Deep in the heart of Taxes

[RecycleMichael]

Big Paychecks, Tiny Tax Burdens: How 21,000 Wealthy Americans Avoided Paying Income Tax

By Amy Bingham | ABC OTUS News

The richest woman in Wisconsin, Diane Hendricks, is worth an estimated $2.8 billion, but she did not pay a dime in state income tax in 2010, the Milwaukee Journal-Sentinel first reported. Because of a change in how her company, ABC Supply Inc., the country's largest distributor of roofing, windows and siding, is structured, Hendricks reduced her personal state income tax burden from $2.3 million in 2009 to zero in 2010, according to  records the state Department of Revenue released to the Journal-Sentinel.

While a tweak in ABC's corporate structure allowed its CEO to get out of state income taxes, a complex web of deductions and exemptions in the federal tax code have allowed more than 20,000 wealthy tax filers get off the hook on paying federal income taxes. A recent IRS report showed that 20,752 households that reported earning more than $200,000 in 2009 paid no federal income taxes. About 1,500 of those tax-free Americans were millionaires.

So how does someone in the top 3 percent of America's income earners finagle their income tax burden down to zero? For the majority of them, it's all about donating to charity, investing in local and state governments, earning money overseas and writing off doctor bills.

In Hendricks' Wisconsin case, ABC Supply switched from an  "S" corporation, which passes all of its profits and losses through its owner to be taxed under personal income, to a "C" corporation, which stands independently of its owner and whose income is subject to corporate taxes.

Scott Bianchini, ABC tax director, told the Journal-Sentinel that the switch was a "substantial part" of why Hendricks had no state income tax liability. Bianchini noted that while Hendricks' tax burden was minuscule this year, the billionaire has paid more than $10 million in taxes since 2005.

On the federal level, the nearly 21,000 high-income earners who aren't paying federal income tax represent only one half of one percent of the 4 million tax filers that make up the top 3 percent. They account for an even smaller fraction of the 59 million tax filers who did not pay income tax in 2009. The vast majority - 56 million - of the people who skipped out on these income taxes earned less than $50,000 per year.

"It's tiny," Williams said of number of wealthy Americans who are income tax-free. "But these are the ones people get upset about."

In 1969, Congress was so up in arms about a mere 155 individuals who earned more than $200,000 and paid no income tax that it passed the Alternative Minimum Tax, which aims to prevent wealthy people from claiming too many tax exemptions and deductions.

More than 40 years after the AMT went into effect, the number of wealthy, income-tax-free individuals has ballooned to 133 times as many as the 155 that inspired the new tax.

In the 2012 battle for the White House, President Obama has made taxing these wealthy Americans a cornerstone of his re-election campaign.

Under Obama's tax plan, the Bush tax cuts would expire, raising taxes for married couples earning more than $212,300 by 3 percentage points. Obama also plans to enact the "Buffett Rule," which creates a minimum tax rate of 30 percent for millionaires.

Mitt Romney takes a virtually opposite approach to tax reform for the wealthy.

His plan not only extends the Bush tax cuts, but further reduces tax rates at all income levels by 20 percent, which puts the tax rate for those making more than $200,000 at about 28 percent. Romney ardently opposes instituting a minimum tax for millionaires, such as the Buffett Rule.

Under Obama's plan, the top 1 percent of income earners would see their taxes go up about 5 percent. Under Romney's plan, they would go down by nearly 8 percent, according to an analysis by the Tax Policy Center.

And as for the 21,000 wealthy Americans who currently pay no income tax, Williams said, "Under Obama's plan, these people would almost certainly pay more. Under Romney's, they will almost certainly pay less."

http://news.yahoo.com/big-paychecks-tiny-tax-burdens-21-000-wealthy-100029578--abc-news-politics.html

[AquaMan]

Someone call EMSA and alert them to the potential bursting blood vessels in a local Italian attorney's head which are soon to appear.

