BY POLLY MANN
The headline of the three-page Dec. 30 New York Times article (large pertinent snaphots included) was “By Molding Tax System, Wealthiest Save Billions.” Yes, indeed, they molded. They’ve been using their influence to “steadily whittle away at the government’s ability to tax them.” The details, no doubt, are easy for accountants to understand and I’m not one of those, but, from what I could gather, it seems that they—the wealthiest—have set up family corporations and the necessary legal help to assist them in keeping their taxes as low as possible, which results in increasing the load on the rest of us.
The biggest current tax conflicts are being supported by the most generous donors of the 2016 candidates for office: Robert Mercer, who favors Republican candidates; James Simon, who favors Democratic candidates; and Jeffrey Yass, who favors liberal-leaning libertarian Republicans. (I wonder if any would qualify as a peacenik?)
“At stake is the Obama’s 2013 tax increase on high earners—the first substantial increase in 20 years. The IRS is cracking down on tax avoidance by the wealthy. While Democratic candidates have pledged to raise taxes on these voters, virtually every Republican has advanced policies that would vastly reduce their tax bills, sometimes to as little as 10% of their income,” says Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities. “That’s why these egregious loopholes exist and why it’s so important to close them.”
One of the chief techniques of the income-tax-reducer bunch is the establishment of family offices which have been around since the late 19th century and gained popularity in the l980s. “Family offices, dedicated to managing and protecting the wealth of a single family, oversee everything from investment strategy to philanthropy. This generally involves a few simple principles, like converting one type of income into another type that’s taxed at a lower rate.” Organizing one’s business as a partnership can be helpful. As their tax regulations differ from those of a corporation, partnerships pay no corporate income tax; the partners pay taxes as individuals. The wealthy use a range of customized tax reductions, including the placement of income in a type of charitable trust, generating a deduction that offsets the income tax. The trust then purchases a private placement life insurance policy, which invests the money on a tax-free basis. The person’s heirs can inherit, also tax-free, whatever money is left after the trust pays out a percentage each year to charity, often a considerable sum.
From President Obama’s inauguration through 2012, federal income tax rates on individuals changed very little. The highest-earning one-thousandth of Americans went from paying an average of 20.9% to 17.6% on their incomes, and taxes on the top 1% were increased minimally. “We do have two different tax systems, one for normal wage-earners and another for those who can afford sophisticated tax advice,” said Victor Fleischer, a law professor at the University of San Diego who studies tax policy.
Having helped foster an alternative tax system, wealthy Americans have been aggressive in defending the major industry group representing private equity funds. They spend hundreds of thousands of dollars annually lobbying on various issues to reduce income taxes on the wealthy, and the Managed Funds Association has begun meetings with members of Congress to discuss a wish list of beneficial adjustments. The founders of the association have each donated at least $500,000 to 2016 presidential candidates for tax loopholes.
Karen I. Hawkins, who until recently headed the IRS office that oversees tax practitioners, says, “Frankly, it is almost beyond the intellectual and resource capacity of the Internal Revenue Service to catch those who seek infinite ways to evade paying their fair share of the tax load.” For the ultra-wealthy, “our tax code is like a leaky barrel,” said J.Todd Metcalf, the Democrats’ chief tax counsel on the Senate Finance Committee. “Unless you plug every hole or get a new barrel, it’s going to leak out.”
