The Secret IRS Files: Trove of Never-Before-Seen Records Reveal How the Wealthiest Avoid Income Tax

“how do megabillionaires pay their megabills while opting for $1 salaries and hanging onto their stock? According to public documents and experts, the answer for some is borrowing money — lots of it.

For regular people, borrowing money is often something done out of necessity, say for a car or a home. But for the ultrawealthy, it can be a way to access billions without producing income, and thus, income tax.

The tax math provides a clear incentive for this. If you own a company and take a huge salary, you’ll pay 37% in income tax on the bulk of it. Sell stock and you’ll pay 20% in capital gains tax — and lose some control over your company. But take out a loan, and these days you’ll pay a single-digit interest rate and no tax; since loans must be paid back, the IRS doesn’t consider them income. Banks typically require collateral, but the wealthy have plenty of that.

The vast majority of the ultrawealthy’s loans do not appear in the tax records obtained by ProPublica since they are generally not disclosed to the IRS. But occasionally, the loans are disclosed in securities filings. In 2014, for example, Oracle revealed that its CEO, Ellison, had a credit line secured by about $10 billion of his shares.

Last year Tesla reported that Musk had pledged some 92 million shares, which were worth about $57.7 billion as of May 29, 2021, as collateral for personal loans.”

“after decades of wealth accumulation, the estate tax is supposed to serve as a backstop, allowing authorities an opportunity to finally take a piece of giant fortunes before they pass to a new generation. But in reality, preparing for death is more like the last stage of tax avoidance for the ultrawealthy.”

“Normally when someone sells an asset, even a minute before they die, they owe 20% capital gains tax. But at death, that changes. Any capital gains till that moment are not taxed. This allows the ultrarich and their heirs to avoid paying billions in taxes. The “step-up in basis” is widely recognized by experts across the political spectrum as a flaw in the code.

Then comes the estate tax, which, at 40%, is among the highest in the federal code. This tax is supposed to give the government one last chance to get a piece of all those unrealized gains and other assets the wealthiest Americans accumulate over their lifetimes.

It’s clear, though, from aggregate IRS data, tax research and what little trickles into the public arena about estate planning of the wealthy that they can readily escape turning over almost half of the value of their estates. Many of the richest create foundations for philanthropic giving, which provide large charitable tax deductions during their lifetimes and bypass the estate tax when they die.

Wealth managers offer clients a range of opaque and complicated trusts that allow the wealthiest Americans to give large sums to their heirs without paying estate taxes. The IRS data obtained by ProPublica gives some insight into the ultrawealthy’s estate planning, showing hundreds of these trusts.

The result is that large fortunes can pass largely intact from one generation to the next. Of the 25 richest people in America today, about a quarter are heirs”

ProPublica’s Bombshell Tax Report That Wasn’t

“Despite ProPublica’s best efforts to make the information enclosed within seem damning, the data tell us little we didn’t already know. For the 2018 tax year, the last year for which we have data, the top 1 percent paid over 40 percent of federal income taxes, despite earning just under 21 percent of total adjusted gross income (AGI). The bottom 50 percent of taxpayers earned 11.6 percent of total AGI, but paid less than 3 percent of income taxes. The same story holds when looking at all revenue sources too, so it’s not just the income tax that is progressive.

ProPublica, however, tries to make the case that the wealthy are getting away with murder through the tax code, so they “do a calculation that has never been done before,” comparing growth in wealth over the course of a year to taxable income. They use this to calculate an individual’s “true tax rate,” which is sort of like handing out wins in a baseball game in the middle of the early innings and calling it the “true outcome” of the contest.

It’s hard to overstate how nonsensical this comparison is (which is perhaps why it’s never been done before). Our tax system rightly does not tax growth in one’s wealth until it is realized as income. After all, the alternative is a monstrously complex and unfair system of wealth taxation that developed countries have avoided.

The reason that wealth isn’t taxable is fairly straightforward: You aren’t directly benefiting from it until it’s turned into income (at which point it is taxable). Wealthy Americans may not pay taxes on the growth that their net worth sees, but should they wish to sell assets that have appreciated in value, they would be liable for capital gains taxes on that growth.”

