A sociologist on the international wealth-management profession
theatlantic.com
theatlantic.com
I went to law school and got a job as a tax attorney. I don't consider my work or world particularly secretive. The barriers to entry are not peculiarly high and lawyers as a profession are a little too happy to talk about themselves.
There's a great comment on the Atlantic that states this better than I can
"If by secret, you mean extraordinarily complex, then yes. But... that's not the definition of secret.
It's not secret. There are many classes on this (albeit from professional-level degrees) and it's all based on public statutes and court cases. All of which are freely available to any person.
A large part of it being "secret" has to do with people's willingness to listen and understand. I'm a tax attorney, I understand these deals, and I can explain them rather well so even someone unfamiliar with tax law will understand it. However, it still does take a bit of active listening on behalf of an unfamiliar (as in, unfamiliar with tax law) listener to actually understand what I'm talking about, regardless of how much I simplify it."
The most disappointing thing about international tax is how little even professional journalists understand it, or care to. It is simply easier to assert that international tax is a scam and since the general public can barely count to 10 using both hands, there's no way to disprove them.
There's a pretty big difference between being a tax attorney and being an offshore consultant where secrecy is one of the selling points. It's not a coincidence that voluntary corrections of tax statements go up significantly when new information sharing agreements are made.
And again she's not a journalist, she has a PhD in Sociology from Harvard and is an associate professor of economic sociology.
Many people I know who have significant assets bemoan the challenges that present themselves when trying to engage in anything resembling a negotiation involving finance. If one side KNOWS you have the capability to pay more, then you're at a disadvantage.
And don't get me started with the lawsuits. People who have money seem to attract lawsuits the same way that children catch colds from kindergarten. As they say: "You know you're rich when you're finally sued frivolously."
So? Abusing loopholes in the law is also by definition perfectly legal, but still dubious practice. In fact, that's exactly what this sentence from the article alludes to:
> By the same token, when Oxfam estimates that just 1 percent of the world’s population will own more than 50 percent of the world’s wealth by 2016, it’s important to realize that such a state of affairs doesn’t just happen by itself, or even through the actions of individual wealthy people. For the most part, the wealthy are busy enjoying their wealth or making more of it; keeping those personal fortunes out of the hands of governments (along with creditors, litigants, divorced spouses, and disgruntled heirs) is the job of wealth managers.
> Given the little that is known about the profession and its role in global inequality, it seemed imperative to learn more about how wealth managers pull off this sleight of hand: Without breaking any laws (for the most part), they enable their clients to sidestep many laws and policies—especially those designed to prevent the kind of neo-feudal concentrations of wealth emerging now.
You're right on all other points of course.
But really, a disadvantage compared to whom?
There's of course the 99.99% [0] of people that simply can't have this "disadvantage" because they're not rich enough to "suffer" it. Given that the fact that the 0.01% will still be 0.01% after this terribly disadvantageous negotiation, it's not really a disadvantage. I say "fact" because it is both expected from the qualities of exponential wealth distributions, as well as evidenced from the real world where there's very little movement at the top.
Then there's the specific party on the other side that KNOWS. They are of course part of the 99.99% too, so the same thing happens. Before the negotiation they are at a huge disadvantage compared to the ultra-rich, and after the negotiation they are roughly at the same disadvantage, except insignificantly less so.
Say I were to go on holiday to a country where cost of living is much, much lower than at home. In some countries, at some point I'd notice I'd get "screwed over", paying 5x the price for a taxi or a drink, which is still not a significant amount to me either way. Of course I will get miffed about it at first, because of the apparent unfairness.
That's natural. It's how we're wired. That deep instinctual feeling of fairness and unfairness, it's part of our primate programming. It probably used to be an important evolutionary trait for group-survival, or something.
I hope that I do not need to explain that what is "natural" does not equate what is "right".
In fact, to be a good person, is for a large part defined by our ability and willingness to observe, rationally criticise our base programming / urges, and decide whether or not to act on them.
And thus, one would happily pay the still-cheap 5x "normal" price for a drink or taxi fare, because it's the right thing to do, and there's really nothing rationally "unfair" about it.
[0] nines pulled from thin air, giving about 73 million "ultra rich" on this planet.
The US has always been a place with a love hate relationship with the wealthy. We like building people and personae and tearing them down lest they get too comfortable in their perches.
