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The billionaire tax formula: Buy, borrow and die

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It comes as no surprise to learn that America's richest 25 people are paying negligible amounts of tax. Following a leak by ProPublica, the extent of tax mitigation strategies by the mega-rich have been revealed.

9th Jun 2021
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You have to feel sorry for America’s most high-profile multibillionaires.

As we discovered towards the end of last week, President Biden is urging the G7 to attack their corporate structures by implementing a minimum 15% corporation tax rate around the world. The plan is that this will then be coupled with a complex formula for allocating tax to countries where profits are made.

As if that were not bad enough, somebody has leaked tax details of America’s richest 25 to investigative journalists ProPublica, a website that seems only too happy to share the information with the world – thus embarrassing the likes of Elon Musk, Bill Gates, Jeff Bezos and Warren Buffett, some of the richest men in the world.

An interview on BBC Radio Four’s Today Programme at around 7.15 on 9 June was equivalent to a cold wake-up shower.

These enterprising entrepreneurs cannot be that rich since, in the last decade or so, both faced years in which they did not pay a single cent in taxes. And they did so in full compliance with the law.

The trick is to keep your income at very low levels (for them, this probably means a few million dollars per annum, but you get the point) while watching your wealth grow at incredible levels, in some cases by tens of billions of dollars a year.

Like the UK, the United States does not have any form of wealth tax, so the mega-rich can get mega-richer without having to trouble the IRS.

The snappy slogan at the head of this column is a direct quote from ProPublica’s Jesse Eisinger that aptly summarises the strategy.

Put simply, rather than withdrawing any funds by way of remuneration or other taxable income, multibillionaires or selling assets, the correct strategy is to borrow against wealth at today’s almost unprecedentedly low interest rates, claim tax relief on the interest and, in doing so, eliminate any significant tax liabilities.

Presumably, the tactic is then to put all of your assets into trust, thereby ensuring that even on death little or no taxes will be due.

To be fair to the likes of Warren Buffett and Michael Bloomberg, whose news organisation ironically felt obliged to report the story, almost all of these individuals make stunningly large amounts of money available to charities, which some might suggest helps to justify a lower effective tax rate.

Even so, when ProPublica announces that the average tax rate for America’s top 25 richest individuals was a mere 3.4% of wealth, one has to wonder. In addition, don’t forget that these are also the people running those companies that are so adept at avoiding taxes.

There is another way of viewing this story. Without the efforts of the top experts in the tax avoidance industry, led by those in our own profession, the people squirming under the spotlight following these revelations would almost certainly be paying many more billions in taxes than has proved to be the case.

Ironically, if there was ever an all-out attack on the mega-rich, those advisers would merely switch their roles and probably make almost as much money in defence rather than offence.

A further question must be whether the same is happening in the United Kingdom, even though our tax system is set up in a rather different fashion from that in the United States.

It must be highly likely that if similar information was leaked on this side of the Atlantic, we would discover surprisingly low tax rates, especially if the comparison was made with overall wealth rather than income.

In a separate revelation that just happened to coincide with this story, there are news reports suggesting that, in addition to supporting crown dependencies that just happen to facilitate fraud and tax avoidance and quite possibly evasion, the United Kingdom is proving to be a safe haven for corrupt oligarchs from all points east, despite assertions at previous G8 and G20 that our country would be in the vanguard of the fight against corruption.

Keep tuned in for further instalments of this wonderful soap opera.

Replies (6)

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By Sheepy306
09th Jun 2021 11:53

I often find percentages in news stories frustrating as they regularly have little or no context. It would be helpful if they quoted, in this example, what the average tax rate as a percentage of wealth was for the typical US citizen.

For example whilst 3.4% of net wealth seems very small, isn't it roughly equivalent to someone earning £25k per annum (paying about £4.3k in tax) who has accumulated say £125k equity in their residential house (excluding any other investments, motor vehicles, pension pot, business, inheritance etc)?

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By Justin Bryant
09th Jun 2021 13:56

I'm not sure why this is suddenly news. It's been like this for as long as I've been practicing tax (nearly 30 years now) and the leak merely confirms what we already know.

It's just human nature to avoid tax if you can. For example, if the Isle of Wight suddenly declared independence and established itself as an international tax haven (like Monaco), do you think property prices there would go up or down as a result?

The only people to blame are the politicians who allow it, but then if they didn't allow it the rich would just move elsewhere wouldn't they (as in my above example)?

EU countries are currently fighting one another over attracting the wealthy with tax friendly golden investor visas etc. e.g. Portugal where you just need around £350k to buy a local villa there I believe.

Similar thing going on here with UK attracting financial services companies with low tax: https://www.ft.com/content/4ed18830-f561-4291-8db5-c3c1fa86c1b8?utm_sour...

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Maytuna
By DJKL
09th Jun 2021 17:22

I find this a bit rough on The Gates and Buffet and no doubt some of the others, their gifts to charity have been massive.

I can also say without fear that as a higher rates Scottish taxpayer and a normal rate Scottish taxpayer we pay far less than 3% of our net worth in Income Tax/NI every year (though if we added in the other taxes we pay it could creep reasonably close ( Council Tax, Vat, IPT , RFL for the cars etc)

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By Duhamel
10th Jun 2021 20:08

I find this surprisingly misleading. Of course tax v wealth is low for billionaires, because (as you state) there isn’t a tax on wealth.

What did you expect?

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By Ammie
11th Jun 2021 10:15

None of us are surprised at all, but what I find interesting is the content of the penultimate paragraph.

It would suggest that the continual pressing of MLR compliance issues, portrayed as the solution to combating fraud etc would appear to be very short in serving its purpose, although I would add doing very well in keeping us busy! I would have thought that the size of the numbers being thrown about would keep the NCA pretty busy investigating. If that is the case, maybe that might explain why it would appear that a significant amount of lower level SAR reporting seems to disappear into the abyss.

Sorry, off point, I know.

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By Chris Pittock
14th Jun 2021 13:08

I am more interested in the second paragraph "allocating Tax to countries where profits are made". If I have followed correctly, this is just Tax on 20% of the Profits and only applies to companies with a NP of over 10%! The chancellor seems to feel this is a good result, but surely it falls miles short? (a) Why only apply it to those earning over 10% (e.g. Amazon made less than 10%) (b) Why on only 20% of the profits?

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