The White House can raise taxes on the wealthy without touching the tax code at all

“President Joe Biden wants to raise taxes on the wealthy to pay for some of his policy proposals. Part of the way he can go about that doesn’t entail touching the tax system at all — instead, he’d just have to put the IRS to work chasing down rich people to make sure they’re paying taxes they already owe.”

“The most recent official tax gap estimate from the IRS, from 2011 to 2013, was that it amounted to $441 billion each year. That’s a big sum already, about 16 percent of total tax liability those years. But there’s reason to believe the gap is much higher — and that wealthy people are often to blame.”

“The IRS’s total budget is down by some 50 percent since 1993 as a share of gross tax collections, and appropriations for the IRS — adjusted for inflation — have fallen by 20 percent since 2010, and after Republicans in Congress sought to curtail its budget. It’s lost thousands of enforcement staff. And its enforcement abilities directly affect revenue, not only by collecting unpaid taxes but also by influencing behavior. If people know that the IRS is going to come after them for skirting taxes, they’re less likely to try it. Rettig told the House Ways and Means Committee at a recent hearing that the number of examining revenue agents, who are tasked with handling complex cases, fell by 35 percent since 2010, and field collection revenue officers, who manage the harder collection cases, fell by 48 percent. The audit rate for millionaires fell from 8.4 percent in 2010 to 2.4 percent in 2019.”

“Biden’s proposal to inject funding into the IRS could go a long way in reviving the agency. Because the IRS’s budget is generally determined year by year, it makes it hard to staff up or invest in technology for the long term. Agents with the experience and know-how to deal with complex audits can take years to train and replace.
“One of the key things in this proposal is not just the money, it’s that it’s a multi-year stream of funding that would allow them to plan it and spend it out over a multi-year period,” Hanlon said.”

Why some of the most liberal Democrats in Congress want to bring back a tax break for the rich

“In their 2017 tax bill, Republicans partially closed a tax loophole that mainly affected higher-income people in high-tax areas — i.e., relatively well-off people in blue states. They capped the state and local tax deduction (SALT) people can take when calculating their federal income tax at $10,000. People can still deduct state and local taxes from their federal tax bill, but only up to that point.

Many Democrats — namely, those from states such as New York, New Jersey, and California — want to repeal the SALT deduction cap and go back to the old regime, where people could deduct all (or at least more) of their state and local taxes. They argue the cap unfairly drives up their constituents’ tax bills, might keep their states from implementing more progressive tax regimes on high-income people, and was a vindictive move by the GOP in the first place.”

“But some Democrats, Republicans, and economists are saying hold the phone.

“The vast majority of the benefits of repealing the SALT cap would go to the people at the very top. It would also be costly — and for that amount, we could finance much more worthy efforts to support American families and workers. We can say we are for a progressive tax code and for fighting inequality, or we can support the SALT deduction, but it is really hard to do both,” said Sen. Michael Bennet (D-CO) in a statement to Vox. When the Senate took up a vote on whether to repeal the SALT cap in December 2019, he was the only Democrat to vote against it.”

The Misleading Push for Corporate Tax Hikes

“A corporation’s book profits are actually an unhelpful metric when it comes to assessing what its tax liability should be. While the tax code is far from perfect, many deductions and credits that reduce liabilities serve an important purpose and help make the tax code fairer. Calculating a corporation’s income before factoring these in makes as much sense as complaining that a kid with a summer job gets to avoid paying regular income taxes because of the “standard deduction loophole.”

For example, consider net operating loss (NOL) carryforwards and carrybacks, one of the most common culprits behind these sensational headlines. These are normal features of a smart policy that allows corporations to pay taxes based on a realistic view of their cash flow over time.

Imagine a start-up business that spends two years developing its feature product, only to release it in the next year. If that business ran a deficit of $2 million the previous two years, then made a $1 million profit the third year, it has not actually made a profit in the long term. Disallowing NOL deductions from being carried forward would mean that the business would face corporate income tax liability despite having, thus far, lost money.”

