Sunday, November 14, 2021

Making the Rich Pay Their "Fair Share" of Taxes - How?

 The problem with the ultra-rich not paying "their fair share" isn't necessarily that they are doing anything illegal (although sometimes that's exactly what it is), it's that the tax code favors the ultra-rich. There are myriad ways to make your income and assets non-taxable, or taxable at lower rates, but most of these methods are only available if you already have a pile of money. I'll use Elon Musk for an example: he claims that he is not taking a salary & his net worth consists of stock, which won't be taxed until he sells it. So how is he living the billionaire lifestyle without any cash?

Debt.

The way our tax code works, income is taxed, but assets aren't. An executive or company owner can be paid in company stock, which isn't taxable until it is sold. The executive or owner then takes out a low-interest loan to finance his lifestyle, with his assets as collateral. Like the assets, the cash obtained through the loan isn't taxable either. Of course eventually these loans will have to be paid off, but in most cases the value of the asset has appreciated much more than the interest that was paid on the loan. Of course, if you're an alleged billionaire like former president Losin' Donnie, you can just default on your loans.

Then there's tax credits.

There are a long list of ways to earn tax credits and book net taxable losses while still bringing in plenty of cash. One shady, yet perfectly legal method is via consulting fees. A real estate developer buys a building and applies for federal tax credits to restore it to historical conditions. The federal government, in addition to awarding credits based on legitimate construction expenses, also allows a "developer fee". IRS standards are that 20% of total rehabilitation costs are reasonable. So the real estate developer creates an LLC for the building. Then, another LLC is created as a developer. The building LLC then pays the developer LLC the developer fee. Assuming the rehabilitation costs, including the developer fee, are $5 million, then the building LLC receives a $200,000 million tax credit for effectively moving $1 million from one account to another, since the building owner is a developer. The $1 million developer fee can also be used as an expense to offset any revenue that the building LLC earns, lowering its taxable income.

The answer isn't necessarily to raise the tax rate on the ultra-wealthy. The answer is to find a way to close the various ways that income and wealth can be shielded from taxation that are only available to the top 0.01%.

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