Did you know that about 45% of Americans pay nothing in federal income taxes?
Almost 80 million American households paid zero in federal taxes in 2018. This isn’t an issue of tax avoidance. People who make less than $10,000 a year are exempt, though they still pay payroll and sales taxes.
Many people also benefited from the Tax Cuts and Jobs Act of 2017, which was signed into law in December 2017. It doubled standard deduction for single filers to $12,000 and doubled the estate tax deduction.
The Trump administration’s tax bill enabled more than 2 million additional Americans to escape paying a federal tax bill.
While that sounds like it was by design, it is more of unintended benefit. There is no question that the Tax Cuts and Jobs Act of 2017 benefits the wealthy elite and the vaunted 1% far more.
The rich have been flaunting their ability to shun paying taxes for a very long time. There are law firms that have existed for over a century just for this purpose.
The rich also use donor-advised funds, charities, shell companies, and the manipulation of tax policy to dodge taxes.
Unsurprisingly, there have been proposals to tax the rich more directly and to penalize them for using legal loopholes to get out of paying taxes.
Who really pays taxes?
The United States government collected more than $2.3 trillion in taxes in 2018. As a group, the richest people in the country pay about 70% of all federal taxes in the country.
How much people pay in taxes depends on their income level, tax bracket, and marital status among other factors.
The average American who makes about $50,000 to $70,000 a year usually has about 20% to 25% of their income taxed. People who make over half a million a year might have 27% to 37% of their annual income taxed.
While rich people paying 70% of federal taxes, that figure only applies to income that they willingly reveal. Many rich people use lawyers and political manipulation to hide money and assets from the taxman.
- Exclusive Access: Get Keene Little’s Crypto Wealth Protocol delivered to your inbox!
In fact, many wealthy people have been legally paying about 12% in taxes relative to their income since 2012.
Many millionaires and billionaires use tax havens and the manipulation of international law to pay nothing in taxes on the income they hide from the American government.
All of this can be done legally. These tax-dodging techniques, and more, were recently revealed in the so-called Panama Papers.
The Panama Papers is a journalistic expose that revealed how rich people, celebrities, and corporations use legal machinations to avoid taxes. The, “Panama” in the Panama Papers are named after an offshore firm called Mossack Fonseca, based in Panama.
Such firms are notorious for hiding wealth, setting up shell companies, and manipulating laws in tax-lenient countries to help clients hide as much of their wealth as possible.
Yes, the richest people in America pay about 70% in federal taxes. But really, they are hiding a lot more income, offshore and internationally, that would dramatically inflate their U.S. tax bill.
Every year the United States loses more than $70 billion in taxable revenue because the wealthy and global corporations shift and hide their money in international tax havens.
That number represents almost a fifth of the business tax revenue collected by the United States in a year.
It turns out that hiding $70 billion is chump change. Almost $9 trillion more is hidden in offshore tax havens and international bank accounts by the wealthy on a global scale.
That’s the equivalent of almost 12% of global GDP.
Tax avoidance techniques of the rich
More than 63% of American business profits are generated outside of the United States are made through multinational companies based in tax havens.
These countries tax the rich and global businesses in small or zero percentages. Among them are Bermuda, the Cayman Islands, Guernsey, Ireland, the Isle of Man, Luxembourg, Mauritius, the Netherlands, Singapore, Switzerland, and more.
- YES, sign me up! Market-destroying trades for serious short-term investors that crush the indexes in days, not months or years!
Many rich Americans have ended their American citizenship and have become Singaporean citizens to protect their fortunes from proportional tax bills in recent years.
Some companies, such as Google, transfer operational stewardship of a subsidiary to Ireland. Meanwhile, the operations in Ireland are officially managed in Bermuda.
That way, any revenue generated in Europe through Ireland can then be sent to Bermuda, hidden from American taxation. The technique is much more complicated than that, of course, using shell companies, shifting bank accounts and so on.
Why all of the tax law subterfuge? Because the corporate tax rate in Bermuda is zero.
The rich also use philanthropy to protect their fortunes from taxation. Donor-advised funds allow the rich to give money and assets to charities, hospitals, and schools.
They give away the money but retain control. Charitable endeavors could be made to wait months, years, or decades. Meanwhile, the benefits of tax breaks are immediate.
Doing so might eliminate federal borrowing, trim the deficit, and help pay for social programs. Capital gains taxes, the profits generated from investments, could be taxed more.
Or tax law loopholes could be permanently closed, like the one that allows real estate owners to dodge capital gains taxes by using the profits of one investment to buy another one.
Again, this is easier said than done. For one thing, the wealthy have disposable income dedicated to paying experts to hide their wealth.
For another thing, American politicians are loath to enact legislation to heavily tax the elite.
It’s easy for the wealthy to pay to manipulate tax laws, codes, and policies to their benefit.
Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities and former chief economic adviser to Vice President Joe Biden, agrees.
“There’s this notion that the wealthy use their money to buy politicians… more accurately, it’s that they can buy policy, and specifically, tax policy,” said Bernstein.
“That’s why these egregious loopholes exist, and why it’s so hard to close them.”
While taxing the rich in a fashion proportionately fairer to the rest of us is plausible, it won’t be probable anytime soon. Not while the rest of us are paying taxes on incomes we can’t afford to hide.
Small-cap winners galoreThe big stock market winners share one common attribute: Near the beginning of the ascent of their shares, the companies offer revolutionary products or services, are market leaders in their respective industries, or both. Some big stock market winners that possessed the attributes outlined above are Netflix (NFLX), which we recommended to investors in October 2002; Intuitive Surgical (ISRG), which we bought and recommended in July 2004; Baidu.com (BIDU), which we bought and recommended in August 2006; and MercadoLibre (MELI), which we recommended to investors in October 2010. Get up-to-date small-cap stock picks from David Frazier, editor of Small-Cap Profit Confidential.
Smarter cryptocurrency investmentsThe stock market crash of 2008 was the catalyst for his journey into alternatives. And interestingly, it was the impetus behind the creation of Bitcoin and the blockchain technology behind it. Keene Little wasn’t ready to risk his money yet but he was very curious, so he began charting Bitcoin’s technical patterns. What finally convinced him to dip a toe into digital currencies was seeing that they followed familiar price patterns that could be analyzed and successfully acted on. Now he shares those insights with subscribers to the Crypto Wealth Protocol.