Most of us think that people who have made a ton of money by various means then simply invest it and live off the resulting income. But what form does this investment income take? If you are an average person, you tend to think of investment income as the interest on certificates of deposit or savings and money market accounts, which are taxed at the same rate as ordinary income. More sophisticated investors get their investment income in the form of capital gains or ‘carried interest’ which nowadays makes it taxable at the far lower rate of 15%. This is how Mitt Romney managed to pay taxes at the low rate of 13.9% in 2010 despite earning $21.6 million. This is also why so many CEOs choose to pay themselves a salary of just $1 per year, preferring to get remunerated by these other means.
But it turns out that, if you have a huge amount of assets there is yet another way that you can pay no federal taxes at all, simply by investing in nontaxable municipal bonds or borrowing money against your assets and live off those loans. Since the amount you borrow is not taxable, you can end up not paying any taxes whatsoever. This article (thanks to reader Fu Dayi) explains how Facebook head Mark Zuckerberg might be able, by using these devices, to live comfortably for the rest of his life without paying any taxes at all. As the article suggests, for tax purposes his ‘income’ might now be so low that he might even be eligible for government aid.
I must say that I haven’t taken the time to fully understand the detailed mechanics of how this works since this brave new world of tax finagling is so foreign to someone like me whose taxes are simple enough to do himself. But it does show how true is F. Scott Fitzgerald’s statement that the rich are truly different from you and me.
The rich have arranged that the tax laws are written in such a way they pay little or no taxes. The actual details are extremely complicated, but the concept is quite simple.
First let me say Mano -- thanks. I truly enjoy your blog.
I think in most countries of the world, if the leader of the nation stands up and says there needs to be less inequality among citizens, they would be applauded by the overwhelming majority of the population.
I find it incredulous therefore, that in the US, President Obama would be criticized by opposing political forces for making such a statement. It does not make politcal sense, let alone moral sense, to suggest that President Obama is trying to divide the nation when he suggests that wealthy people should make greater contributions in times of need.
I would have thought that anyone who is against this idea does not have due regard for history. Whenever there is significant inequality, and the burden falls mostly on those who are least well-off, social unrest and even revolution has followed.
In the case of Zuckerberg and the many others who use schemes to reduce their tax, one can only think of where their money might go if it does not go into taxes. If the gains they make as a result of tax minimisation strategies is squandered on lavish living, then it is completely indefensible. So often we hear stories of people who spend $ millions on assets they cannot possibly use (and certainly not for any good purpose anyway). Or as in the case of the well-known in Australia failed entrepreneur Christopher Skase, the ill-gotten gains are thrown on friends with great extravaganza parties.
On the otherhand I could accept that tax minimisation strategies resulted in an increased ability to be a philanthropist. Instead of paying tax, the wealthy funded community programs and sought to help people less well-off than themselves.
You’re going to love this:
Mitt Romney’s Kids Pay an Even Lower Tax Rate Than He Does
In feudal Europe, the serfs paid exorbitant flat taxes to feudal lords and got little in return; flat taxes hurt the poorest the most. On top of that, they were forced to serve as soldiers on call for petty wars that were often nothing more than land grabs.
In futile America, nothing has really changed.
People used to say that communism was the “20th century experiment that failed”. It was only one of two experiments that failed; the middle class was the other.
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