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Leaked IRS Files Reveal How the Wealthiest Avoid Income Tax

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Bobfitz1

Active Member
Supporting Member
Sep 24, 2012
1,294
4,349
Ludlow, Vt
The illegal release of IRS files on some of the richest individuals in U.S. , including Elon Musk, has been picked up
and reported widely. All on TMC know that his increases in net worth are mostly from appreciation in value of the
Tesla stock he already owns and performance target awards of options to purchase large numbers of additional
shares at a fixed price now much lower than current (and future) SP.

I think many of us who will be questioned by friends and relatives about this 'wealthy dodge paying their fair share of taxes'
meme would appreciate some posts from members who have better knowledge of accounting and tax law and fairness
considerations.
 
...fairness...

The illegal release dispels the notion that the rich are the victims of a witch hunt and they are taxed to death.

The American tax system believes in a progressive tax rate. The richer you are, the higher tax rate you are taxed. The poorer you are, the lower (or zero) tax rate you are taxed. Some would decry that's a witch hunt to persecute the rich.

In some cases, that progressive tax rate is true as in sales tax: The more you spend to buy on your car, the more tax you have to pay. Even in property tax when a home is not even sold, as the value of the home goes up, the property tax would go up annually as well.

But, not so with the current Federal Income Tax.

The rich know that and that's why in 2013, Warren Buffet complained that:


Remember, these schemes are not illegal. However, it goes against the principle of "progressive tax rate". And morally, it's just plain wrong because the rich can afford to pay the taxes but the burden is shifted to the middle class instead.
 
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The illegal release dispels the notion that the rich are the victims of a witch hunt and they are taxed to death.

The American tax system believes in a progressive tax rate. The richer you are, the higher tax rate you are taxed. The poorer you are, the lower (or zero) tax rate you are taxed. Some would decry that's a witch hunt to persecute the rich.

In some cases, that progressive tax rate is true as in sales tax: The more you spend to buy on your car, the more tax you have to pay. Even in property tax when a home is not even sold, as the value of the home goes up, the property tax would go up annually as well.

But, not so with the current Federal Income Tax.

The rich know that and that's why in 2013, Warren Buffet complained that:


Remember, these schemes are not illegal. However, it goes against the principle of "progressive tax rate". And morally, it's just plain wrong because the rich can afford to pay the taxes but the burden is shifted to the middle class instead.
Sales tax is not progressive. The rate is the same whether you buy a car for 20,000 or 2,000,000.

US income tax is progressive. You pay a much higher rate on 2,000,000 of income than on 20,000.

People confuse income and wealth. They are completely different things. You can have huge income and negative wealth. Conversely you can have huge wealth and negative income.

It is trivial for wealthy people to eliminate all income if they so desire. Examples:

1. You own a 1000 acre farm, passed down from your great-grandparents. You lease the land to a working farmer, netting 25k/year after property taxes, insurance, etc. A nearby metro area grows and developers offer you 50 million. You can sell and pay10m federal income tax or you can borrow 500k this year against the land's value, borrow another 500k next year, etc. You pay no income tax on that 500k/year and are free to spend it however you want.

2. You've owned and operated a bookstore in SoHo for 40 years. Your take-home is only 40k/year (thanks a lot, Bezos!), but you enjoy running it. Trump and other developers offer 50 million so they can tear down your beloved store and put up a condo tower. Like the farmowner, you can sell out and pay 10m federal income tax or you can borrow 500k/year, live in luxury and pay no income tax while still running your store.

3. You start ClickClock, a wildly popular social media site. You draw no salary, crashing on a friend's couch and eating 'company food'. After the IPO your stock is worth 10 billion. You can pay 20% federal income tax on every share you sell, while reducing your control over the company, or you can keep every share and borrow 50 million per year to buy Lamborghinis, yachts, private islands, etc. All while paying no federal income tax.
 
Pretty much. Musk didn't pay any taxes on his wealth because its all still paper money in Tesla stock. When he sells that stock, he'll pay taxes.

... or he'll never sell that stock. When he dies, the basis will be reset when it passes to his heirs. They'll sell it for 0 profit since the basis reset.