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HOW TO GET RICH SANS SWISS OR CAYMAN BANK ACCOUNTS (PART II)

December 4, 2014

HOW TO GET RICH SANS SWISS OR CAYMAN BANK ACCOUNTS (PART II)

The GAO study of how the rich elite are using the IRA as an investment vehicle offers two detailed examples. In the first, an entrepreneur put $5,000 in a Roth IRA and used the funds to buy “founders’ shares” in a business in 2008 when the shares cost $0.00125 each. The company went public in 2012 at $25 per share. The account grew to $196 million by 2014. The other example offered by the GAO study shows how a key employee of a private-equity fund can generate an IRA balance of tens of millions of dollars. First the employee invests $500,000 of IRA assets in a way that gives him the right to 5% of the general partner’s “carried interest” in a successful fund. The result 10 years later is that a $23.9 million payment was made to the employee’s IRA, a return on investment considerably above current bank interest of perhaps one tenth of one percent on savings which translates into virtually free money for Wall Street and (after inflation) nothing for you and me. This is policy?

I have been a strong critic of the fiction of “carried interest” which should be taxed as ordinary income, especially after learning that Mitt Romney had a traditional IRA valued at approximately $101 million. With carried interest taxed minimally and with tax-sheltered IRA income, it is no surprise that he only paid 13.7 percent on an overall income of over $21 million in a tax year shortly before the election of 2012. Janitors and gardeners who kept his estates up to snuff paid at a higher rate, and they made nowhere near $21 million a year, one may safely assume.

The Supreme Court ruled repeatedly against a tax on income until 1913 following a constitutional amendment, when our first income tax law was passed during a Republican administration. The tax was designed to be progressive, i.e., the more you made, the more you paid. That design is nowhere to be found today. When a zillionaire’s gardener pays at a rate on his meager income higher than the owner of the estate, it is clear that progressive taxation has come and gone to its resting place as historical artifact. Once the politicians found out that there were lots of campaign contributions available for those who worked to amend the internal revenue code to suit the tax lawyers for the superrich, the idea of progressive taxation was doomed. Greed and campaign contributions (aka bribes as they were known in my day) are joined at the hip and enjoy mutuality of purpose – to get rich and/or to exercise power.

Proof of this is found in the fact that the internal revenue code is amended on an average of ONCE A DAY (mimicking the One-a-Day of Vitamin fame). No other federal statute enjoys such repeated visits by those who would amend its language to game the system. Accountants and lobbyists and tax lawyers for the superrich are busy people. Seemingly innocuous riders on motherhood and apple pie bills such as a single word amendment of “may” for “shall” can result in billions of dollars in tax savings to those who benefit from such amendatory language, savings for them that you and I have to make up via taxes in one way or another at some point in time. The superrich get the money; the rest of us get the bill.

As noted earlier, individual retirement accounts (IRAs) were just that, retirement accounts. The intent of the Congress was to provide additional tax-sheltered opportunities for ordinary Americans to put a limited amount of their annual compensation aside for their retirement years. I don’t think legislators of this 30-plus year old act thought of it as an investment vehicle to be used by hedge-fund and private-equity managers under either the traditional or Roth IRA versions to tax-shelter investments. Indeed the vast majority of Americans who owned IRAs was not and is not in the investment class. The scheme and reach of the original act was modest, and while the GAO report did not distinguish between traditional and Roth IRAs, it is clear that Roth as the vehicle opened up undreamed of opportunities for accumulation of tax-free income which in turn resulted in the loss of billions of dollars in revenues to our treasury, billions not paid by the superrich that the rest of us have to make up, thus perhaps offsetting whatever advantage we may have gained by our individual participation in the IRA program in trying to augment our social security upon retirement. The superrich have massaged a program designed as a retirement program for you and me into a domestic tax-avoidance fiscal monster right before our very eyes, so why go to Switzerland or the Caymans when you can beat the tax rap right here at home – and in broad daylight? Why risk potentially tattle tale Swiss banks who might “turn you in?”

I will discuss the GAO’s recommendations and how our government is failing to protect us from having our taxes raised by the machinations of the superrich beyond the IRA example in Part III. Stay tuned. GERALD    E

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