Why can’t a middle class individual use the same tax avoidance methods as the ultra rich to pay little to no income taxes?
In: Economics
The biggest reason is that banks won’t let you borrow a hundred million dollars.
If you take out a loan, any kind of loan, the interest you pay is deducted from your taxes.
So if you pay more in interest than the income your tax bill is based on, then you end up paying zero taxes.
Now imagine you own shares worth 150 billion dollars, and while you do have a regular income, it’s nowhere near that big. The shares are where your wealth is at.
Now, like all the other super-rich, you’ve decided that you need your own private space program. You can’t buy one of those with your regular income, and you don’t want to have to sell a couple billion worth of shares (both because that would leave you with fewer shares, but also because you’d then have to pay taxes on the sale, and as a multi-billionaire you really think that “contributing to society” is beneath you. Taxes are for poor people!)
So instead, you go to a bank, and say “Hi, I’d like to borrow a billion dollars. I can put up a billion dollars’ worth of shares as collateral, so there’s really no risk to you”
To the banks, this is a really good deal, so they accept, and lend you a billion dollars at a very low interest rate.
But with a loan that size, even a low interest adds up, so you end up paying quite a lot in interest, possibly more than your actual income. So you declare this as a tax deductable, and the taxman goes “oh no, it must be so hard being you. Don’t worry, you won’t have to pay any taxes”.
So at the end of the day, you’ve paid a bit of money to the bank, sure, but you got to keep all of your shares, and you avoided those icky taxes.
The reason normal people can’t do the same is that we don’t have enough wealth to be able to take out such huge loans. Even if you buy a house, the interest you pay on your mortgage is much smaller than your total annual income, so the resulting deductable only cancels out a small part of your taxes, not all of them.
TL;DR: Middle class people are primarily taxed on income, which has about the highest tax rate. The rich are being primarily taxed on investment income, which is almost always less (and comes with assorted deduction and deferment options).
Mostly because said methods do not exist in the first place, but also because people confuse income and wealth. If you use 500.000 to build a company, and over the year said company is worth 500.000.000, you do not have any income, just ownership of said company. That is wealth.
Sell parts of that wealth and you will pay taxes on it.
“Journalists” like to talk wealth like it is income, but it is not. They of course never go into details, as that would destroy the narrative they are trying to sell.
Everyone can use the exact same “tax avoidance methods”.
BTW what blipsman says about conference is also a sure way to get attention from the IRS. That is illegal and of course well monitored, but it is another well believed story that people propagate.
Note: I am not rich. And I know that because I also wanted to reduce taxes, so I looked into it.
They can. They can treat their income, losses, and wealth the exact same way the ultra rich do. The key is understanding the difference between wealth and income and which one is taxed. If I own a billion dollars worth of stock yet had zero income in 2020 what is my income tax burden? Zero. Hell I might even be able to get various types of income based welfare.
Not an economist but if you own a business you can put down a lot of personal things as a business expense. Eg, fancy new car, yea I need to be able to travel from site to site for meetings. Also I need to meet a client in hawaii so my vacation plane tickets are now a business expense
You could start a small business and then invest everything you earn back into the business.
The problem would be where do you find money to live off of? I guess you could live off your parents or your gf/bf/spouse.
Maybe you could own a restaurant and get all your food from the kitchen, then sleep in the back office. Sounds like a shitty life.
The offshore method requires a lot of money to set up. This applies to business owners or brand owners of the super rich. They pay to set up a business in a tax haven (e.g. Panama) and pay lawyers to make that business (in the tax haven) the legal owner of the IP. All the profits are given to this Panama entity as the legal owner of the IP. The business in the USA doesn’t make any profit because they are paying the Panama business a “fee” for the right of using the brand/business assets owned by the company in Panama.
This is how they avoid making tax in the USA and other countries they operate. They then pay themselves a “wage” for being on the board of both companies.
The middle class do not have access to this sort of set-up.
Jeff Bezos has $$$$$$$$$$$$$$$$$$$$$$$$$$$$$
he can afford to spend $$$$ on lawyers and accountants in order to save $$$$$$$ in taxes
you and I have $$
we cannot afford to spend $$$$ on lawyers and accountants to save $ on taxes
Because most people pay little to no taxes and a such have almost no taxes to avoid.
No tax = no way to avoid the tax
Another reason is that the rich often invest the profits from their business back into that business, or another business, which deducts it from their income because they aren’t profits anymore. The average person can’t invest half their money into a profitable business they own because they don’t own a business. There are plenty of people who own a small business, but many of them are profiting not much more than minimum wage per hour after all the time and efforts they put into their business is factored. Some of them are earning less than minimum wage even, before they call it quits. Why invest your valuable profits into your business when your business isn’t that profitable?
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