The Atlantic continues this tradition of faux populism but with a twist to drive readership.
I have seen too many wealthy individuals legally bend the rules the poor, and middle class can't in order to get to that perch.
Whether by hook, or crook, luck, family backing, and yes--sometimes honest hard work that person makes it to the perch; the peons will look up at that perched individual, and their resultant behavior. We watch what that perched individual does with their goodies. If they narcissistically waste their goodies, we get annoyed. If they buy up apartment building, and kick out section 8 recipients we get annoyed. If they buy up houses so they don't need to look at the peons, we get annoyed. If they waste money while their neighbors are starving, we get annoyed. Basically, if they act like jerks, we get annoyed.
Why, because we all inhabit the same little space. "Want to act like a jerk--fly to another planet." This one is too small.
In American, we provide a pretty good starting pad for most people. They can go and do pretty much whatever they want. They make their money, and then go to extreme, complex lengths to not give back to the nest---is frustrating, and ugly. It's no wonder--sometimes we want to pull them from their perches?
(Excuse the avian metaphors--it's early, and I can't write.)
When there is zero room for error and all jerk-ish-ness is punished by trying to drag someone from their perch, you've created a dangerous place to visibly be on a perch. When you couple this with a society where it's virtually impossible to not be a jerk, you've created a society where those on perches will quickly grow deaf to being called a jerk. When you have both, the people on perches will just do whatever they want, because they will conclude that they will attacked all the same no matter what they do.
And if you're going to be considered a jerk no matter what you do, why should you care about the people who call you a jerk?
You've heard of Gell-Mann Amnesia?
Sure, the rules may be public the play is not.
When she tells the story about the gentleman who is wary of academics concerned with income inequality, I think it's interesting that she seems to be writing precisely the kind of account that may lead to further scrutiny of his assets and people like him. I would say his concern is well-placed!
There are two ways to look at this issue. First, these rich people are just fleecing the "system" and governmental powers should be increased to prosecute them. Or, the "progressive" tax system is particularly punitive for high net worth individuals, and they will continue to shell out millions to wealth managers while tax laws are actively hostile to their assets. (Tax collections have been ~19% throughout U.S. history, even when tax rates were as high as 90%.[0]) On a purely "practical" level, tax codes should be simplified and taxes lowered so that it's more economical for those of high net worth to comply with the intent of the law, rather than skirt it. As an added bonus, it would also help economic growth generally.
[0] http://www.wsj.com/articles/SB100014240527487035149045756029...
So how are they effectively paying the lowest band?
If you make 1 million dollars per year, and I make 100k, and my taxes are 30k per year while yours are 100k/year (numbers made up), you'd be paying more total taxes, and a larger slice of the total tax dollars paid.
However, my taxes are 30% of my income, whereas yours would be only 10% of your income. If we paid at the same "band" of taxes, you would be paying $300k instead of $100k.
Because the tax bands tax you at a lower percent the higher up you go, making more money leads to less proportion of taxes.
Consider also that the people who pay the most tax (in dollars) often have a substantial amount of their wealth in real estate, stocks, or stock options, rather than cash income, and those are all taxed differently than the kind of income that most of us have.
And thats at the federal level. State income taxes vary from place to place, but nowhere is what you are saying true. And a state would have to apply a substantial effective negative income tax rate for high earners which is laughably unheard of.
Practically speaking, high taxes are not an effective way to tax the wealthy, but they are an effective way to send capital overseas. If you want another example, look at the $2.1 trillion in U.S. corporate cash being held abroad, which hasn't been repatriated because companies refuse to pay the high U.S. corporate taxes, and use it to buy foreign companies/assets like Minecraft for a couple billion instead.[0]
[0] http://www.bloomberg.com/news/articles/2015-03-04/u-s-compan...
Do you happen to know of the thread, or even the term for this person? I need to use that advice now and I cannot find the comment thread or recall the term used.
Thanks
Thank you "Enrolled Agents" was the term I was looking for.
Appreciated.
The ability to practice as an EA in front of the IRS is nationwide, I'm pretty sure.
Any good books on understanding international tax strategy for corporations?
The author spends several pages telling us how clever and interesting he is, with his unique method of infiltrating this secret world, putting him in such company as [some important famous journalist we would be familiar with were we as educated and worldly as the author] and gaining the insight and ability to write this masterful piece of journalism that you, Reader, are about to witness.
