On tax avoidance
The only thing worse than paying taxes is the idea that other people avoid paying their fair share of them.
On the subject of tax avoidance by other people, I can think of at least three principal feelings. As the kids say, I feel all the feelings.
Outright tax fraud
People everywhere on the political spectrum can get angry about outright tax fraud, whether it’s hiding income in offshore accounts to avoid income taxes or shielding inheritances from estate taxes.
A new book by Gabriel Zucman, “The Hidden Wealth of Nations,” estimates the size of offshore wealth at $7.6 trillion worldwide, or 8 percent of global wealth. In the U.S., Zucman estimates $35 billion in tax revenue is lost every year from people hiding their assets. Meanwhile, governments worldwide lose up to $200 billion in annual revenue from hidden tax havens, with a significant burden of that fraud hitting smaller, developing countries.
Wealthy folks seem to like to hide their assets in Switzerland and Luxembourg as well as other known tax havens such as Cyprus or the Caribbean.
Clever tax avoidance One exception to my outrage, I suppose, is petty tax fraud such as when my barista fails to report to the IRS each and every dollar she removes from the tip jar at the end of the day. In that sense, the minor scale of tax fraud diminishes my outrage, as well as the fact that the barista isn’t herself wealthy. Also, she supplies my drug of choice. Still, fraud is fraud, and it’s never cool.
My feelings slide from “outrage” over to the milder “envy” when I read about some billionaires’ strategies to legally avoid taxes, such as explained recently in the New York Times. In the article, the authors describe leading hedge fund founders whose investments in Bermuda-based insurance companies reduce their tax bills.
Their ability to guide tax legislation through Congress and to finance presidential campaigns does stick in my craw quite a bit, and should offend those of us who still hold out hope for our democracy. On the other hand, most of the specific clever tax avoidance that the article describes can be described as the benefits of simply owning a business (albeit in their cases, big businesses.)
Now, of course you could decide to hate the fat cat hedge fund guys who simultaneously write the rules on creating income tax loopholes and then nimbly leap through those holes to the tune of billions in annual savings. I think generating that outrage is the main point of the New York Times article, and I don’t blame you too much for feeling that way.
Alternatively, you could decide not to hate the player and just to hate the game. By that I mean, understand that a major part of the “scandal” exposed by the article is simply the trick of turning ordinary (high tax-rate) income into long-term (lower-tax rate) capital gains. The other trick — and this is really simple — is to invest in a business that appreciates tremendously in value over time but that only gets taxed when you sell it. And then don’t ever sell it. Like, to take an example I recently wrote about, buying a stock and holding it for 30 years, or for forever.
Look, I don’t intimately know all their tax tricks, but hedge funders investing in offshore insurance companies mostly just extend this year’s short-term income (a nearly 40 percent tax rate this year) into long-term capital gains (a 20 percent tax rate, eventually). It’s legal. It’s clever. I’m envious, but I’m not particularly angry.
This is how Warren Buffett famously pays a lower tax rate than his secretary. When you read about Buffett or Facebook’s Mark Zuckerberg merely claiming the proverbial $1 per year in salary, you really shouldn’t be impressed with their admirable lack of avarice. Rather, you should note their tax savvy. They make their money through (tax-advantaged) business ownership rather than through (tax-disadvantaged) wages.
Imitation
By the way, if you, personally, want to start to save money on taxes like a baller, you need to own your own business.
I’m not your accountant. and you really shouldn’t take tax advice from a newspaper columnist, but you should seriously set up your own business, like, today, if you’d like to reduce your personal tax bill.
Will you use a cellphone and monthly Internet service for your business? What about a computer for record-keeping? Or perhaps a car with your business logo on it? If you are in the 25 percent income tax bracket, and those are legitimate business expenses, all of these will cost you 25 percent less, in after-tax terms.
If the business you own happens to pay you annual profits in dividends, you might enjoy favorable income tax treatment, when compared with taxes on ordinary wages.
If you can control the timing of when you actually get paid by the business you own, you may realize considerable income tax savings through timing your income. If your business makes an expensive investment this year that reduces your annual profit, you may end up paying little to no taxes this year, even as your business grows.
So, my journey from outrage to envy to imitation can be summed up as: Workers of the world, unite! Start your business today! You have nothing to lose but your chains (and your top tax rates!)
Unfortunately, as Marx discovered with the Communist Revolution, this is easier said than done. I plan to write about the difficulty of finding money to found your small business in a series of upcoming columns.
