Agreed, it's very silly. No one attacks people in the upper middle class for using mortgage deductions, tax advantaged investment vehicles (ie 401Ks), education accounts, tax loss harvesting etc to minimize tax burden; however, whenever a wealthy person tries to minimize their tax burden, they are immediately judged. It is not reasonable to state that one group of people can take advantage of tax code incentives and other groups cannnot.

Middle class folks who are using the mortgage deduction generally use it exactly as intended. They don't have an army of accountants on retainer to figure out how to game the tax code and accomplish things that weren't really intended.

The example that always sticks in my head- maybe this isn't true, but I've heard there are strategies of buying failing companies for pennies, shuttering them, and then writing off their losses on your own taxes. You incurred no risk, you lost no money, and now you pay no taxes. Whether it's actually intended to happen that way, it doesn't seem right, and ordinary people can't do it.

Anyway, I'm not an accountant, but the upset over the tax exploits of the wealthy revolve around the concern that they are managing to exercise the tax code in a way that was never intended to pay less than they were meant to owe. Middle class folks don't wind up in the crosshairs because they generally file very ordinary returns, following both the letter as well as the spirit.

> The example that always sticks in my head- maybe this isn't true, but I've heard there are strategies of buying failing companies for pennies, shuttering them, and then writing off their losses on your own taxes. You incurred no risk, you lost no money, and now you pay no taxes. Whether it's actually intended to happen that way, it doesn't seem right, and ordinary people can't do it.

That's the problem with most of these situations -- people don't understand what's really happening.

Suppose you have a company that started off with $25 million thinking it would turn it into fifty million, but really it turned it into five million. Then the company is still worth $5 million dollars, right? Except that it has a $20M tax loss, which is worth something. When other people have profits they're paying a 35% tax rate on, the tax loss has a market value of $7M, so the company is actually worth $12M.

Which means that's what richie rich who wants to use the tax loss has to pay for it, since the seller can shop the tax loss to the highest bidder and get close to the full value for it. The money isn't going to the rich guy, it's going to the guy with the tax loss.

Which means it's a rule that helps the little guy. If you take a risk and fail, it allows you to at least recover as much of your investment as the big guy with diversified investments would have had as a tax deduction -- i.e. it prevents creating a disadvantage when the little guy takes a risk vs. the big guy. And if you have creditors, the buyer has to make them whole in order to take the tax loss, which makes them more likely to lend to you to begin with.

But people see the result that rich people are getting a tax deduction and clamor to get rid of the rule.

If it actually worked how you describe, it wouldn't happen. As the market value approaches the expected benefit, there becomes no point.

I gather it's a strong buyer's market, in which case this isn't really the saviour of the little guy.

Also worth considering, if these loss deductions always find their way to the guy with the highest marginal tax rate- is that really working as intended?

> If it actually worked how you describe, it wouldn't happen. As the market value approaches the expected benefit, there becomes no point.

If you pay $6.9M for $7M in lower taxes, you make $100,000 for free and the little guy recovers $6.9M. Then one of the other million companies with net profit realizes they can net $90,000 by offering $6.91M. This is not what a buyer's market looks like.

Obviously no one is going to offer exactly $7M because they have to cover the transaction costs etc., but that's not even profit -- if they offer $6.95M because they have $40,000 in transaction costs, they're only making $10,000, but they still do it because they're still making $10,000. Until someone else is willing to make $5000.

It's a seller's market because there are more companies with net profits than net losses.

> Also worth considering, if these loss deductions always find their way to the guy with the highest marginal tax rate- is that really working as intended?

This one of the many reasons why graduated tax rates are inefficient as compared with something like flat rate + UBI (which can be equally progressive but doesn't have this problem), because it works that way for everything. The same thing applies to losses incurred directly by the big guy. Or if you create a deduction for green cars, someone paying a 35% marginal rate gets more from buying the same car than someone paying 15%.

But that doesn't apply to corporations anyway. Corporate tax rates largely aren't based on income. If they were, splitting an operation into multiple corporate entities would lower the tax rate and then everybody would do that.

> But people see the result that rich people are getting a tax deduction and clamor to get rid of the rule.