Talk about Profiles in Courage, Romney affirms his committment to make sure that millionaires do not have to pay a minimum tax and the top 1% will actually get a tax reduction of 8%. What a guy.

[Red Arrow]

Big Paychecks, Tiny Tax Burdens: How 21,000 Wealthy Americans Avoided Paying Income Tax

By Amy Bingham | ABC OTUS News

And as for the 21,000 wealthy Americans who currently pay no income tax, Williams said, "Under Obama's plan, these people would almost certainly pay more. Under Romney's, they will almost certainly pay less."

Earned Income Credits?

[Conan71]

All the various loopholes is the reason a package like the Fair Tax makes far more sense than our current tax code.

[nathanm]

All the various loopholes is the reason a package like the Fair Tax makes far more sense than our current tax code.

Except the Fair Tax is essentially one giant loophole for people who make enough money to sock away substantial savings or to hire attorneys to structure sales in a way that they don't look like sales, similar to how Boeing avoids much Washington tax by flying the planes they make out over the Pacific before transferring ownership. It also discourages consumption and investment, as all sales taxes do. I'm not quite sure why you're so invested in a flat tax of some form, anyway. The progressive tax dates back to ancient Greece, who instituted it after seeing their flat tax impoverish small farmers.

RA, more likely illegal tax shelters. The IRS rarely catches any rich folks because their enforcement budget is so low and most of that is focused on EITC abuse. Seriously, you're more likely to be audited if you're a twentysomething single mother making $20,000 a year and claiming the EITC than you are if you make $10 million a year. If you make income from a partnership, even better. For a time in the early to mid 2000s, the IRS did not audit partnership returns at all. As you can imagine, hundreds of billions of dollars worth of income escaped taxation during those years.

Many of the richest folks in America are blatant tax evaders, yet even when they are caught using some obviously illegal tax shelter they are not punished. Why? Because they pay $50,000 for an opinion letter stating that whatever illegal thing they're doing is actually legal. For whatever reason, the IRS accepts them at face value no matter how obviously faulty the legal reasoning is and allows the taxpayer to only pay the amount owed plus interest. No penalties.

The rest of us don't get that kind of treatment.

[Conan71]

Except the Fair Tax is essentially one giant loophole for people who make enough money to sock away substantial savings or to hire attorneys to structure sales in a way that they don't look like sales, similar to how Boeing avoids much Washington tax by flying the planes they make out over the Pacific before transferring ownership. It also discourages consumption and investment, as all sales taxes do. I'm not quite sure why you're so invested in a flat tax of some form, anyway. The progressive tax dates back to ancient Greece, who instituted it after seeing their flat tax impoverish small farmers.

RA, more likely illegal tax shelters. The IRS rarely catches any rich folks because their enforcement budget is so low and most of that is focused on EITC abuse. Seriously, you're more likely to be audited if you're a twentysomething single mother making $20,000 a year and claiming the EITC than you are if you make $10 million a year. If you make income from a partnership, even better. For a time in the early to mid 2000s, the IRS did not audit partnership returns at all. As you can imagine, hundreds of billions of dollars worth of income escaped taxation during those years.

Many of the richest folks in America are blatant tax evaders, yet even when they are caught using some obviously illegal tax shelter they are not punished. Why? Because they pay $50,000 for an opinion letter stating that whatever illegal thing they're doing is actually legal. For whatever reason, the IRS accepts them at face value no matter how obviously faulty the legal reasoning is and allows the taxpayer to only pay the amount owed plus interest. No penalties.

The rest of us don't get that kind of treatment.

Have you actually read the Fair Tax book?  Big difference between that and a flat tax.  Consumption taxes don't seem to be that big a disincentive. Otherwise, companies and people would not locate in states or cities with consumption taxes.

Here's a summary:

http://www.fairtax.org/PDF/PlainEnglishSummary_TheFairTaxAct2007.pdf

[nathanm]

Big difference between that and a flat tax.

