Proponents of bigger government celebrate a tax-avoider (Yvon Chouinard, not Bill Gates this time)

The newspaper that says government should be bigger and that rich people should pay their fair share to fund that bigger government celebrates a billionaire who will pay essentially nothing at all in tax… “Billionaire No More: Patagonia Founder Gives Away the Company” (nytimes):

Rather than selling the company or taking it public, Mr. Chouinard, his wife and two adult children have transferred their ownership of Patagonia, valued at about $3 billion, to a specially designed trust and a nonprofit organization. They were created to preserve the company’s independence and ensure that all of its profits — some $100 million a year — are used to combat climate change and protect undeveloped land around the globe. … The trust, which will be overseen by members of the family and their closest advisers,

(“overseen by members of the family” mean that the trust can pay for almost everything that the family members might want, e.g., Gulfstream charter to Switzerland to hang out at Davos, rent a luxury apartment for a month in Paris to meet with others who are interested in climate change, etc.)

If he and his family members had sold $3 billion in shares while living in California, for example, they would have paid Federal income tax of 20%, Obamacare tax of 3.8%, and California state income tax of 13.3%. The 37.1% total rate would have yielded $1.11 billion in funding for all of the great things that Joe Biden is doing (e.g., paid for 1/500th of the student loan forgiveness scheme).

Instead, the government will get almost nothing and the money will be spent in ways over which citizens of the U.S. have no influence.

Even journalists who claim that they are experts on money seem to have some blind spots. “Patagonia Billionaire Who Gave Up Company Skirts $700 Million Tax Hit” (Bloomberg) does not consider the Obamacare and state income tax liabilities:

Still, the moves mean Chouinard won’t have to pay the federal capital gains taxes he would have owed had he sold the company, an option he said was under consideration. On a $3 billion sale, that bill could be more than $700 million. It also helps Chouinard avoid the US estate and gift tax, which is a 40% levy on large fortunes when they’re transferred to heirs.

From my 2019 Denver post, Patagonia uses backlit sidewalk billboards to inform downtown pedestrians that young good-looking American humans are facing extinction (which is why we need to bring in migrants?):

A Democrat-voting aircraft-owning friend, with the carbon footprint of an Argentinosaurus, responded to the Patagonia tax-avoidance scheme with “Loved reading that. Hurray for Chouinard”. Unless he assumes that government spending is going to be reduced, he loves that he will be paying the tax that Chouinard isn’t paying? He loves that none of the Chouinard fortune will ever be used to build a road that he can drive on to get to his airplane, a runway that he can use to take off in his airplane, or an air traffic control center that he can talk to? (admittedly much of the aviation infrastructure in the U.S. is funded separately via user fee taxes on aviation fuel and airline tickets)

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Can Black Americans get a huge discount on property tax?

“Home Appraised With a Black Owner: $472,000. With a White Owner: $750,000.” (New York Times, August 18):

Last summer, Nathan Connolly and his wife, Shani Mott, welcomed an appraiser into their house in Baltimore, hoping to take advantage of historically low interest rates and refinance their mortgage.

But 20/20 Valuations, a Maryland appraisal company, put the home’s value at $472,000, and in turn, loanDepot, a mortgage lender, denied the couple a refinance loan.

Dr. Connolly said he knew why: He, his wife and three children, aged 15, 12 and 9, are Black. A professor of history at Johns Hopkins University, Dr. Connolly is an expert on redlining and the legacy of white supremacy in American cities, and much of his research focuses on the role of race in the housing market.

Months after that first appraisal, the couple applied for another refinance loan, removed family photos and had a white male colleague — another Johns Hopkins professor — stand in for them. The second appraiser valued the house at $750,000.

The industry standard, in other words, if we are to believe the Newspaper of Science, is to apply a 37 percent discount to a Black-occupied house.

An appraised-low house is a curse if you’re the typical spend-like-a-drug-dealer American and want to pull the last dollar of home equity out to spend on bling. But an appraised-low house is a blessing if you’re faced with paying the annual property tax bill.

I’m wondering what this means for sharing out the property tax burden in the U.S. Wouldn’t most members of the laptop class eagerly grab their one Black friend to stand in for them when the local tax assessor comes buy to set the house’s value for property tax purposes? Let’s consider the appraisal discrepancy that affected Dr. Connolly, M.D., above: $278,000. At Baltimore’s 2.25 percent property tax rate, a subtraction of $278,000 in assessed value would save $62,550 over a 10-year period.

