President Biden’s big plans for America rest in part on his plans to pay for them by raising taxes on the rich. He wants the top marginal rate restored to 39.6%. He wants households making more than $1 million a year to pay the same rates on capital gains as regular people pay on income from work. He wants to close a loophole that allows appreciated assets to pass tax-free to heirs.
It’s hard to argue with the president’s focus on the rich. The fiscal pickings are second to none, and polls show that Americans strongly favor his approach. They hugely support equal taxes on capital gains, and a solid majority don’t believe the rich are paying their fair share.
There’s just one big problem. No matter what tax increases Biden manages to pass, some of America’s richest families stand a good chance of somehow getting around them. They expect no less from their “militia of tax attorneys, wealth managers, accountants, trust lawyers and other advisors…”
The militia has its own special name (the Wealth Defense Industry), its own special shorthand (WDI) and its own special job: “to create and enrich hereditary dynasties of wealth and power.” The players and the tools of their trade are the subject of a new and infuriating book by Chuck Collins, The Wealth Hoarders: How Billionaires Pay Millions to Hide Trillions.
The hoarders have perfected disappearing acts that make Houdini look like a novice. The particulars differ but the aim is always the same, to disguise and minimize how much the rich are really raking in.
Let’s look at where the trillions are hiding and some of the paperwork that hides them—including an instrument mistakenly created by Congress.
The list of tax havens is extra-long, heavy on islands but including major countries and cities: the British Virgin Islands, England, Switzerland, Bermuda, Luxembourg, Liechtenstein, Seychelles (a group of islands in the Indian Ocean), Cyprus, Gibraltar, Malta, the Marshall Islands and their coral island neighbor Nauru, Samoa, Mauritius, the Cayman Islands, the Channel Islands, the Isle of Man, Taiwan, Singapore, Sweden, Denmark, Austria, London, the Netherlands, Germany, Ireland, and Puerto Rico.
The Wealth Hoarders makes the case, though, that the friendliest haven of all is right here at home: “In the last 10 years, a number of converging factors have led to the United States becoming the No. 1 global destination for hidden wealth and kleptocrat capital. The US is the new Switzerland,” long the gold standard for shielding wealth from taxes.
An especially noteworthy U.S. haven is the newbie South Dakota, “which has quietly made itself the world’s leading money haven, crushing former go-to shelters…” Of course, it has plenty of company: “Nevada, Alaska, Delaware and other states also participate in this race to the bottom,” routinely obscuring wealth and lowering taxes for the super-rich.
One popular shelter stems from a Congressional misstep in 1990, the replacement of GRITs (grantor retained income trusts) with GRATs (grantor retained annuity trusts). The change eliminated one loophole but, as it turned out, created a bigger one:
The lawyer Richard Covey, a star member of the Wealth Defense Industry, cleverly figured out that GRATs, in fact, allow the wealthy to avoid estate and gift taxes by “rapidly churning assets into and out of trusts.” The IRS tried to end the accounts in 2000 but lost the case to Audrey Walton, a Walmart heir.
Covey’s flair for tax avoidance is matched by his honesty. GRATs, he admitted, make a mockery of the Tax Code.
There’s no lack of other hideouts, including FLPs (family limited partnerships) and IDGTs (intentionally defective grantor trusts). Measly millions have to go elsewhere; to set up shelters like these, individuals need a net worth of $5 million or more and couples twice as much.
Democrats often rail against shelter abuses, but the idea of cracking down carries its own Catch-22. Major party donors are delighted to use them, and even more delighted to have a Covey of tax professionals keeping them on the books.
The late Herman Wouk won the Pulitzer Prize for his 1951 novel The Caine Mutiny. He deserves another prize for a single sentence he also gave us: “Income tax returns are the most imaginative fiction being written today.”
The same kind of fiction curls the pages of the maddening new book The Wealth Hoarders