Keelan: Why the super-rich pay no taxes

by Don Keelan

I am not a subscriber or reader of the nonprofit newsroom, ProPublica, “that investigates abuses of power.” This changed on June 8, 2021, when a friend emailed the day’s edition titled, “The Secret IRS Files: Trove of Never Before Seen Records Reveal How The Wealthiest Avoid Income Taxes.”

Two aspects of the headline piqued my interest: just how did IRS personal income tax files get into the hands of the press, and second, how do the rich avoid income taxes?

Don Keelan

As far as the disclosure revelation goes, I will leave this criminal act up to the authorities.  I guess the shenanigans of the Watergate Era are still with us. 

In the second part of the article, the operative words were “avoiding taxes.” And for those who have been in the field of income taxes (preparers, CPAs, and tax attorneys), helping clients avoid paying more in income taxes than what is legally owed is paramount.

The eminent jurist, Learned Hand’s comments from 1947 (Comm’r v. Newman, 159 F.2nd 848 (2nd Cir.1947)) are still relevant today: “Over and over again courts have said there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor, and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.”

I guess Judge Hand’s decision meant nothing to the ProPublica piece authors: Jesse Eisinger, Jeff Ernsthausen, and Paul Kiel. They make no bones about reporting that the richest men in the world–Jeff Bezos, Elon Musk, Michael Bloomberg, Carl Icahn, George Soros, and Warren Buffett–paid no income taxes in some years.

 The fact that no taxes were paid is not a surprise. Several of these men donated vast sums of their fortune to their family foundations. And if anyone is in the dark, donating to one’s family foundation gains a sizeable tax deduction that can be used in the donation year to offset other income. Moreover, any amount not taken as a deduction in the donation year can offset income in future years. That is precisely what these billionaires must have done.

But what is really annoying and so misleading about the ProPublica article is the shown matrix(table). It discloses the “True Tax Rate” of several of the above-noted individuals. The authors take the taxes paid from 2014 to 2018 and divide the taxes by the increase in the individual’s net worth over a similar period. 

Use Elon Musk, the founder and principal of Tesla Inc., as an example. Between 2014 and 2018, Musk’s net worth increased by $14 billion, and he paid $455 million in taxes. By the authors’ methodology, his tax rate is 3.27%.

In reality, Musk had a tax rate of 29.7 %, derived by $455 million in taxes divided by $1,528 billion in income. In simple terms, assume your home appreciated by $250,000 over five years, and you were told that the $15,000 you paid in income taxes over that period, on an income of $75,000, was a tax rate of only 6% when in fact it is 20%.

The WSJ’s June 9, 2021 editorial slammed the reporting done by ProPublica, noting the return of an IRS scandal. In all fairness, the Bennington Banner’s editorial of June 17, 2021, does comment on the method used by noting, “take advantage of a tax system that taxes wages as income but not the rising value of stock and real estate.”

The Banner was correct: “we are not talking about tax evasion.” Well, then stop talking and change the system. Until then, Judge Hand’s comments stand. Taxes are not some form of contribution.  

The author is a retired CPA and Arlington resident.

Categories: Commentary

4 replies »

  1. 1. Tax evasion is illegal; tax avoidance is a national sport and a high priority activity of the wealthy and large corporations.
    2. The rules of the tax game are defined by Congress.
    3. The rules are too complicated for any Congress Critter to understand.
    4. It is much easier to blame those playing by the rules than to fix the rules.
    5. Because of #3 changing anything in the rules usually results in creating new opportunities to avoid taxes.
    6. Scrapping the whole thing in favor of a simpler system greatly reduces the social engineering power (a major source of campaign donations) enjoyed by Congress Critters.Therefore, #4 reigns supreme as the first (only) step to be taken, repeat as required.

  2. A Fat Tax is the only way to prevent Politicians from using tax law to extort political contributions from parties with an interest in having the law biased to their benefit. It works like this….(telephone call to potential donor). “Hi ——, the reason I’m calling is that I wanted to make sure you were aware that my opponent in the upcoming election is a proponent of instituting changes to the tax code that would massively effect you tax obligation.” It works the other way around to when wealthy donors and corporations want tax law written to their benefit. “_____We would be willing to contribute substantial support to your upcoming election campaign.”

    The Graduated Income Tax was the greatest scam ever purported on the average taxpayer and they fell for it “hook, line and sinker”.

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