The big problem is that people see and remember companies like Toys R US and Guitar Center that would be JUST FINE if companies like Bain capital hadn't loaded them with debt to pile in tax writeoffs.

> The big problem is that people see and remember companies like Toys R US and Guitar Center that would be JUST FINE if companies like Bain capital hadn't loaded them with debt to pile in tax writeoffs.

Except that their strategy had nothing to do with tax write offs.

In theory what they were doing is borrowing money to buy an ailing company and turn it around, and as long as they succeeded they could have serviced the debt.

What they actually did was fail to turn the company around while charging it hundreds of millions in consulting fees, until it finally collapsed.

The way things were set up, if they succeeded in turning the company around, they would get the profit in excess of the interest. If they failed, they still get all their consulting fees and the lenders are stuck trying to recover their loan principal in bankruptcy.

That situation creates terrible incentives. Either they can be lazy and just collect consulting fees for doing nothing, or they can take big risks with house money and cash in if it pays off or walk away if it doesn't. The people who lent them the money were nuts. They would have been better off buying the company for themselves.

You need to read up the history of the 401k.[1]

It was an obscure part of the tax code that was never intended to be a tax-deferred saving vehicle until some guy named Ted Benna figured it out. He even suggested it to other clients and they said "no, the IRS will never buy it".

So is your argument that anyone using a 401k is a "greedy tax cheat"?

[1]https://learnvest.com/article/your-401k-when-it-was-invented...

Nearly forty years ago that was the case. Today it's expressly intended to be used that way, the gov't even heavily promotes it.

> They don't have an army of accountants on retainer to figure out how to game the tax code and accomplish things that weren't really intended.

Even that doesn’t sound that bad to me. All of those people have a job, are being paid and are also paying taxes.

Also that sounds like a tax code bug and not a rich people problem. The government is allowed to collect exactly the minimum required by law and nothing more.

>>Also that sounds like a tax code bug and not a rich people problem. The government is allowed to collect exactly the minimum required by law and nothing more.

Not to be "that guy" but who do you think is writing the tax code, if not rich people and the government officials they help fund? Of course it's a rich people problem, or rather a rich people solution.

That strategy works in some countries, not in others. Not sure about the US. In certain countries a profitable company can acquire a company with carry forward tax losses, and by merging both you can offset profits from the profitable company with the losses of the unprofitable one.

Not exactly extreme tax avoidance I'd say. This is quite a well known mechanism.

Do you have any more info on the “buying failing businesses” strategy?

A

i'm also curious. unless i'm not understanding something, your tax writeoff could not exceed your cost basis on the purchase of the business, making the maneuver a net loss.

Tech startup A is capitalised with $1m. Burns through $1m, left with $0 in the bank, now has a million dollars in carry forward tax losses. That means you can make a million dollars without paying taxes. At a 21% corporate tax rate, that's $210,000 in taxes you'd pay on a $1m profit if you didn't have the carry forward loss.

How much are the shares of that shell worth if you can use the tax losses to offset profits of a different, profitable business? Somewhere between $0 and $210,000.

sure, but aren't you still out the original $1mm?

it looks like in your example you end up with $1mm, since you didn't have to pay tax on the profits of company B. but if you had just kept the original million and paid tax on B's profits, you would have ~1.8mm? or are you implying that you can buy company A for less than the market cap in the first place?

Yes, the owners of company A can sell their shares to profitable company B for an amount between $0 and $210,000. Obviously you wouldn't burn a million to create tax losses.

Remember: this company has $0 in the bank. It's essentially the same as a newly incorporated company, but with tax losses. There would generally be a discount on the value of the tax loss due to historical liability risks of the previous operating business.

The things written above are highly simplified though, and might not give a completely accurate reflection of the situation. There are likely some anti avoidance rules in place to stop this behavior. But this again depends on the country.

Billionaire John Malone (who hates taxes) talks a bit about tax in this business talk at a university: https://youtu.be/v5QfCLeloEg?t=2174.

Also this: https://www.businessinsider.com/what-liberty-really-loves-ab...

