It’s Time to Go Clubbing 

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker, financial journalist, and money manager.

I’m not usually the type of man who wants to be in a “club.” In fact, I generally eschew membership in social organizations, political parties and other artificial constructs that humans create to feel kinship with one another.

However, there is one club of sorts, or more specifically, a list of individuals, that I would love to count myself a member of. That club, if you will, is the group of individuals profiled in what has been described as a “bombshell” story by investigative journalism organization ProPublica last summer.

Here’s the headline of the article that captured the attention of the mainstream media, as well as progressive and populist websites around the globe: “The Secret IRS Files: Trove of Never-Before-Seen Records Reveal How the Wealthiest Avoid Income Tax.”

The story, which is an interesting read for a variety of reasons, is basically an analysis of the taxes paid by the richest Americans. The analysis is based on the private tax returns that ProPublica says it received from an “anonymous source.” The organization also claims that disclosing this very private information about American citizens is in the greater “public interest,” and this, they’ve concluded, outweighs privacy considerations.

So, who is in this “club” of the richest Americans, and what’s all the fuss about?

Here are some of the top names mentioned in the ProPublica article: Jeff Bezos, Elon Musk, Warren Buffett, Carl Icahn, George Soros, Michael Bloomberg, Bill Gates, Rupert Murdoch and Mark Zuckerberg. According to the report, the tax data “shows not just their income and taxes, but also their investments, stock trades, gambling winnings and even the results of audits.”

The article goes on to claim that “taken together, it demolishes the cornerstone myth of the American tax system: that everyone pays their fair share and the richest Americans pay the most. The IRS records show that the wealthiest can — perfectly legally — pay income taxes that are only a tiny fraction of the hundreds of millions, if not billions, their fortunes grow each year.”

Ok, let me unpack that statement, because it’s riddled with a few bad insights.

First, as my friends at Reason.com point out, “For the 2018 tax year, the last year for which we have data, the top one percent paid over 40 percent of federal income taxes, despite earning just under 21 percent of total adjusted gross income (AGI). The bottom 50 percent of taxpayers earned 11.6 percent of total AGI, but paid less than 3 percent of income taxes.”

So, while the elite club of richest Americans profiled in the article show that they often paid very little or no income taxes in some years, the wider point is that the oft-vilified “top one percent” pay far more into the federal tax system than any other group. So, in a way, the ProPublica article unwittingly got it right in the sense that this is definitely not “fair,” i.e., not fair to the top one percent of Americans who pay far more into the system than other groups.

The other point here from ProPublica is that the records show that the wealthiest can pay “income taxes” that are only a tiny fraction of the hundreds of millions, if not billions, their fortunes grow each year.

The problem here is that the growth of one’s fortune via such things as share price appreciation of assets, including shares in a company, or real estate or a business, is not “income” until those assets are sold. And then it’s not the same as ordinary income, but rather more like a capital gain.

Here again, I’ll let Reason.com do the explaining:

“ProPublica, however, tries to make the case that the wealthy are getting away with murder through the tax code, so they do a calculation that has never been done before, comparing growth in wealth over the course of a year to taxable income. They use this to calculate an individual’s ‘true tax rate,’ which is sort of like handing out wins in a baseball game in the middle of the early innings and calling it the ‘true outcome’ of the contest.

“It’s hard to overstate how nonsensical this comparison is (which is perhaps why it’s never been done before). Our tax system rightly does not tax growth in one’s wealth until it is realized as income. After all, the alternative is a monstrously complex and unfair system of wealth taxation that developed countries have avoided.”

Ah, but you see, here is where the progressive and the populist dream “wealth tax” comes in, one where the most successful among us are taxed on our investment prowess and our ability to accumulate appreciating assets. That tax would not just be on our incomes, but on what we own. We know this because Senators Elizabeth Warren and Bernie Sanders have already piggybacked on the ProPublica article to buttress their argument in favor of a wealth tax.

But let’s put this into perspective that most of us can relate to. A wealth tax would, in effect, consist of tax authorities coming to you and taking an annual inventory of your stock portfolio, 401(k), home value, automobile values, collectibles, art, furniture, etc., and then determining a figure of how much you are worth. Then, they would send you a tax bill on that amount each year. It doesn’t matter that you haven’t sold these items. The tax is just based on their overall value.

In essence, the ProPublica “exposé” is, in my view, just another attempt to try and vilify the rich for doing what we all should be doing — using the money we’ve accumulated via our productive achievement and investing that money in appreciating assets that can flourish into enormous wealth.

So, one day I hope to be in that exclusive club, the club where my tax returns reveal that I paid little or no taxes in a given year on income because all of my wealth was tied up in the best stocks, real estate and business investments that I made with the expert knowledge of the markets that I’ve accumulated over the years.

To me, the ProPublica article was a financial form of a Tony Robbins seminar, one that has motivated me to be a subject of the next ProPublica on how the super-rich legally avoid paying Uncle Sam.

If you want to “go clubbing” alongside me as a future member of this exclusive wealth club, then I invite you to check out my newsletter advisory services today. Together, we can get on our way to being the subject of the next ProPublica wealth piece.

***************************************************************

Reality and Dreams 

“You know you’re in love when you can’t fall asleep because reality is finally better than your dreams.”

— Dr. Seuss

The writer and illustrator Theodor Seuss Geisel, better known as “Dr. Seuss,” was a unique genius who has touched just about every young man and woman with his brilliantly creative work. Yet in this quote, he reminds us that he also was filled with profundity about adult relationships, and in particular, the nature of love, happiness, dreams and what makes life worth living. As a kid, I always loved Dr. Seuss. As an adult, I love him even more.

Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.

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