Not really. If anything it's worse, because it allows people to store their income tax free. Those who can afford to not spend money will essentially escape taxation on their original income. Ask an estate planner. Delaying taxation for 20-30 years on a given bit of money is just as good as never paying tax on it. Not only will the tax be paid in debased dollars, but they get to earn interest on it in the interim. Secondly, not taxing capital gains, losing the estate tax, and all the rest basically ensures we will have what Jefferson called "dynastic wealth." I'm supposed to be happy about going back to the days when people got ahead based on the luck of their birth rather than their own effort?

Our income tax system would be fine if we simply removed the loopholes and most of the allowable deductions, tightened up the rules that allow CEOs to push the cost of flying around in the company jet off themselves and onto shareholders and taxpayers, and that sort of thing. (Legitimate business expenses should obviously be deductible, but flying the corporate jet halfway around the world and back to take the CEO's son on a ski trip is not a legitimate business expense)

All that said, I do applaud your desire to pay the highest proportion of your income in taxes of any of the income cohorts. People poorer than you will, of course, have their overall rate reduced by their exemption/refund/whatever. So will you, but not as much. You likely don't make enough to save all that much money, though. (Most people don't..have you seen the savings rate lately?) Folks higher up the ladder can just save it all until later, when it's grown in value untaxed, thus avoiding the largest part of the tax.

[Conan71]

Not really. If anything it's worse, because it allows people to store their income tax free. Those who can afford to not spend money will essentially escape taxation on their original income. Ask an estate planner. Delaying taxation for 20-30 years on a given bit of money is just as good as never paying tax on it. Not only will the tax be paid in debased dollars, but they get to earn interest on it in the interim. Secondly, not taxing capital gains, losing the estate tax, and all the rest basically ensures we will have what Jefferson called "dynastic wealth." I'm supposed to be happy about going back to the days when people got ahead based on the luck of their birth rather than their own effort?

Our income tax system would be fine if we simply removed the loopholes and most of the allowable deductions, tightened up the rules that allow CEOs to push the cost of flying around in the company jet off themselves and onto shareholders and taxpayers, and that sort of thing. (Legitimate business expenses should obviously be deductible, but flying the corporate jet halfway around the world and back to take the CEO's son on a ski trip is not a legitimate business expense)

All that said, I do applaud your desire to pay the highest proportion of your income in taxes of any of the income cohorts. People poorer than you will, of course, have their overall rate reduced by their exemption/refund/whatever. So will you, but not as much. You likely don't make enough to save all that much money, though. (Most people don't..have you seen the savings rate lately?) Folks higher up the ladder can just save it all until later, when it's grown in value untaxed, thus avoiding the largest part of the tax.

Regardless of tax rates, people need and want to consume.  Wealthy people will still buy larger houses, cars, planes, boats, beluga caviar, Dom Perignon, etc.  The idea that they won't consume to simply keep from paying taxes is farcical. 

You are fond of other European systems like healthcare, ever study up on their VAT?

[nathanm]

Regardless of tax rates, people need and want to consume.  Wealthy people will still buy larger houses, cars, planes, boats, beluga caviar, Dom Perignon, etc.  The idea that they won't consume to simply keep from paying taxes is farcical. 

Of course they won't consume. Their company will consume on their behalf, sticking shareholders with the bill. No different than today. Moreover, the really wealthy (of the sort we're talking about here) already don't consume with all of their income. They invest/save/whatever most of it.

VAT is completely different, btw, as it has no exemption for items used in the course of business. In fact, most states currently don't exempt such items from sales tax. Something you buy for resale, say an ingot of aluminum, is not a taxable sale for the purpose of sales tax. When you buy things like office equipment, paper, and what have you that you are not reselling, but are used in the course of business, that is currently considered a taxable sale. That is not how the Fair Tax works, making it even more of a giveaway to those who can shelter income in a business than the current tax code already is.

