that never should have been allowed to happen, yet blinds itself to the most interesting part of the story.
One piece of good news on the tax front:
According to economist Brian Erard, only 5% of 3.6 million American households that should be filing forms and paying federal taxes related to household help are doing so.
That’s from Laura Sanders, “You’re Not the Only One Who’s Not Paying Your ‘Nanny Tax'”, Wall Street Journal, October 12, 2018.
Years ago, I learned that Vice-President George H. W. Bush was paying state income taxes as if he lived in Texas, that is, he was paying zero state income taxes, even though everyone knew he lived in D.C. I asked my accountant how I could set up residence in Texas. My accountant didn’t know. I still don’t. But in California I pay a 9.3 percent income tax rate on a large portion of my income. (Social Security is exempt.) And I’ve been doing it for a long time. Thank goodness we’re going to get an allegedly fast train out of it that I’ll probably never use.
READER COMMENTS
Benjamin Cole
Oct 14 2018 at 10:31pm
I am shocked —shocked!—that wealthy elites avoid taxes either legally or through grey tactics such as offshore bank accounts and too-complicated to understand holding companies or shell companies.
Gee, do you suppose a national property tax could remedy some of these ills?
BC
Oct 15 2018 at 12:35am
“the IRS code features both an estate tax and ways to avoid it. A loophole…estate tax avoidance games”
If the tax rate is 40% and someone does not pay 50%, have they found a “loophole” to “avoid” paying 10% in taxes? Of course not, that person is paying the correct amount of tax, the tax prescribed by tax law. It’s strange to describe trusts as vehicles for “tax avoidance” or as “loopholes”. The estate tax is defined in tax law as a tax on the taxable portion of an estate. If a trust is not part of the taxable estate, then by definition the correct calculation of estate taxes would exclude such amounts. It’s strange to describe paying the correct amount of tax as “avoiding” taxes.
Alan Goldhammer
Oct 15 2018 at 9:05am
The first President Bush was a long time resident of Texas and there was nothing fancy about tax avoidance issues. You can easily go to his Wikipedia Page and see when he moved to Texas for business reasons. He was a Congressman for almost two full terms before he lost a Senate race to Lloyd Bentsen and then too some administration positions before running for President in 1980.
I do know that Texas has both a property and residence requirement for state tax purposes. My last boss established Texas residence and thus gained the advantage of not paying any state income tax despite living “most” of the time in Washington, DC. David would have to do something similar in order to escape CA income taxes.
As an addendum, when my mom died ten years ago we inherited an apartment building in San Diego as part of the estate. Rental income was subject to state taxes and as the trustee for my two daughters who also had a share in this building I had to file tax returns (I think it was only those in the trust who owed state taxes). It was a total joke because CA would not permit the filing electronically and I had to send in a 40 page tax return for $2 (yes TWO) in taxes owed.
The tax laws concerning real estate are a complete joke. Why should it allow buildings to be constantly depreciated when they change ownership? The recent tax “reform” efforts were laughable as well. I would hope that whatever happens in the 2020 election that the tax code gets the complete overhaul that is deserved. I know most folks don’t like VATs but it is one way to reduce or even eliminate some taxes and close the multiple loopholes that exist.
BTW, my home state of MD is also a high tax state but we have lots of public amenities that are constant proof that my tax dollars are being well spent.
Thaomas
Oct 15 2018 at 11:24am
The point of Trump’s tax shenanigans is to point to the need to shift to truly progressive consumption tax. I have no problem with people not consuming by giving to charity or paying state taxes.
Benjamin Cole
Oct 15 2018 at 11:30am
BTW, the title of this post need a possessive. “Trump’s” not “Trumps.”
David Henderson
Oct 15 2018 at 11:42am
Actually, no.
ZC
Oct 15 2018 at 12:07pm
@Ben Cole
It doesn’t need a possessive. Multiple Trumps have arranged their affairs to pay the least taxes possible. Pedantry is valuable when it comes to the tax code…
Benjamin Cole
Oct 16 2018 at 10:51am
I think I stand corrected. I presumed the headline referred to Don Trump, but it can also be read as referring to father and son.