"There are some catches here. To use the NOLs (net operating losses), Sirius can't undergo a full change in control for three years. So Malone has to bide his time with his 40% for three years before scarfing up the rest of the company."

This is one such anti avoidance mechanism.

By being smart about taxes, he essentially got that business for free.

ah okay, thanks for the lesson.

The person who buys the failed business is not the same person who put in the original $1M.

Those tax breaks all sound like they benefit the middle class, even though they do mostly benefit the upper middle class.

But are you surprised that people are more willing to accept tax breaks on the middle class over the rich?

> Agreed, it's very silly. No one attacks people in the upper middle class for using mortgage deductions, tax advantaged investment vehicles (ie 401Ks), education accounts, tax loss harvesting etc to minimize tax burden; however, whenever a wealthy person tries to minimize their tax burden, they are immediately jumped on. It can't be ok for one group of people to take advantage of tax incentives and not others.

I don't like tax credits and deductions at all. I think all of these things are an additional burden on the lazy and the stupid (like me). Using taxes to encourage the public to do something or not do something doesn't even make sense for the political party that keeps harping about making taxes simpler.

Personally, I think all businesses should pay taxes on total revenue. I don't give two ships if you had a revenue of $2B and expenses of $5B. You owe taxes on that $2B. If your business model is low margin, that's your problem. No credits. No deductions. No deferrals.

The current policy isn't based on fairness or logic. It is simply based on who can get their way and by how much.

Taxing businesses on total revenue would prohibit entire classes of businesses, for example stock brokerages, bond market makers, ebay, and amazon's 3rd party marketplace. And did you know that grocery stores are low margin?

Hell, if you average them over the economic cycle, airlines and car production are low margin.

i'm curious, what do you think would actually happen if we taxed corporate revenue instead of profits?

the effect of a particular tax can be pretty hard to figure out. just because the tax is levied against a certain company or individual doesn't necessarily mean they actually bear the burden of that tax; depending on the situation, they may be able to pass off the burden to someone else entirely. in general though, you can think of taxes as discouraging a particular activity/transaction.

if you directly slap a tax on revenue, you are basically putting the brakes on all economic activity. low margin businesses are probably hit harder than higher margin businesses, but keep in mind that the profitability of the average business varies a lot by industry, so you run the risk of putting entire sectors underwater. unless they are able to pass the tax on to their customers, a grocery store is going to be hit a lot harder by this tax than a semiconductor company, and people are going to be less likely to invest in them. taxing corporate profit is somewhat perverse in the same way, since it serves to discourage efficient allocation of capital, but it does have the nice side effect that it increases the incentivize for companies to spend more tax free dollars on things like employee benefits and wages.

in my opinion, we should probably not tax corporations at all. ultimately all corporate revenue turns into either income for employees or capital gains for investors, so just tax these (progressively) and hike the rates. while we're at it, let's also eliminate as many personal tax credits and deductions as possible.

> in my opinion, we should probably not tax corporations at all. ultimately all corporate revenue turns into either income for employees or capital gains for investors, so just tax these (progressively) and hike the rates.

This sounds reasonable to me As long as the money doesn’t disappear to another country.

Do you think all businesses should be vertically integrated?

I have a (horrible) solution for that as well. Make the board criminally liable for the actions of employees, contractors, or other agents where such actions are a condition to the employment or contract.

Tax rates will probably need to go down and this is obviously just a thought experiment because no change is possible as we are too comfortable being hypocrites.

There is a much simpler solution for the vertical integration problem. If you buy something from another company which has already paid tax on it, you don't have to pay tax on it a second time. The resulting tax is called VAT.

It looks like there is an opportunity to reduce the taxes owned on the initial capital gain as well as avoid all taxes on the additional capital gain if held long enough.

Because nobody got rich by spending on the poor. It's the lie at the heart of every trickle-down scheme and corrupt charity: that all we need to do is give wealthy people a little bit more, and we'll all somehow benefit from it.

Absent a vocal minority, wealthy people spend their money in ways that make them more money or get them more political power. They don't build communities, they build dynasties.

From an introductory pdf [1]: "A qualified Opportunity Fund is a privately managed investment vehicle organized as a corporation or a partnership for the purpose of investing in qualified opportunity zone property (the vehicle must hold at least 90 percent of its assets in such property)".