And then he spends a paragraph or two saying "it's secretive, and offshore". And we're done.
I want my ten minutes back.
I hope she has a follow up article with more meat.
- In most countries you can set yourself up as a company. This means you can write off certain things and adjust the proportion of revenue that ends up as salary, which has implications for various types of tax. For instance in the UK NHS contributions are dependent on salary, so you can give yourself a minimal salary and lots of dividends. This is a pretty standard play, probably done by everyone in the country who has a business, eg. doctors and plumbers. I don't think there's anything wrong with this.
- At some point a guy will phone you. He finds your name on lists of likely people. He shows up at your office draws you a box diagram of corporations, with lots of little arrows. He quotes tax legal terms you won't understand, but they are always some sort of loophole. In one case I was offered to do a company with P Diddy (or whatever he's called now) in which I was to critique his new music. I had to produce evidence that I'd spent at least 10 hours a week or so on this. Now keep in mind I can't even read sheet music, have zero appreciation of Diddy's genre, and generally have no interest in him as a musician. I suppose this was mutual, as I've never heard of him being associated with quantitative developers either.
- A friend told me about what he'd been offered. Along similar lines, he'd been told there was an opening in poetry. Another box diagram with arrows, and it boils down to that you can get a tax benefit if you publish your own book of poetry. The guy in question was an old school Essex local (shoutey trader). I doubt he'd spent much time reading Sylvia Plath. So anyway, the organisers had all their City connections write crappy (who am I to judge?) poetry, print up a few hundred books, and distribute it to everyone.
- I never did any of these last two schemes. If something sounds ridiculous, you know it's a tax dodge. They tend to end up in court, where they are decided on arcane points if tax law, eating up the productive time of many people. If it goes wrong, you lose the money, a long while after you thought you had it. If it goes right, you are abusing the law in some sense. The other way you can tell is there are some plays every accountant in the whole country will tell you. Other will require a somewhat more entrepreneurial accountant, one that requires a sales operation.
Sorry, good comment.
If you ask about the schemes, the advisor will openly tell you they expect a ruling, ie there is some contention about whether it's actually legal.
Now why people need to resort to these practices to get more fair share of their brutto income is completely different topic, something around "voting with your taxes" about how public cash is spent (usually pretty badly). FYI, I don't do it anymore, got a perm job, but when I was doing consulting this way, I had all the possible support of my local tax office when something was unclear.
A doctor typically has a staff, or may want to have the ability to sell the practice later on. If you make $600,000 a year, why should you have to pay 40-45% tax on that income when $250k will be invested back into the business anyway? Why should you be compelled to subject your spouse and children to the liability of the business?
A real estate investor will often setup LLCs to isolate the liability associated with one property from the overall portfolio. Again, a legit business use.
Obviously there are abuses here, but the fundamental concept isn't wrong. Typically the abuses are when there isn't a bona-fide business. Some financial dude setting up a shell company for his bonus is an example of a questionable use of this approach in my book. When a person sets up a chain of shell companies to obfuscate the ownership or transfer of assets, that's obviously crossing the line into money laundering territory!
If by "fair" you mean we all pay a roughly equal amount, then I'm cool with that.
If by "fair" you mean that people who are more productive contribute a greater share of that production to the pot to achieve the social justice goals of others, then that's where I think there is room for debate.
I understand the arguments for progressive taxation and I'm not advocating against them, but when you look at taxation in the western world (particularly in the USA) you see a steady rise in use of tax funds to insulate people from negative outcomes that derive primarily from their personal choices.
I'm all for freedom of choice. I'm less for "you pay for my stuff" because I made a choice to pursue a life that doesn't contribute to the general welfare of the country, now or in the future.
I know people will downvote this post, but I know I'm not alone in my thinking.
Theoretically, a dividend is a share of the profit generated by the business. Salary is payment for labor rendered. They both exist for different reasons.
Personally, I also think that any dividends and capital gains should be taxed equally, or more, than salary, but that's a different topic.
Finding a bright line differentiation between formation of a company for "legitimate" (what does that even mean?) reasons vs. tax avoidance/optimization is likely impossible. It's quite likely that even pursuing this in legislation would only result in a net loss due to regulatory burden etc. without any real gain.