A very large amount of certain people's income will never be taxed thanks to seemingly innocent exemptions like that and its included repeal of the estate, gift, and corporate income taxes. Those of us stuck in the middle are the ones who get to foot the bill.

[Red Arrow]

The progressive tax dates back to ancient Greece, who instituted it after seeing their flat tax impoverish small farmers.

Yep, I sure wish our economy was more like the Greek economy.

[Red Arrow]

Not really. If anything it's worse, because it allows people to store their income tax free. Those who can afford to not spend money will essentially escape taxation on their original income. Ask an estate planner. Delaying taxation for 20-30 years on a given bit of money is just as good as never paying tax on it. Not only will the tax be paid in debased dollars, but they get to earn interest on it in the interim. Secondly, not taxing capital gains, losing the estate tax, and all the rest basically ensures we will have what Jefferson called "dynastic wealth." I'm supposed to be happy about going back to the days when people got ahead based on the luck of their birth rather than their own effort?

Our income tax system would be fine if we simply removed the loopholes and most of the allowable deductions, tightened up the rules that allow CEOs to push the cost of flying around in the company jet off themselves and onto shareholders and taxpayers, and that sort of thing. (Legitimate business expenses should obviously be deductible, but flying the corporate jet halfway around the world and back to take the CEO's son on a ski trip is not a legitimate business expense)

All that said, I do applaud your desire to pay the highest proportion of your income in taxes of any of the income cohorts. People poorer than you will, of course, have their overall rate reduced by their exemption/refund/whatever. So will you, but not as much. You likely don't make enough to save all that much money, though. (Most people don't..have you seen the savings rate lately?) Folks higher up the ladder can just save it all until later, when it's grown in value untaxed, thus avoiding the largest part of the tax.

So the purpose of taxes is not to buy needed/wanted goods and services.  The purpose of taxes is to punish anyone not living Poverty.  By the way, Poverty is not a town SW of OKC although there may be plenty of poor people there.

[nathanm]

So the purpose of taxes is not to buy needed/wanted goods and services.  The purpose of taxes is to punish anyone not living Poverty.

No, the purpose of (most) taxation is to pay for the things we ask our government to do. When one set of people escape taxation, that necessarily shifts the burden onto another set of people.

The purpose of the estate tax is to prevent dynastic wealth, which harms us all by locking up capital in what amounts to a permanent aristocracy. That it also raises revenue which then need not be raised through other taxes is a happy side effect. The purpose of the gift tax is to prevent simple estate tax avoidance.

[guido911]

Big Paychecks, Tiny Tax Burdens: How 21,000 Wealthy Americans Avoided Paying Income Tax

Oh. NOW it's okay to b!tch about people not paying income tax. When I point out that 47% of American's don't pay it, we hear about how the "poor" don't make enough or that there are all those OTHER taxes the "poor" do pay like payroll blah blah blah. Not hearing that argument very much in this thread about the rich. More to the point, though, even the article points out the massive percentage disparity between the "rich" not paying and the millions that don't. Still, it's apparently newsworthy that in a country population by more than 300 million, 21,000 of them--roughly the population of freakin Bixby--are not paying income tax for whatever damned reason. Wow. If only they had paid their taxes maybe the UE number wouldn't have jumped today.

Now, where is that phone number for my accountant so I can start riding the gravy train....

[Red Arrow]

Now, where is that phone number for my accountant so I can start riding the gravy train....

BR-549,  ask for Junior.

[Red Arrow]

No, the purpose of (most) taxation is to pay for the things we ask our government to do.

Boy, you'd never know it from a lot of posts on TNF.

The purpose of the estate tax is to prevent dynastic wealth, which harms us all by locking up capital in what amounts to a permanent aristocracy. That it also raises revenue which then need not be raised through other taxes is a happy side effect. The purpose of the gift tax is to prevent simple estate tax avoidance.

The purpose of the estate tax is to tell people they have no say in their assets.  It also insures that family farms and small businesses get sold to a large conglomerate or broken up and dismantled.