One could argue for “Trumps’ “(a possessive after the “s”) but that is perhaps a stretch.
Phil
Oct 15 2018 at 2:39pm
“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any
public duty to pay more than the law demands.” — Judge Learned Hand in Helvering v. Gregory, 69 F.2d 809, 810 (2d Cir. 1934), aff’d, 293 U.S. 465 (1935)
David Henderson
Oct 15 2018 at 4:48pm
Thanks, Phil. Always good to remind people of that famous quote.
Vivian Darkbloom
Oct 15 2018 at 4:16pm
I believe that the District of Columbia explicitly exempts the President, the Vice President and other federally elected officials (as well as executive office employees who “serve at the will of the President”) from District taxation even though they may (temporarily) live and work there. GHW Bush certainly was not unusual (also having been resident in Texas long before he became VP):
https://code.dccouncil.us/dc/council/code/sections/47-1801.04.html
Consistent with this, note that Obama filed Illinois returns and Biden Delaware returns as residents during their terms of office:
https://obamawhitehouse.archives.gov/blog/2016/04/15/president-obama-and-vice-president-bidens-2015-tax-returns
David Henderson
Oct 15 2018 at 4:49pm
Ah hah. Thanks, Viv.
John Hare
Oct 15 2018 at 4:18pm
close enough loopholes and raise the taxes high enough and it will incentivize people to not produce, leave, or operate in an actual criminal manner. I remember a line in some movie “ a million each before AND after taxes “. I may have the number wrong it that is the flavor of the idea.
Vivian Darkbloom
Oct 15 2018 at 4:59pm
@Benjamin Cole
“…wealthy elites avoid taxes either legally or through grey tactics such as offshore bank accounts…”
It is neither legal nor a “grey tactic” for US citizens or residents (wealthy or not) not to report income on their offshore (i.e., outside the US) bank accounts. Nor is it even legal not to report the existence of such accounts (the balance of which exceeds certain relatively small annual thresholds).
I certainly hope that readers of this blog are not naive enough to believe otherwise.
David Henderson
Oct 15 2018 at 6:02pm
That is correct.
Benjamin Cole
Oct 16 2018 at 11:09am
Vivian–
I understand you are tax lawyer (or something) so I will defer to you.
But on the other hand I strongly suspect that, say, Paul Manafort would never have “been caught” if not for his extraordinary bad luck (or bad personal judgement) in becoming associated with the Trump campaign.
If a law is poorly enforced, or if effectively unenforceable (without costs that exceed benefits) then a law might be considered “grey.”
I knew an IRS agent in Orange County. She said usually the IRS is interested in settlement, and not determination of fraud and conviction.
Then, there is this:
“A growing fraction of the world’s wealth, and particularly of the wealth in tax havens, is owned via shell companies, so it’s obviously a business that is booming and is doing extremely well,” says Gabriel Zucman, assistant professor of economics at the University of California, Berkeley and the author of The Hidden Wealth of Nations.
Because the industry is shrouded in secrecy, any estimates of its size are at best an educated guess, Zucman says. But he estimates that 60 percent of the money held in accounts in Swiss banks is under the names of shell corporations.
For those with money to hide, the lures of a shell corporation are many.
In most places you don’t have to attach your name to a shell corporation, making it virtually impossible for tax authorities or law enforcement officials to tell who owns it. But if you really want to cover your tracks, you can set up interlocking shell companies in different places, such as the British Virgin Islands or Bermuda, Cardamone says.”
Okay, so an offshore bank account is set up for shell company Then you use that, and legally avoid taxes. Or maybe that is a grey zone. You tell me.
Actually, I think income taxes are becoming impractical, due to globalized financial systems, and indecipherable tax codes. Of course, one could argue against all income taxes, and instead migration to property, Pigou, and fossil fuel taxes, user fees, and import tariffs.
Why import tariffs? Let the multinationals pay for global guard services.
