IRS Files Released of Super Rich

[The Observer]

Maybe we should adopt some of the recommendations that former top government officials are making.

You are mixing apples and oranges here. The recommendations are targeted against evasion and not tax avoidance. Not that I am against getting the IRS funded appropriately so that the evaders are audited and collected. The IRS has been severely underfunded for years and you can't have an effective tax system without an agency that can enforce the laws. Some of that has been the fault of politicians from both sides of the aisle in Congress, and some of that has been the result of the IRS shooting itself in the foot over the years due to corruption, abuse of power, lack of planning and poor leadership.

[The Observer]

I have often thought about a wealth tax for Ultra High Net Wort Individuals (100M+) which would be a small percentage, but could be used as a credit/offset against tax due on future gap gains, that expires upon death. but doubt we would ever implement a wealth tax.

The closest thing we have to a wealth tax on the ultra-rich is the estate tax. And that targets people with a wealth of $11.7 million (as an individual for 2020) - far less than your $100m criteria. That is approximately 0.2% of the total estates every year. Of course, there are number of loopholes that have been enacted over the years that effectively allow many of that 0.2% to avoid being taxed at all. The rest get taxed at roughly a 17% tax rate. Of course the merit to your plan would be that the same taxpayers would be taxed every year (if the wealth continues to increase) instead of an estate tax that only gets collected once from the deceased's beneficiaries.

I doubt those numbers would, even if the loopholes were repealed, satisfy any of the wealth tax proponents out there since they are fixated on realizing billions of dollars in tax revenues. They would soon realize that the dollar criteria for a wealth tax would have to be lowered to target less wealthier people to net those projected numbers. Or they would just simply re-tax the same wealth that they had already taxed the year before. At which some point the tax would be seen as punitive by people who would have to start liquidating assets in order to pay the tax.

[The Observer]

I have to say that I am in two phases shocked by this, firstly that it happened, and secondly that it hasn't happened before now. In light of the data breaches at places like the State Dept and the Pentagon for example, I can't for a moment believe that the IRS is any more bullet proof and in fact is most likely not magnitudes more vulnerable. That being said, I will be very interested in seeing how this plays out as to the who and how and why.

I am somehow shocked, but somehow not. There have been numerous instances over the years of IRS employees abusing the information system to access taxpayers' private information for which there was no business reason to do so. Some of the time it has been because someone was curious about celebrities, or other well-known figures in society. Other times it was due to people who had an axe to grind with relatives, neighbors, or some personal enemy in order to get even or revenge. And the rest of the time it was done for personal gain (filing false tax returns for phony taxpayers to get refunds as an example). The IRS' auditing system that monitored these accesses is pretty efficient and these employees were quickly investigated, charged with illegal access, terminated and prosecuted if a particular law was broken.

And we don't need to go into describing situations where politicians (can you say Nixon? Good, I knew you could!) used the IRS information database to target their own enemies. Despite Congress taking steps to put that information out of bounds, it still happens simply because the information exists and there are legitimate and/or legal reasons for politicians and administration officials to see that information. The breach in this case happened because an individual or individuals have a political motivation to release this information and somehow had access to the information or otherwise procured it. Either way, it was illegal and needs to be investigated, if only for the sake of assuring US taxpayers that their private information is secured and will be protected within the limits of the law.

People who say that this leak happened for good reasons are simply invoking "the-ends-justify-the-means" philosophy - which they will immediately forget when their own private information gets abused by someone else who has decided that it needs to be leaked.

[Cpt Banjo]

I have often thought about a wealth tax for Ultra High Net Wort Individuals (100M+) which would be a small percentage, but could be used as a credit/offset against tax due on future gap gains, that expires upon death. but doubt we would ever implement a wealth tax.

An unapportioned wealth tax would face serious constitutional challenges. The Supreme Court has said on many occasions (admittedly in dicta) that a tax on the mere ownership of property is a direct tax that must be apportioned. This view goes back to the 1895 Pollock case in which the Court held (a) a tax on the ownership of property is a direct tax, and (b) a tax on the income from property is also a direct tax because it'a a tax on the property itself and therefore on its ownership. Although (b) was overturned by the 16th Amendment, (a) wasn't.

[NYGman]

Never really contemplated constitutionality, just thinking how to make it somewhat fair. As was pointed out above it likely would not raise nearly enough tax, and some may be timing, or optics, but then this all does come down to optics. They pay no tax because the rules are written that way, and it is perfectly fine, the problem is, to the average tax payer, it doesn't look fair. They don't understand the difference between increase in net worth, and income. Your theoretical worth it's just that a theory if you are somehow able to sell everything and recognize that. But think what would happen if Elon Musk sold all his shares tomorrow Tessa would plummet and he probably wouldn't recognize that full value. Again I think the current system is fine, but I just think our cap gains rates are too low. I mean when your money is working for you and that's how you're really early living then shouldn't that the ordinary income? The whole trader v investor rules should be looked at too.