Here’s some new construction near the Stuart, Florida airport, maybe evidence that someone managed the PPP and other coronarelief programs correctly. I’m betting that he/she/ze/they would pay good money to a Black family willing to move in for a couple of hours while Martin County’s assessors try to figure out how much to hit them for.

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Do the 87,000 new IRS agents boost the attractiveness of welfare relative to work?

One of the features of the latest spending bill from Democrats in Congress and Joe Biden is the hiring of 87,000 IRS agents (or 30,000 new agents, depending on whom you believe). I’m wondering if this tips the scales a bit in favor of not working. If you’re in public housing, on Medicaid, shopping via SNAP/EBT, talking on an Obamaphone, and playing Xbox via the new taxpayer-funded broadband benefit, you won’t have to deal with the IRS in any way, regardless of how many agents are hired.

Back in 2013, before all of the coronapanic-related enhancements, the welfare system yielded more spending power than working at the median wage (i.e., being a chump) in at least some states. Table 4 from CATO:

Obviously, the typical American will still be unlikely to get audited in any given year, but the greater risk of an audit, with all of the expense that is entailed even when no errors are found, could be reasonably expected to have at least a small effect on labor force participation, no? Especially for the declining percentage of Americans who are willing to incur the risk of starting their own business (See Inc. and “The decline of American entrepreneurship — in five charts” (Washington Post, 2015)). Speaking of labor force participation rate, let’s check the chart:

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Big Obamacare tax increase this year due to inflation

The Obamacare tax was imposed in 2013 on “net investment income” in order to shovel more money from Americans who don’t work in health care to Americans who do work in health care. Capital gains from selling a house, interest, dividends, etc. are hit with an extra 3.8 percent federal tax. For an individual filer, the first $200,000 is exempt, but this amount is not indexed to inflation. The Obamacare law was signed in March 2010. If the threshold had been indexed to the official CPI, it would be over $260,000 today. So the government is collecting an extra $2,280 from everyone who would have been subject to this tax as originally envisioned. Given that the main reason an average taxpayer would be hit by this tax is selling a house, what if we instead indexed this to the average price of a house? It was $275,000 in March 2010 (St. Louis Fed) and is about $500,000 today. So the $200,000 threshold should be $367,000.

From a recent trip to Dezerland Orlando (huge hit with the kids!), the Dr. Dude pinball machine that can serve as a helpful guide to where money from this tax is being spent:

Related:

  • “Homes Earned More for Owners Than Their Jobs Last Year” (WSJ): Increase in value of typical U.S. home exceeded median worker income for first time, Zillow says
  • “Here’s how rising inflation may lead to higher tax bills” (CNBC, Nov 2021): “It’s a hodgepodge of things that get left out,” said certified financial planner Larry Harris, director of tax services at Parsec Financial in Asheville, North Carolina. “And it’s not just hitting wealthy taxpayers.” For example, couples filing together selling their primary home may exclude up to $500,000 of profit from capital gains taxes ($250,000 for single filers), provided they meet the ownership and use tests. These amounts haven’t changed since 1997, despite median home sales prices more than doubling over the past 20 years, and property values have outpaced wages over the past decade.
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Your Christmas gift to the richest people in the U.S.

If you’re concerned that you haven’t spent enough on Christmas this year, the Wall Street Journal reassures you that, via your federal income tax payments, you’re subsidizing some of America’s richest private equity partners, $1,500/hour lawyers, etc. “High-Income Business Owners Escape $10,000 Tax Deduction Cap Using Path Built by States, Trump Administration” (12/6):

More than 20 states created workarounds to the limit, and New York’s law firms and private-equity firms are signing up

Here’s how it works. Normally, so-called pass-through businesses such as partnerships and S corporations don’t pay taxes themselves. Instead, they pass earnings through to their owners, who report income on individual tax returns. That subjects them to state individual income taxes—and the federal limit on deducting more than $10,000, created in the 2017 tax law.

Details vary by state, but the workaround flips that concept. The states impose taxes—often optional—on pass-through entities that are roughly equal to their owners’ state income taxes. Those taxes then get deducted before income flows to the business owners.

The laws then use tax credits or other mechanisms to absolve owners of their individual income-tax liabilities from business income. Thus, they satisfy state income-tax obligations without generating individual state income-tax deductions subject to the federal cap.

