Tax the Rich?

     

Now that the U.S. Senate and House of Representatives have passed tax reform bills, the bills will go to a joint committee of both houses to reconcile the differences before sending the final bill to President Trump for his signature. In the meantime, political commentators and cartoonists are only intensifying their efforts to brand the Republican bills as favoring the rich to the harm of everyone else.

In particular, they point to the potential reduction or removal of the estate tax as a huge benefit to the rich. Anyone who looks at the pie chart to the left will see that the estate tax makes up less than 1% of total annual revenues. Why is this so?

In the first place, I would guess that more than 95% of estates are exempt from the tax because estates under $5 Million are not subject to the tax. Indeed, in the new proposals the exemption will be raised to $11 Million. Only the very, very wealthy are subject to the tax but in most cases, they will pay very little.

When I worked as a financial advisor, it was common to refer to the estate tax as a “voluntary” tax, a tax only paid by those too lazy or stupid to take measures to avoid or minimize it. In fact, there was a host of lawyers and other so-called estate planners who specialized in advising wealthy clients in how to avoid dreaded death taxes. When Congress raised the exemption amount a few years ago, most of these parasites had to find other areas of work.

The very wealthy, both liberal and conservative, often turn to tax-exempt family “foundations” not only to promote their own pet causes but also to avoid estate taxation. We are all familiar with the Clinton, Gates, and Buffett foundations. Just this year wealthy progressive financier George Soros added $18 Billion dollars to his foundation.

Critics of tax reform also argue that lowering the corporate tax rate from 35% to 20% is also a boon for the rich. But if you look at the pie chart again, you will see that corporate taxes make up only about 10% of federal revenues. It should be obvious to all but the most die-hard progressives that any large corporation will use its high powered attorneys and accountants to use every means to reduce its tax burden.

Lowering the tax rate will make many of these tax-avoidance strategies less attractive. As President Trump has pointed out, these companies will have less incentive to relocate their operations overseas to lower tax countries, or to keep their profits overseas.

Moreover, what do companies do if they can keep more of their profits. If they are taxed at a lower rate, they might pay higher salaries or even keep prices down to the benefit of consumers, rich and poor. If they just pay out the profits to shareholders in the form of dividends, those dividends become taxable income to the recipients.

People think that only the rich benefit from corporate profits but stock ownership in this country has spread to millions. Practically everyone receiving a pension check has benefitted from the recent increase in stock prices because most pensions invest heavily in the stock market. Most holders of IRA or 401k accounts need only to check their most recent statements to see how much the upsurge in stock prices has helped them.

One element in the tax code that really helps the rich has so far received little attention from the media. Hedge fund managers have made enormous profits during the Obama administration. These funds are investment companies that in addition to earning high annual management fees also claim 20% of the profits they make for their investors. They can charge such exorbitant fees because they are largely unregulated due to the fact that they are not open to the general public. Only large investors can participate but many small fry do get involved because many state and local pension funds invest in them. A few years ago the pension fund of my own town of Fairfield lost millions because it had entrusted funds to a money manager who, for an annual fee of more than 2% (2% of millions of dollars is a lot of money), merely turned over the money to the infamous Bernie Madoff.

In any event for some reason Congress, whether run by Democrats or Republicans, has allowed these huge hedge fund fees to be taxed at a substantially lower rate than the rate on ordinary income. In 2016 both Donald Trump and Hillary Clinton campaigned against this policy, but so far I have not seen that either party is willing to change it.

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