[Burnaby49]

It is a great example. My example was based on one of my former employees, who bought a simple condo in Orange County, CA back in the 80s with her savings (savings, that I might add, she had already paid taxes on). She is now 72 years old and single and, given the rapid rise in real estate prices across the US over the last couple of years, that condo is probably worth 3-5 times more than what she paid for it. If we taxed wealth as Number 6 wants us to, there would be no way this senior citizen would be able to afford the tax and she would have to sell it. Selling it would gain her some money but she would not be able to buy any other home in the area due to being priced out of the market. So in addition to losing her house, if she wanted a replacement home, she now would have to move out of state away from her relatives, she would lose any familial support if she needed it due to the distance, and be in a strange new place without friends or connections that she has in the OC.

Canada doesn't have a wealth tax. We had an estate tax way back but it was eliminated in 1971. Like the United States capital gains are taxable (wife and I recently paid a huge whack of it on a rental apartment we sold). However we have one very significant tax-free benefit you Americans aren't allowed. The situation given above wouldn't happen here because gains on the sale of your home aren't taxable. Wife and I bought our house in Burnaby for $69,000 back in 1978 and still live in it. It's currently assessed at about $1,500,000 and the gain, at such time as we sell, is tax-free. An offset is that we can't claim mortgage interest as a deduction.

[NYGman]

the gain, at such time as we sell, is tax-free. An offset is that we can't claim mortgage interest as a deduction.

By my calculation, for you, even if we would factor in astronomical interest rates of the 80's I bet the tradeoff is still worth it. Although I will note, we can shelter some of our gains 250k for single and 500k for married. At least for Married couples in the US, where the typical family moves every 5 years, this would be sufficient to result in both mortgage deduction and CG Exclusion for most, of course exceptions would apply.

[Burnaby49]

the gain, at such time as we sell, is tax-free. An offset is that we can't claim mortgage interest as a deduction.

By my calculation, for you, even if we would factor in astronomical interest rates of the 80's I bet the tradeoff is still worth it. Although I will note, we can shelter some of our gains 250k for single and 500k for married. At least for Married couples in the US, where the typical family moves every 5 years, this would be sufficient to result in both mortgage deduction and CG Exclusion for most, of course exceptions would apply.

Astronomical? At the peak we were paying 20% interest and we were never below 15%. However with a $20,000 down payment we only had a mortgage of about $50,000 and we put every spare dollar we had into it so it was paid off in about six years. I had, and have, no problem with not getting a mortgage interest deduction. It's my conclusion that interest deductions just encourage excess debt. People tend to pay whatever they can afford for housing so if they get a tax break on mortgage interest they just get bigger mortgages. Not that that stopped the frenzy of the early 2000's. A frenzy, I'd note, that didn't affect Canada because we have much more stringent mortgage rules than the United States.

At the peak, around 2005, Canadian banks were lamenting to the government that the archaic unfair rules were stopping Canadian banks from competing against American banks and our entire banking system was in danger of collapse because of this injustice. The only remedy was to go the American way and allow banks to give mortgages to anyone who walked in the door. The government just ignored their pleas and, after 2008, the lobbying abruptly stopped.

[Pottapaug1938]

I am well to the left of center; but I don't see a wealth tax as being viable. Many who might be expected to pay such a tax will promptly work at hiding as many of their assets as they can manage; and the wealthiest among them will do better at it than the least wealthy.

[Arthur Rubin]

Meanwhile a lot of working class Americans I know who make around $25K a year or less did not get their withholding back this year; most of them ended up paying more in taxes, why?

Assuming this is real (of which I am not convinced: the plural of "anecdote" is not "data"):

Mostly, their taxes were cut, but their withholding was cut further. Also, those sensible taxpayers who adjusted their withholding for the tax cut, didn't realize that the withholding was also cut, and often had to pay taxes and (estimated tax) penalties.

[wserra]

I am well to the left of center; but I don't see a wealth tax as being viable.

Me too, on both counts. Add "and have strong doubts about constitutionality without apportionment", then we hit the trifecta.

[obadiah]

And a taking?