Further, the business could decide to buy the tools, supplies, and provide the plumber's van. In exchange for providing all these supplies (which are deductible for the business), there's a strong argument that the salary due the plumber is less than if he had to provide all those tools himself.
There's a fair amount of flexibility in determining how much of the total is salary and how much is dividends and that's why there's "nothing wrong" with the first example when properly applied. Saying a plumber worked 100 jobs for a penny-per-job is not reasonable, but there is a broad range of reasonable.
To put it in our field, suppose I had the fortune to create the next modest sized thing that was purchased by Facebook for $10MM in cash. Suppose that a team of 2 of us (me and one other) created this over a 1 year period and it was 100% funded by me (no VC, no angel, etc). Suppose that I paid the other person $200K salary for their efforts. How should the remaining $9,800,000 be divided on my tax return? Surely you wouldn't argue that my "salary" was $9,800,000, but rather my salary should be $200K and I should receive the $9,600,000 as non-salary compensation (capital gains in this case, presumably, but not W-2 salary).
It's a game that let's you play out the role of a company engaging in tax avoidance. The tax dodges in-game are meant to mirror those available in the current business world.
Taxodus - Playing The Global Tax Avoidance Game
- Suppose someone has significant assets in, say, Canada.
- They move to the UK and claim non-domiciled status on their taxes, which means they only need to pay taxes on income which is moved into the UK.
- They stay in the UK for 7 years, leaving their assets in Canada.
- They then move back to Canada
Because the assets were never moved into the UK, there is no need to pay UK taxes on the capital gains/income, under the non-domiciled rules of the UK.
Because they were non-Canadian residents, there is no need to pay Canadian taxes on the capital gains/income. (Only the US taxes non-resident citizens)
In other words, they get 7 years of gains/income which get 0 taxes.
I use Canada in this example, but this works for a large number of source countries. No wonder certain neighborhoods in London are filled with Russian oligarchs...
I actually think the UK non-dom thing is reasonable. You pay tax to support a state, which in turn protects your assets and provides various services. If you can't bring your money in, it's not protected by that state. You're also not using it for any kind of gain (pleasure, investment, etc) in the UK, so why it any of their business? On the other hand of course whatever state it is in should be allowed to tax you.
http://works.bepress.com/cgi/viewcontent.cgi?article=1001&co...
"... when knights of medieval Europe departed for the Crusades, leaving their lands vulnerable to seizure by the church, the state, or rival noblemen—some adopted the practice of putting their assets in trust. This involved transferring legal ownership of the property to a trusted kinsman or friend for the benefit of a third party: usually the wife and children of the original owner, who had no legal standing to own property themselves and were thus left vulnerable to dispossession."
If you want the "rich" to pay their fair share; they already pay the bulk of all taxes; then the tax system has to be fair. That means it has to minimalist as possible so that everyone with standard education can comprehend it.
Legislatures like complex tax codes for political and social reasons. Lawyers and computers can manage the complexity fairly OK so far at a cost.
I skimmed the Oct 27 new budget bill and it contains about 100 pages of mysterious tax code changes. The language is very opaque with referring to line changes in previous laws. I can gleen that farmers, drug makers, hospitals, and hedge funds are the recipients of these changes. But lack the time to figure them out.
Anyone who works for a hedge fund will have their own company that will get paid thier bonus. Companies have two nice traits.
1) Their end of year can be any month
2) They have a lower tax rate than most high net-worth individuals do.
So consider 2 fictional employee's.
The first one gets paid a bonus of $500,000 at the end of the year(2014). His tax rate is 40% so he ends up with $300,000. He reinvests the $300,00 at his hedge fund that returns 20% in the year 2015. As of December 31st 2015 he has a net-worth of $360,000.
Individual 2 gets the same $500,000 bonus at the end of 2014 but she has a company that gets the bonus. Now the companies year end is November so the tax year on on that bonus isn't until November 2015.
That hedge fund also returns 20% so as of December 2015 she has $600,000 ($500,000 * 1.2) and then owes tax of $120,00 (the corporate tax rate is 20% on her $500,000 bonus) so she ends up with $480,000.
Now when she pulls the money out of her corporation to spend she'll have to pay the dividend tax rate of %20. But she can let this money ride tax sheltered for any number of years.