Okay, so here's my prediction: a series of shell corporations will be constructed so that the investors are essentially moving their money around on their own plate. Those funds will then look for the most efficient way to produce a return on that investment, which will probably consist of purchasing real estate, pumping up its value (increasing housing costs in the region), and then dumping it at the end of the 10-year term so that the investors can get out without any tax liability. The affected communities will end up with artificial housing cost inflation followed by a slump that will leave them in just as bad of shape as they are now, at best.

It's raw, seething cynicism, yes, but it also closely matches something that's already happening right now. Communities across the country are seeing artificially high commercial rents coupled with empty storefronts in heavily-trafficked areas because real estate owners have discovered that they can make a little extra money by keeping some of the spaces empty and using them as tax deductions, instead of lowering the rent to market rate and putting a small business in there. [2]

[1]: https://eig.org/wp-content/uploads/2018/02/Opportunity-Zones...

[2]: https://www.dnainfo.com/chicago/20161006/jefferson-park/vaca..., for one example.

The easiest would be to invest in assets that don't (or only moderately) go up in value, but that you can (in the end) liquidate at cost. Then you get the tax benefit without the risk.

The PDF I linked describes O-Funds with 7% annual appreciation.

They won't all hit that, but the goal will be to get the O-Funds to match similar low-risk long-term investment vehicles and then get out tax-free, and the businesses managing the funds will be under enormous pressure from the investors to make that happen.

The thing that concerns me about this is that there isn't much reason to expect the area's interests are aligned with investors' interests.

Investors build something that allows the local economy to bring money into the area - e. g. A factory of something like that with well paying jobs where workers get to keep a good chunk of their value add and a lot of the profits stay in the local economy? Great! Win win.

Investors build something that provides a bit of short term benefit but then leeches money out of the area forever after - e. g. An apartment building, low wage retail, toll roads, etc? Well it'll be great for the investor who now has a new tax free passive income steam on top of the hard assets they built (the road, apartment building, or whatever that they can later sell - again tax free - if they want). Sucks for the city though. Sure it might have been necessary, but the local economy was basically just forced to take out a loan that it will never repay - sending money to already wealth investors in perpetuity for housing or transportation or a place to buy shit.

In either case, and probably more the latter than the former, the already-hilariously-wealthy investor gets to earn fistfulls of money tax free. But only one of those situations really helps out the local economy itself. And in either case I don't see how removing a 10% or so tax on profits and deferring taxes on investment is going to massively change how or whether projects pencil out.

So yeah, in an era where the wealthy already have way too much money and don't need help hiding more of it, and they might not even be helping anyone but themselves, and they're basically doing something they probably would/should have done anyway, and they get to feel good and claim good pr for basically just making gobs of money that they don't need, yeah, I'm not feeling super proud for them or this program.

What would make me happy? Well, if they paid their damn taxes, that'd be a start. Even better if the rates actually have them paying their fair share instead of basically nothing, as is the case with capital gains tax rates today.

I'd also be happy if they spent their money lobbying for common good things - like climate change prevention, universal health care, free college, etc - instead of looser regulations and tax breaks. Some places and people do this, most don't, and some actively and vociferously work against the public good (kochs, bp, etc).

Really though I'll probably only really be happy when we don't have the obscene rates of poverty and semi poverty in the us, and we fix the floundering public infrastructure and services paired with deep government deficits. Obscene wealth is only such if its accrued in the context of millions of people living paycheck to paycheck at best, or being actively in the red month after month more typically. Likewise, it's only really selfish to try and lower your taxes if the common space is currently just ridiculously under funded - the rest of us generally pay our fair share or something like it, but a small minority of people jump through miles hoops and work tirelessly to massage the rules so they get to keep the disgusting level of wealth they accrued on the back of society entirely to themselves.

Fix those things, and they can do whatever they want with their mountains of cash - I'll probably stop caring.

>I swear some of these people will never be satisfied with the way rich spend their money.

Some people will never be satisfied with the fact that there are rich people in the first place.

This sentiment is as old as civilization