[Number Six]

That paying as little in taxes is some type of duty for rich people to do together with their accountants strikes me as a slavish and miserly mentality. If intent is as important as action then certainly those who legally though questionably chisel and cheapskate tax authorities strikes me as leaving a sick mental burden on those who think that they can always spend their money better than the government. And it makes those that pay "more" than they should to be fools and suckers and their accountants, many of whom know there are multiple methods to file taxes with different outcomes, into incompetents. The Clintons, who always paid their taxes were told by David Cay Johnston in one year did not take advantage of resources to cut their taxes.

However when you see how extreme and pernicious the tax avoidance businesses have become, with the likes of Jeffrey Epstein reaping large profits, you wonder how such people can still live with themselves if they have a conscience. And to make silly arguments that the release of vital information that would ordinarily be confidential but serves the public interest as "against the law" and therefore should never have happened strikes me as someone who has their priorities off and would also berate and wag the finger at Daniel Ellsberg for breaking the law. What matters is intent, much of the law is governed by that when verdicts are issued.

[NYGman]

Why should someone pay more taxes than they should? That the rules allow for deductions, credits, and deferments, are the same rules everyone has to operate under. The fact that you can exploit those rules to the fullest when you hold appreciated assets, and have amassed wealth is due to the way the rules have been drafted, often with the intent to promote some sort of activity over another. If I had Hundreds of Millions of assets, I would not be looking to needlessly pay more taxes than I owed under the rules. I don't need to exploit any rules to minimize taxes if I had enough assets, I just need enough assets, and a way to service some debt, to mitigate some of my taxes, and of course I have to have assets that don't go down in price. There are way to make things more equal. I think raising and graduating CG and Div rates further, is a good place to start. I also do think we should look at the trader/investor distinction to force more investors to become traders, and you will be able to raise more tax revenue.

[Famspear]

Number Six wrote:

The intent and motive are what matters, so the letter of the law becomes a justification for absurd tax avoidance.

I respectfully disagree.

Following the letter of the law is one of the most important things that separates the United States of America from societies where government officers and employees oppress their fellow citizens.

Technically, motive is not what matters. Intent does matter. I'm splitting hairs here.

In the case of U.S. Federal criminal tax violations, the mens rea requirement is willfulness, which is defined as the voluntary, intentional violation of a known legal duty -- a duty of which the defendant was aware. (U.S. Federal criminal tax law thus is an exception to the general rule that ignorance of the law is not a legal defense in a criminal case.)

Tax evasion is not necessarily "criminal", and tax evasion and fraud are such a big area it is hard to lump all instances into the same category.

If a person engages in conduct (generally, an act to evade or defeat either the assessment of a legally owed tax or the payment of a legally owed tax, and not a mere failure to act), together with the applicable mens rea (willfulness) and the applicable attendant circumstance (the existence of the unpaid, legally owed Federal tax that the person attempted to evade or defeat), that person may be convicted of tax evasion under section 7201.

Under U.S. law, using the term "evasion" to describe conduct that is not illegal is a misuse of the term. Tax evasion is always criminal, if we're using our terms correctly.

Further, tax evasion is only one category of U.S. Federal tax crime. Willfully failing to timely file a required return is a crime, a misdemeanor, under section 7203, but technically it is not "evasion." Again, a mere failure to act may be a crime, but it is not tax evasion.

In the context of U.S. Federal taxation, tax avoidance is a term that is properly used to describe conduct that is not criminal.

Over a certain percentage evasion becomes "criminal" but is seldom charged as such.

Yes, there is a concept of materiality. Willfully attempting to evade only one dollar of Federal tax probably will not result in a prosecution.

[Famspear]

That paying as little in taxes is some type of duty for rich people to do together with their accountants strikes me as a slavish and miserly mentality.

What do you mean by some type of "duty"? What "duty" would that be?

It appears that rich people in general (or, at least, the rich people mentioned in the ProPublica article) are doing the same thing as everyone else in general -- paying the Federal income tax that they owe. How is that "slavish"? How does that amount to a "miserly mentality"?

If intent is as important as action then certainly those who legally though questionably chisel and cheapskate tax authorities strikes me as leaving a sick mental burden on those who think that they can always spend their money better than the government.

And, how are the billionaires chiseling and cheapskating the tax authorities? What are the billionaires doing that a person with a net worth of, say, only $100,000 and an annual gross income of $50,000 is not doing?

And to make silly arguments that the release of vital information that would ordinarily be confidential but serves the public interest as "against the law" and therefore should never have happened strikes me as someone who has their priorities off [ . . . ]

Good grief. Are you serious? You really believe that an employee of the Internal Revenue Service would be doing the right thing by committing a felony under section 7213(a)(1) as long as the employee feels or believes that the information is "vital" to some sort of "public interest"? A "public interest" as defined by whom? Who gets to decide that people who believe in not violating Federal criminal laws have their "priorities off"? Any IRS employee who has access to the information?

