How the rich avoid taxes

The invaluable ProPublica has come out with another article about how billionaire Harlan Crow, the generous benefactor of justice Clarence Thomas who showered him with vacations on his luxury yacht and private planes, has used the tax law loopholes to avoid paying taxes.

He adopted a well-known tactic by the wealthy, to use so-called ‘business losses’ to reduce their net income. In his case, how this was done was to set up a company for his luxury superyacht that was purportedly a business and then use the ‘losses’ incurred by the company (i.e., the money used to run the yacht for him and his family and friends) to offset his income.

The rich, as we’ve reported, often deduct millions of dollars from their taxes related to buying and operating their jets and yachts. Crow followed that formula through a company that purported to charter his superyacht. But a closer examination of how Crow used the yacht raises questions about his compliance with the tax code, experts said. Despite Crow’s representations to the IRS, ProPublica reporters could find no evidence that his yacht company was actually a profit-seeking business, as the law requires.

As ProPublica reported in April, Crow lavished gifts on Thomas for over 20 years, often in the form of luxury trips on Crow’s jet and yacht. One focus of the investigations is whether Crow disclosed his generosity toward Thomas to the IRS, since large gifts are subject to the gift tax. Another is whether Crow treated his trips with Thomas as deductible business expenses.

ProPublica’s data for the company runs from 2003 to 2015. Rochelle Charter reported losing money in 10 of those 13 years. Overall, the net losses totaled nearly $8 million, with about half flowing to Harlan Crow. By using those deductions to offset income from other sources, the Crows saved on taxes. (The wealthy often find ways to deduct the expense of a private jet; the records don’t make it clear whether Crow is doing so.)

In order to claim these sorts of deductions, taxpayers must be engaged in a real business, one that’s actually trying to make a profit. If expenses dwarf revenues year after year, the IRS might conclude the activity is more of a hobby. That could lead to the deductions being disallowed, plus penalties. Nevertheless, the ultrawealthy often pass off their costly pastimes, like horse racing, as profit-seeking businesses. In doing so, they essentially dare the IRS to prove otherwise in an audit.

For a yacht owner to meet the legal standard of operating a for-profit business, said Michael Kosnitzky, co-chair of the private client and family office group at the law firm Pillsbury Winthrop, “You have to be regularly chartering the yacht to third parties at fair market value,” typically through an independent charter broker.

ProPublica interviewed around a dozen former crew members of the Michaela Rose, some of whom spent years aboard the ship, and none said they were aware of the boat ever being chartered. ProPublica also reviewed cruising schedules for three different years. According to the former staff and the schedules, use of the vessel appears to have been limited to Crow’s family, friends and executives of Crow’s company, along with their guests.

Crow treated personal trips on his jet in a similar fashion, according to his attorney. Wealthy business owners often derive tax savings from their jets, since business-related flights are fully deductible, and the rich can often find ways to blend business and pleasure, as ProPublica has reported. The company that owns Crow’s jet is not in ProPublica’s data set, so it’s unclear if it reported net losses.

These loopholes that only the wealthy can exploit have existed for a long time. As long as the number of such wealthy people was small, the net loss in government revenue was not too large. Redressing it was mostly an issue of fairness, not necessarily trying to raise revenue. But the number of millionaires and billionaires have exploded recently and the loss of tax revenues is significant.

This is why Republicans, spurred on by lobbyists for the wealthy, were up in arms about the provision in Biden’s Inflation Reduction Act that provided for the hiring of many more auditors by the IRS that would go after high income tax cheats. They conjured up false fears of these auditors going after ordinary people when the real targets were their wealthy sponsors.


  1. chigau (違う) says

    I don’t “earn” anything. I am old and the government sends me money.

  2. flex says


    Why are you asking the question? Do you think we are rich? Are you rich?
    I don’t see how your question has any relationship to the OP.

    But, since you ask, my salary in 2022 was $132,713. My take-home pay, of course, was quite a bit less.

    Are there people reading this comment who are paid less than I? I’m certain of it. Are there people reading this comment who have a larger income than I do? Absolutely. My income is what I get paid, and has nothing to do with my worth. I feel very lucky to get paid as much as I do. Am I proud of it? No. I’m proud of the work I’ve done which as resulted in a company willing to pay me that amount. But I don’t feel any pride in the dollars; I spend them for my family’s needs and enjoyment. I even occasionally spend the dollars I earn for other people’s enjoyment. I would do the same if I was paid more, or paid less.