To recap, she essentially shelters her money in two ways:
1) her bonus is sheltered for 1 year from taxes allowing the full amount to grow
2) she pays the corporate rate at the end of the year allowing her to hang onto an additional %20 until she pulls it out for her own use.
Any one can do this, the only preconditions you need to make it worth while are
1) a large bonus
2) a way to make the bonus money grow at a decent rate.
Among Doctors, lawyers, etc this is a common practice.
Now if you want t up the ante, you move your hedge fund to the Cayman Islands where you don't pay any tax on the gains until you repatriate the money back to the North America.
When Renaissance Technologies finally has a tell all book written about then, their brilliance will be acknowledged but I'm going to guess that a very large portion of their returns comes from not paying tax.
See: http://www.bloomberg.com/politics/articles/2015-07-08/irs-mo...
people worry about paying fees as a drag on their retirement earnings but paying tax is the single largest drag on creating wealth that the wealthy have. The above corporation sheltering is legal well tested under law and used in a very pervasive manner in the North American and the UK, I don't know anything about the rest of Europe but I'd imagine its the same.
Assuming a 35% gross tax rate rather than 40% (I think that's the top marginal rate), Individual 1 gets to keep $325k.
tl;dr; You aren't avoiding a lot of taxes.
Now if you want t up the ante, you move your hedge fund to the Cayman Islands where you don't pay any tax on the gains until you repatriate the money back to the North America.
In other news, the Old Monk corporation (sellers of delicious Indian rum, mostly within India) don't pay American taxes either. There is a whole world out there that isn't paying US taxes, oh noes!
You get tax sheltering two ways.
1) you get to collect gains on the amount you would have paid tax on originally, so if you shelter $120,000 for a year, you get the 20% in gains on that amount.
2) you don't pay the dividend rate until you pull out the money from the corp. So you can leave it in the corporation for 20 years, allowing it to grow at our imaginary 20% rate per year.
working through the example again individual 1 is still $360,000 his $500,000 - $200,000 from taxes(I'm Canadian), plus the 20% gains on his $300,000.
Individual 2 gets to shelter the entire $500,000 for the year allowing her to get gains on the whole amount so she has $600,000(with 20% growth, we are a hedge fund after all). She then has to pay the %20 corp tax on her original $500,000($100,000) leaving her with $500,000.
She is then free to let that amount grow until she wants to take it out, at which point its taxed at the 20% dividend rate.
If you compare the person who leaves their money in the tax sheltering corp for 10 years vs the person who takes their bonus as income you'll find that the corp comes out substantially ahead.
I've done the math and seen it play out in the real world:)
In reality, the person who invests the money actually comes out worse. If his investment had either profit or capital gains, he paid even more taxes. I.e., instead of getting $1.20 next year for every $1.00 he put in this year, he's getting something less than that.
With the current taxation regime, the only benefit to investment is shifting consumption into the future. But you actually pay pretty dearly for that. You can see a more detailed explanation here: http://www.themoneyillusion.com/?p=28842
I'll let you re-read my above posts to figure out where you went wrong. My email is in my profile if you need help:)
Only a tiny fraction of Individual 2's actually manage to do what you are describing.
Not necessarily true: CFC status is going to tax your Cayman Islands company as if that income accrues you you personally unless you meet requirements to avoid you having control of that corporation.
https://en.wikipedia.org/wiki/Controlled_foreign_corporation
Wait, wasn't that the biggest conclusion from Piketty's book? That inequality will happen by itself due to difference between returns on capital and economic growth?
If some people have income and save it inequality will go down: bignum x exp(rt) / smallnum x exp(rt) < (bignum x exp(rt) + k) / (smallnum x exp(rt) + k).
All r > g directly implies is that the ratio of capital stock to income will increase. I.e., we'll move from a situation with one factory (worth $1M) producing $1000/month in income to a situation with two factories (worth $2M) producing $1500/month in income. In this case, r=100% but g = 50%.
Combine this with a 30% ex-patriation tax* (yes, they tax you for giving up your citizenship), it's no wonder people create and keep wealth overseas.
https://www.irs.gov/Individuals/International-Taxpayers/Expa...
http://data.worldbank.org/indicator/IC.TAX.TOTL.CP.ZS?order=...
It's really rather ingenious.