“NOL carryforwards were one reason Amazon had no federal tax liability when those articles appeared a couple years back. Another was the research and development (R&D) tax credit, long a bipartisan favorite. The Obama administration in 2012 identified the R&D credit as a crucial element of business tax reform, claiming that businesses undervalue R&D in the absence of the credit as the social benefit is far greater. It’s deeply disingenuous to incentivize R&D, then wag your finger when businesses respond to the incentives the R&D credit provides.

Then there’s accelerated depreciation. One of the most positive changes in the 2017 tax reform law was the introduction of full expensing of capital investments, which allowed businesses to bypass the complicated system of asset depreciation that requires them to recoup the value of capital investments over timelines as long as decades. Huffing and puffing that businesses use full expensing to zero out their tax liabilities is absurd, because it merely accelerates tax deductions businesses would receive anyway. In other words, the long-term “cost” of accelerated depreciation in terms of revenue reduction is zero. The difference is that businesses, which prefer cash on hand to cash down the line, are then able to reinvest the value of the deduction immediately rather than waiting years to receive the tax benefit.”

The Misleading Push for Corporate Tax Hikes

“A corporation’s book profits are actually an unhelpful metric when it comes to assessing what its tax liability should be. While the tax code is far from perfect, many deductions and credits that reduce liabilities serve an important purpose and help make the tax code fairer. Calculating a corporation’s income before factoring these in makes as much sense as complaining that a kid with a summer job gets to avoid paying regular income taxes because of the “standard deduction loophole.”

For example, consider net operating loss (NOL) carryforwards and carrybacks, one of the most common culprits behind these sensational headlines. These are normal features of a smart policy that allows corporations to pay taxes based on a realistic view of their cash flow over time.

Imagine a start-up business that spends two years developing its feature product, only to release it in the next year. If that business ran a deficit of $2 million the previous two years, then made a $1 million profit the third year, it has not actually made a profit in the long term. Disallowing NOL deductions from being carried forward would mean that the business would face corporate income tax liability despite having, thus far, lost money.”

“NOL carryforwards were one reason Amazon had no federal tax liability when those articles appeared a couple years back. Another was the research and development (R&D) tax credit, long a bipartisan favorite. The Obama administration in 2012 identified the R&D credit as a crucial element of business tax reform, claiming that businesses undervalue R&D in the absence of the credit as the social benefit is far greater. It’s deeply disingenuous to incentivize R&D, then wag your finger when businesses respond to the incentives the R&D credit provides.

Then there’s accelerated depreciation. One of the most positive changes in the 2017 tax reform law was the introduction of full expensing of capital investments, which allowed businesses to bypass the complicated system of asset depreciation that requires them to recoup the value of capital investments over timelines as long as decades. Huffing and puffing that businesses use full expensing to zero out their tax liabilities is absurd, because it merely accelerates tax deductions businesses would receive anyway. In other words, the long-term “cost” of accelerated depreciation in terms of revenue reduction is zero. The difference is that businesses, which prefer cash on hand to cash down the line, are then able to reinvest the value of the deduction immediately rather than waiting years to receive the tax benefit.”

A $60 billion surprise in the Covid relief bill: Tax hikes

“They’ve tucked a trio of little-noticed tax hikes on the wealthy and big corporations into their coronavirus relief package that together are worth $60 billion.

One takes away deductions for publicly traded companies that pay top employees more than $1 million. Another provision cracks down on how multinational corporations do their taxes. A third targets how owners of unincorporated businesses account for their losses.”

“[Democrats] ran into problems complying with the stringent budget rules surrounding so-called reconciliation measures like the coronavirus legislation — especially after some wanted to add provisions like one waiving taxes on unemployment benefits.

If Democrats exceeded their $1.9 trillion budget cap for the plan, they would lose the procedural protections that were used to shield the entire measure from a Republican filibuster in the Senate.

The tax increases Democrats picked to help keep their plan’s cost in check had the political benefit of being arcane. Unlike things like raising the corporate tax rate or upping the top marginal tax rate on the rich, the ones they chose won’t produce many headlines.