Vivian Darkbloom
Oct 16 2018 at 11:56am
“Okay, so an offshore bank account is set up for shell company Then you use that, and legally avoid taxes. Or maybe that is a grey zone. You tell me.”
I’m here to tell you (again), even though it’s not that difficult: For an American citizen or resident not to report income on his or her offshore accounts is illegal. There’s no “grey” there. Actually, Paul Manafort would be just the person to ask. The fact that one gets away with it for a while because enforcement is difficult doesn’t change the character or color of the transaction. And, some people, and you may be among them (you tell me), just want to believe that inserting a couple of offshore shell companies to throw the IRS off the scent somehow lends legitimacy. I’m not here to contribute to or perpetuate that idea.
And yes, I’m a tax lawyer (or something like that) so I’ve done a lot of homework. This isn’t a casual idea of mine that I’ve just thrown over the hamper.
Benjamin Cole
Oct 17 2018 at 12:47am
Vivian–
I again defer to your expertise.
But you skipped on the “offshore shell corporation” angle.
If I, as a US citizen, set up an offshore shell corporation, is that corporation required to report its offshore bank accounts to the IRS? I suspect not, otherwise every corporation on the planet would be required to file forms with the IRS. Of do I have an offshore manager set up the offshore corporation, and I am the “silent” (but majority) partner?
Okay, so I assume offshore corporations are not required to file bank account information with the IRS.
With that as a platform, can I direct that payments be made to the offshore corporation, legally? Then how would this income ever be reported to the IRS?
Anyway, I come back to my main point: The income tax system is broken, and I doubt it can be repaired.
The US would be better off with national property taxes, sales taxes, pollution taxes, fuel taxes, and import tariffs.
Add on: Obviously, there are law firms whose stock in trade is setting up offshore bank accounts and shell corporations. Think Panama. There must be a reason for this. What is the reason?
BTW, I probably have more libertarian leanings than most readers here. I may assume government is usually captured by the wealthy, smart and powerful, but that it a reasonable position to take.
Vivian Darkbloom
Oct 17 2018 at 5:01am
Benjamin,
I didn’t skip “the offshore shell company angle”, but frankly I was afraid that I’d need to get into whack-a-mole mode with you.
I suggest that you familiarize yourself with the following before you entertain any further ideas that you’ve come up with a legal tax avoidance scheme:
–The Passive Foreign Investment Comany (PFIC) rules under IRC Sections 1291-1297;
–The definition of Foreign Personal Holding Company (FPHC) under IRC Section 552;
–The definition of a “Controlled Foreign Corporation” (CFC) under IRC Section 957 and the defintion of “Foreign Personal Holding Company income” (FPHCI) as applicable to CFC’s under Section 954(c);
–The Foreign Bank Account Reporting (FBAR) requirements, paying particular attention to the definition of “signature authority”;
–The Foreign Asset Tax Compliance Act (FATCA) and, in particular, the definition of “foreign financial asset”.
I hope we can skip the regulations, revenue rulings, criminal penalties, etc. for now.
Our tax rules are complicated in large part because of the history of Congress and the IRS needing to play legislative and regulatory whack-a-mole with folks like you. Sometimes common sense isn’t enough legal deterrence. You are not the first to have thought you’ve come up with the next great tax avoidance scheme. For example, the FPHC rules were first introduced in 1937…
Viv
Benjamin Cole
Oct 18 2018 at 10:51am
Viv–
Okay, I will let it rest.
The topic of offshore shell companies does seem to be very sensitive.
David Seltzer
Oct 16 2018 at 5:03pm
All this commentary is important but, my bottom line is this. My marginal tax rate for the years I lived in NYC, was 50% , city, state and federal taxes combined. Add in fica, sales tax and other imposts, my marginal rate approached 60%. Now the estate tax takes another 25% or so from my after tax acquired wealth just for the privilege of dying. Regarding the tax code, “An unjust law is no law at all.” With apologies to Augustine of Hippo, tax avoidance may be more just!
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