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Posted June 09, 2021

Sean Ring

By Sean Ring

The Floor is Taxes!

My friend, there are days when you wake up, and you know the world is a better place than it was the day before.

Today is one of those days.

ProPublica released the tax return information on the wealthiest Americans. While the hoi polloi will call for higher taxes and soaking the rich, were going to take the right lessons away from this.

Uncle Carls Advice to a Young Banker

When I asked my Uncle Carl, a former investment banker for Lehman Brothers (RIP), what I should do with my budding banking career, he gave me advice Ive never forgotten.

Find someone your age whos successful at doing what you want to do and copy them. The skillset that made me successful is not the same skillset thatll make you successful.

Its a genius bit of advice thats served me well for 25 years, and I encourage you to avail yourself of it as well.

Today, well amend that advice slightly to do what the rich people are doing, so you can become rich like they are.

One thing I dont like is when the rich hide their secrets, which leads me to Mitt...

Mitt The Tit Romney Lost An Opportunity

Is there a figure in Washington more hateable than Senator Mitt The Tit Romney?

At least Nancy Pelosi is consistently ridiculous. Chuck Schumer is hopelessly inept. AOC is plain stupid.

But Mitt?

This is a man whos got a beautiful wife, five sons, a joint Harvard MBA/JD, ran Bain & Co. and then its spinoff Bain Capital, is a former Governor of Massachusetts, and is now a Senator from Utah. Hes one of a handful of people who were Governor of one state and a Senator from another.

Yet, Romney is easily one of the most unlikeable and suspect members of Congress. A bit of a weasel. He voted to impeach Trump twice and marched with BLM, a bunch of unadulterated Marxists.

But the thing I disliked most about him was his complete aversion to speaking about his wealth. He was plainly uncomfortable about it. I never understood that.

Fine, dont brag. Its unattractive. But when confronted with his 15% tax rate, Romney just ran away.

Quickly, the tax rate on carried interest used to be 15%. Carried interest is private equity jargon for a performance fee. Carried interest is only paid if a private equity fund meets a designated threshold return. As carried interest is a return on investment and not income, its taxed at the capital gains tax rate. Back in the Dubya years, you may remember the CGT rate was 15%.

All this is good. Carried interest can take years to happen, and its not guaranteed. Its risky. I wouldve loved to see Romney explain this to everyone. Not only that, but also to show people how to invest like he did to reap the benefits and to pay less tax. Unfortunately, he chose differently.

But with ProPublicas leak, we have the information we need.

The Higher the Tax, The Lower the Level of Civilization

Taxes are the price we pay for a civilized society. - Oliver Wendell Holmes

Holmes didnt live to see the flourishing of Monaco, Andorra, Lichtenstein, Switzerland, Singapore, Hong Kong, Estonia, the UAE, Belize, the Bahamas, Bahrain, and Qatar. They all look pretty damn civilized to me.

Taxes are the sinews of the state. - Cicero

Thats more like it.

Though he was in favor of taxes, Cicero hit the nail on the head. More taxes, more State. (But not more civilization.) Its the last thing you should want, especially after Bidens awful first five months.

Ultimately, I prefer economist Mark Skousens take:

Taxation is the price we pay for failing to build a civilized society. The higher the tax level, the greater the failure. A centrally planned totalitarian state represents a complete defeat for the civilized world, while a totally voluntary society represents its ultimate success.

If you read the Rude before, you know how much I hate tax. And this is why Im so excited today.

Now, what did ProPublica leak?

The ProPublica Leak Itself

First, its essential to write that I dont condone the leaking of this information and that whoever did should be prosecuted to the fullest extent of the law.

The ProPublica guys wrote a piece on why they felt compelled to leak this information. They write, We are disclosing the tax details of the richest Americans because we believe the public interest in an informed debate outweighs privacy considerations.

I call bullshit.

Theyre publishing it because no newspaper/blog is going to pass up an opportunity like this.

Fine.

Ignoring these disclosures in the name of privacy is silly. So lets find out as much as we can and wield this information to our benefit.

Caveats

The first thing I discover is that the ProPublica guys are not economists. They routinely mistake the income tax for a wealth tax. America doesnt have a wealth tax.

Also, they dont seem to understand that when the Federal Reserve prints money that goes directly into the stock market, people who own stock will get rich out of all proportion to our perceived reality.

Hence, their true tax rate is an absurdity, which they calculate this way:

We compared how much in taxes the 25 richest Americans paid each year to how much Forbes estimated their wealth grew in that same time period.

Were going to call this their true tax rate.

Theres a reason we pay tax on crystallized or realized wealth. Its so we dont pay tax on what could be risky, fleeting paper gains. (And if you dont think AMZN or TSLA is going to fall one of these days, Ive got a bridge over the East River to sell you.)

Lets (Not) Get Outraged!

ProPublica writes, According to Forbes, those 25 people saw their worth rise a collective $401 billion from 2014 to 2018. They paid a total of $13.6 billion in federal income taxes in those five years, the IRS data shows. Thats a staggering sum, but it amounts to a true tax rate of only 3.4%.