    I really don’t know why people are reticent about revealing their income. It’s certainly a cultural thing, and apparently Rupert, you thought it was some sort of gotcha. If the IRS wants to audit my accounts, they can. In fact, since my income is already certainly known to the IRS through employer reporting, the IRS already knows everything they need to about my finances. If you are being paid by an employer, salaried or hourly, the IRS already knows how much you are earning from your employer(s). They probably know yours too.

    You know which people the IRS doesn’t have good records on income? The rich.

    Which brings me back to my questions to you..

    Why are you asking the question? Do you think we are rich? Are you rich?

  3. ruoert says

    Gosh, no. I am not rich at all.I don’t know why I asked. The question just popped into my mind.

  4. billseymour says

    Like flex @5, I see no reason why my earnings should be a secret.

    First of all, I’m fortunate that I was born a cis, het, white, male boomer.  I’m very aware that that gave me a leg up right from the get-go.

    I’ll be 77 years old in a couple of weeks; and I retired about this time last year after 31 years as a computer programmer with the U.S. Postal Service.  (“If this were my [former] employer’s opinion, I wouldn’t be allowed to post it.” — Norman Diamond)

    I ended up with a gross salary of around $95k/year; and since I’m a fairly extreme introvert, there’s not really anybody else who depends on me for anything, so I was able to amass some pretty good savings.  That gives me the luxury that I can afford to travel first-class if I don’t try to afford other stuff that I don’t really want that much anyway; and I continue to serve on the ISO standards committee for the C++ programming language, which is my excuse for travel and what keeps my brain active in retirement.

    I was diagnosed with small cell lung cancer a couple of months ago.  (I’m one of those fools who hasn’t be able to quit smoking yet, so I deserve no sympathy.)  My next trip to Kailua-Kona, Hawaiʻi in November might well be my last.  I’ll know more around the end of this month.

    My will says that all my stuff should be liquidated and everything donated to the St. Louis Food Bank.

    Also like flex, I wonder what this has to do with anything important.

  5. rupert says

    Sweden your personal data is available online for everyone to see, including earnings.

  6. Dunc says

    As tax avoidance schemes go, this sounds bizarrely transparent and straight-forward… I think the way you’d normally do something like this would be to have the boat registered under a flag of convenience somewhere that doesn’t keep ownership records, owned by a trust legally based in a convenient secrecy jurisdiction like Jersey or Nevis, operated by a shell company in a different secrecy jurisdiction such as the Cayman Islands, and then lease it back through another shell company in Delaware so you can offset it against US tax. Then play lots of complicated games with transfer pricing to shift the expenses around to wherever’s most tax efficient… And maybe throw in a few more layers of obfuscation through other trusts and shell companies scattered around the world.

    If you really want to know how the rich avoid taxes, I’d recommend reading Treasure Islands: Tax Havens and the Men Who Stole the World by Nicholas Shaxson. It’s quite an eye-opener.

  7. says

    Many people complain that the US tax code is needlessly complex. In fact, it is as complex as it is so that tax avoidance becomes easier for wealthy individuals and corporations. Page after page of the tax code are little more than carve-outs for the connected. Thank you, lobbyists!

    And this is what proponents of flat income tax schemes don’t understand. A flat tax versus a progressive tax would shorten the tax code by a couple of paragraphs. It’s the carve-outs that make it big and complicated.

  8. birgerjohansson says

    I make ca 23,000 Swedish kr per month. After the latest economic turmoil that hit small currencies harder, one $ is worth about 10 skr. So I am hardly priviliged by US standards.
    I can certainly not pull off tax-avoidance stunts.

  9. GerrardOfTitanServer says

    How many people on here will post how much they earn?

    Approx 230,700 USD per year before taxes, not counting stock options, retention bonuses, 401k, etc. I am a techbro in Silicon Valley (who also tries to subvert the techbro stereotype where possible), and so that’s substantially less than what it may appear to be because of housing costs (but it’s still a lot of money).

    They should close all the loopholes. They should have higher and more progressive taxation for universal health care and a laundry list of other programs. If that means I have to pay more to make the world into a better place, then please do so. This is one big reason why I consistently vote Democratic party.

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