In these systems, state revenue is virtually unchanged, because the entity-level tax replaces personal income taxes. Business owners win, because every $100,000 of state taxes that go from nondeductible to deductible yields up to $37,000 in net gain on federal income-tax returns. The federal government loses money.

In New Jersey, pass-through businesses reported $1.3 billion in entity-level liability for the tax’s first year in 2020, suggesting an equivalent amount of federal deductions that might have otherwise been disallowed. In New York, more than 95,000 pass-through entities opted into the tax for 2021 before the Oct. 15 deadline.

“It’s really a slam dunk,” said Phil London, an accountant and partner emeritus at Wiss & Co. in New York, who said he has seen the owners of one business save $1.5 million and expects law and accounting firms to use the workaround. “The larger-income entities and real-estate investors and real-estate operators, they’re going to benefit from it.”

Private-equity firms have been particularly interested, said Jess Morgan, a senior manager at Ernst & Young LLP. And some businesses have restructured themselves to take maximum advantage of the benefit, she said.

After rejecting other workarounds, the Treasury Department blessed these a few days after the 2020 election, citing a footnote in a committee report from the 2017 law and a handful of entity-level taxes that predated 2017. The Trump administration, which had pressed for the $10,000 cap, offered the path out of it.

In other words, many of the richest Americans in high-tax states will be able to deduct nearly all of what would have been their state tax liability, thus keeping the subsidies flowing from workers in low-tax states and from ordinary W-2 slaves who can’t work around what was advertised as the law.

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Bidenflation will make it easier for rich people to avoid estate tax?

President Biden promised chicken soup for our envious souls in the form of taking money away from rich people. But the inflation associated with Big Government and Bigger Government is already making rich corporate executives richer (easier to meet targets expressed in nominal dollars; see Is Elon Musk one of the bigger winners from inflation?). A recent Bloomberg article makes it look as though inflation also makes it much easier to work around the estate tax. From “The Hidden Ways the Ultrarich Pass Wealth to Their Heirs Tax-Free”:

First, Knight cycled millions of Nike shares through a series of trusts that effectively moved billions of dollars’ worth of stock price gains from his estate to his heirs, tax-free. Then he put most of his remaining shares into a vehicle called Swoosh LLC and let a trust controlled by his son, Travis, purchase a stake at a big discount. The chain of trusts let hundreds of millions of dollars in dividends flow to Knight’s heirs with him covering the income taxes. All this planning also ensured his family would retain control of his sneaker empire.

The foundation of Knight’s strategy is the grantor-retained annuity trust, or GRAT. His first step was to set up nine GRATs, which successfully transferred Nike shares now worth $6.1 billion to heirs tax-free from 2009 to 2016. Two other GRATs that show up in public filings received about $970 million of unspecified assets from Knight. The filings don’t disclose the ultimate beneficiaries, but Lord says that, based on how family wealth transfers usually work, they might include the family of Knight’s late son, Matthew, who died in 2004.

Officially, gifts are taxable: If you send someone more than $15,000 per year, you’re supposed to file a separate gift tax return, with the total counting toward your $11.7 million lifetime estate-and-gift-tax exemption. (Double that for married couples.) Once you reach that threshold, you must pay a 40% levy. But giving heirs the right to profit, risk-free, from your investments? Not a taxable gift if you route it through a GRAT. “It looks like the heirs didn’t receive anything of value, but in fact they have been given all of the upside growth potential,” says Ray Madoff, a law professor at Boston College.

[section on the grantor-retained annuity trust machinery]

Put in assets, such as stocks, that have a good chance of making money over time. Technically this isn’t a taxable gift, as long as the GRAT is set to repay you the initial value of the assets in the form of an annuity, usually over two or three years.

If the assets go up in value during this period, the gains can stay in the GRAT, minus a (usually low) minimum rate tied to interest rates. Whatever’s left goes to the heirs tax-free.

If the assets drop in value during that time, your heirs are unaffected. You can pretend the GRAT never existed and try again. The more GRATs you set up—and some of the ultrarich open one monthly—the higher the chance some will succeed.

In our current inflationary environment, it is a lot more likely that assets in the trust will go up in value (expressed in nominal dollars rather than real (inflation-adjusted)). Thus, the more money President Biden and the Democrats promise to spend, the richer the children and grandchildren of today’s super rich should become. American tax law in general and estate-/trust-related law in particular are so complex that it takes a $600/hour lawyer to figure it all out and a layperson’s head will be left spinning, but I think the Bloomberg article is worth reading.

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