No, pointing out that such conduct would be criminal is not "silly."

[JamesVincent]

Good grief. Are you serious? You really believe that an employee of the Internal Revenue Service would be doing the right thing by committing a felony under section 7213(a)(1) as long as the employee feels or believes that the information is "vital" to some sort of "public interest"? A "public interest" as defined by whom? Who gets to decide that people who believe in not violating Federal criminal laws have their "priorities off"? Any IRS employee who has access to the information?

No, pointing out that such conduct would be criminal is not "silly."

No point in pointing out the obvious Fam. Number 6 obviously believes that people who are following the law to the letter are some type of criminal. Every time one of his gurus post an article he links it and starts the whole argument anew. This time he's talking about a "whistleblower" who, at great risk to him/herself let us know that people aren't breaking the law and that, somehow, is a great justice.

[Famspear]

Number Six wrote:

[ . . . ] Is the leak of private and confidential information like this upsetting to anyone?

OK, let's say that I am an IRS employee, and I decide that it is "vital" under the "public interest" that the confidential returns and return information of all "wealthy" people be disclosed to the public.

As an IRS employee, I conclude that a "wealthy" person is defined as anyone with over $50,000 of gross income or a net worth of over $100,000, or both. So, I release all the information I can find on everyone in that category. Is the leak of private and confidential information like this going to be "upsetting to anyone"?

What is going on here with the ProPublica article is in part a disguised, infantile scream that large disparities in wealth from one person to another are unfair. Some of the key words here are envy and resentment. Here is the scream: "That guy has much much more money than he needs, and he has much more than I do! It's not fairrrr!"

[Famspear]

As I have noted in another place on the internet, the ProPublica article is really discussing two different kinds of tax: a wealth tax, which would really be a form of property tax, and the the Federal income tax.

Regarding the income tax, the article does clearly explain the difference between realized income, which is generally taxed under the Federal income tax law, and unrealized income, which generally is not taxed.

The article includes a mistake regarding the famous case of Eisner v. Macomber. The article incorrectly states:

Yes, she’d gotten a bit richer, but she hadn’t received any money.

Ms. Macomber did not get a little bit richer. The stock dividend was, in economic substance, a pure stock split; there was no transfer of money -- or any other kind of property -- from the corporation to her. In economic substance, the corporation simply divided each of her shares into smaller units, with her total remaining the same percentage of ownership in the corporation.

The ProPublica article explains some of the differences between and among: (A) an ordinary property tax (that is, a tax on property by reason of its ownership, of which a national "wealth" tax would be a type), (B) an income tax on realized income, and (C) an income tax on unrealized income.

A wealth tax --a tax on property by reason of its ownership -- could very well be deemed to be a direct tax. If such a tax is not an income tax, it could very well have to be apportioned among the states according to population -- which would make its implementation almost impossible.

Another point: The ProPublica authors do not seem to appreciate that where unrealized income is concerned, the low net worth individual is treated the same as the high net worth individual. The fact that a high net worth individual may reduce what his or her Federal income tax would otherwise be (e.g., by using borrowed funds) does not change that fact. All the hand waving and hair pulling about unfairness is arguably misplaced.

[The Observer]

What is going on here with the ProPublica article is in part a disguised, infantile scream that large disparities in wealth from one person to another are unfair. Some of the key words here are envy and resentment. Here is the scream: "That guy has much much more money than he needs, and he has much more than I do! It's not fairrrr!"

I tried to avoid going here in my earlier posts, but I strongly agree with you that this is main motivation for most people who are pushing for a "fair" tax against those that they see as being wealthy. Envy and resentment are not positive behaviors that one would associate with mature adults.

As I have gotten older, I realized that a ton of money is simply not the wonderful paradise that people think it must be. And I am not "wealthy" nor in the upper .05, 1% or 5% of the population. Yes, it is nice to know that you have enough money to keep a roof over your head, keep yourself fed and clothed, and even have a nest egg. But beyond that, I see little reason to have a yacht, private jet, a luxury sports car, a mansion spread out over 100 acres, and so forth. The people that I see owning those things usually within a few years don't have them due to economic reversals in their life, or if they do still have them, some of them have personal problems in their lives (succession of spouses, alcohol/drug dependency, sex problems, trust issues with family members, alienation from family and friends, etc.) or end up being convicted of criminal behavior. Their wealth could not save them from their problems, so I gain nothing by envying their lifestyle and getting enraged over it. I am just happy and content with having the basics in life covered and not worrying about more wealth complicating my life in a world growing more complicated every day.

As the old saying goes, be careful for what you wish - you may get it.