Again, that wealth grew because these 25 people own listed companies in a stock market goosed by the Federal Reserves asinine balance sheet expansion. You dont pay tax on that.

But $13.6 billion in tax between 25 people? Thats about $544 million each.

Put it this way, even if they paid 100% of that $401 billion gain in tax, the US debt would be reduced by only 1.823%.

They continue, From 2014 to 2018, such households saw their net worth expand by about $65,000 after taxes on average, mostly due to the rise in the value of their homes. But because the vast bulk of their earnings were salaries, their tax bills were almost as much, nearly $62,000, over that five-year period.

Since they dont state the net worth in 2014, you cant get an accurate growth rate. But If they paid $62,000 over five years, thats $12,400 per year in tax. Not all that much.

Warren Buffett is a Hypocrite

What Im happy to agree with ProPublica on is that Warren Buffett is an ancient hypocrite.

 

But I didnt need their interpretation of his tax payments for that. Buffett has been agitating for higher taxes for years. Why? Because his tax rate is allegedly lower than his secretarys.

Well, Warren, here is the US Treasurys Gift to Reduce the Public Debt page:

https://www.pay.gov/public/form/start/23779454

Feel free to donate anytime.

Oh wait, old Warren explains why he doesnt do that:

I believe the money will be of more use to society if disbursed philanthropically than if it is used to slightly reduce an ever-increasing U.S. debt, he wrote.

Then, Warren, stop trying to get everyone else to pay for your debt reduction plan.

But Theyre Borrowing!

I have these reporters at an advantage because I used to work for a major international bank.

But the fact that these guys are surprised that wealthy people borrow against their wealth shows me they havent got the foggiest idea of how the game is played.

Heck, my erstwhile colleague Robert Kiyosaki shows you how to do this, too!

To wit:

The tax math provides a clear incentive for this. If you own a company and take a huge salary, youll pay 37% in income tax on the bulk of it. Sell stock and youll pay 20% in capital gains tax and lose some control over your company. But take out a loan, and these days youll pay a single-digit interest rate and no tax; since loans must be paid back, the IRS doesnt consider them income. Banks typically require collateral, but the wealthy have plenty of that.

Hey guys, its not just the tax math. Its the fact that the Fed has its foot on the yield curve, making loans so cheap.

Yes, this is called being smart with your money.

Lastly, Theyre Avoiding Inheritance Tax

Tell you what, Im going to do everything I can to leave my son my entire estate and to leave The State nothing but dust. This stance horrifies these reporters.

Its clear, though, from aggregate IRS data, tax research, and what little trickles into the public arena about estate planning of the wealthy that they can readily escape turning over almost half of the value of their estates. Many of the richest create foundations for philanthropic giving, which provide large charitable tax deductions during their lifetimes and bypass the estate tax when they die.

Wealth managers offer clients a range of opaque and complicated trusts that allow the wealthiest Americans to give large sums to their heirs without paying estate taxes. The IRS data obtained by ProPublica gives some insight into the ultrawealthys estate planning, showing hundreds of these trusts.

The result is that large fortunes can pass largely intact from one generation to the next. Of the 25 richest people in America today, about a quarter are heirs: three are Waltons, two are scions of the Mars candy fortune, and one is the son of Este Lauder.

The inheritance tax is perhaps the most unethical and immoral tax there is. Do everything you can to avoid it. And the fact that only 6 of the 25 wealthiest people in America inherited their wealth shows you the system hasnt ossified.

What Can You Do?

You dont have to be Elon Musk or Jeff Bezos to better your financial situation. Here are some simple steps I recommend to get started:

    1. Save every receipt from every item you buy. Some apps let you take pictures of the receipts, so you dont get stuck with shoeboxes of them. Why do this? Because if youre not a tax expert, you probably dont know whats deductible and whats not. Heres a list of expense apps. So save them all and
    2. Hire an accountant. If you dont have an accountant, get one. If you dont have an extensive portfolio, get a local guy. Youll know when you need a more experienced one. But for now, call a few up. Say, my goal is for my accountant to save me more than I pay him. The keen ones are the ones you decide between. Then give them all your receipts and any other pertinent information (such as using a room in your house as an office, your car as a sales vehicle, etc.). And then let them get to work.
    3. Talk to a lawyer. As you get bigger and wealthier, lawyers come in handy. Structuring companies, trusts, and other tax wrappers are their game.
    4. Get a side hustle. If youve already got a skill thats in demand, great. Get a webpage and start selling yourself. The feeling of convincing someone to pay you for your work and then successfully delivering is intoxicating. It also opens up a whole slew of tax advantages. If youre currently a PAYE employee, this is your ticket into entrepreneurship. It may take a year or two, but its worth it. If you dont already have a skill, you know what youre secretly interested in doing. Learn that skill here or here or here. You can learn much about it for free.
    5. Learn to manage your investments. The banksters of today are only interested in fees. If youre interested in growing your wealth, you need to learn how to do it yourself. Fall down this rabbit hole. Dont waste time on hobbies when you can make money with this skill.

Well, thats all Ive got today. Apologies for the long Rude, but I was excited.

And remember: dont envy those rich dudes. Instead, become a rich dude, yourself.

All the best,

Sean

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