They also fit Democrats’ themes of fighting inequality by forcing the well-to-do to pay more.

Since the provisions were added late in the legislative process, lobbyists didn’t have much time to rouse opposition to the plans.”

“Democrats turned to a rule Republicans created as part of their 2017 tax cuts. It limits to $500,000 the amount of losses certain people who own unincorporated “pass-through” businesses can use to offset other income and thereby reduce their tax bills.

That issue became a lightning rod last year when lawmakers temporarily suspended that limit as part of a previous stimulus package. At the time, lawmakers were trying to get money into the hands of businesses owners in order to prevent layoffs by making it easier for them to qualify for tax refunds, and the $500,000 limit would have impeded that.

Many progressives criticized the move, calling it a giveaway to the rich.

Democrats’ coronavirus plan stops short of undoing last year’s provisions, though it does extend the $500,000 limit — which, like much of the Tax Cuts and Jobs Act, is currently scheduled to expire at the end of 2025 — by an additional year. The Senate Finance Committee says that will raise $31 billion.

Another provision generates $6 billion by going after executive compensation.

Businesses are normally allowed to deduct employees’ pay on their tax bills, though there are rules limiting those deductions when a CEO and a handful of a company’s other top employees earn more than $1 million. Democrats are doubling the number of officials, to 10, that would be subject to that restriction, which would hit businesses such as investment banks.

A third provision, which budget forecasters say will produce $22 billion, repeals an arcane provision giving multinational companies more flexibility in deciding how to account for their interest expenses when they do their taxes.

To be sure, the tax increases are dwarfed by the amount of tax revenue cut by the legislation — about $590 billion, according to the official Joint Committee on Taxation. Lawmakers are sending another round of stimulus checks to millions of Americans as well as temporarily expanding popular breaks like the Child Tax Credit and the Earned Income Tax Credit.”

11 Trillion Reasons To Fear Joe Biden’s Presidency

“Biden’s expansive vision is about more than vastly increasing spending, but let’s start there because the numbers are simply staggering. He’s proposing $11 trillion in brand new spending over the next decade, according to the Manhattan Institute’s Brian Riedl. Big-ticket new items include $1.4 trillion to expand Obamacare; $2 trillion on his version of a Green New Deal; jacking Social Security and Supplemental Security Income by $1 trillion; and goosing spending on preschool, K-12, and higher education by $1.5 trillion. Biden has also signed on to a $3.3 trillion stimulus spending plan pushed by House and Senate Democrats.

All of this new spending would be layered on top of an existing annual federal budget that has swelled to nearly $7 trillion in fiscal year 2020, from a record-high yet relatively cheap $4.4 trillion in 2019. To pay for this new largess, Biden has laid out $3.6 trillion in tax hikes over the coming decade, resulting in what Riedl says is “the largest permanent tax increase since World War II.” Much of the new revenue would come from boosting corporate income taxes back to what they were before Republicans lowered them during Trump’s first year in office. Yet despite all the hikes, Biden would still manage to increase the national debt”

“Pick any page of his campaign website’s extensive “vision” section and you’ll find endless proposals to tinker with everyday life and employment. He pledges to “aggressively pursue employers who violate labor laws, participate in wage theft, or cheat on their taxes by intentionally misclassifying employees as independent contractors” and also to “establish an Environmental and Climate Justice Division within the U.S. Department of Justice.” What sort of bureaucracy do those sorts of things require? The same sorts of questions are raised by his on-again, off-again endorsement of a federal mask mandate.”

Biden and Trump Offer Competing Tax Proposals, but Both Ignore Economic Reality

“In a world in which economic reality mattered to politicians, grandiose spending plans coupled with soaring government debt would pretty much preordain grim tax policy. But we don’t live in that world. In ours, tax and spending proposals are crafted based on their appeal to target audiences of voters, with no regard for balancing books or averting financial catastrophe.”

“It’s necessary, though probably pointless, to emphasize that neither Trump’s nor Biden’s tax plans come close to paying for the federal government’s anticipated spending spree in the years to come.”