How The Rich Hide Their Wealth
Barack Obama says that his tax plan will only affect the top 5% of working Americans who earn more than $250,000 a year, otherwise known as the “rich” or “wealthy Americans” according to him and the Democrats.
However, what many Americans don’t realize is that the Rich know how to hide their wealth so that they are not forced to pay more taxes than the rest of working Americans.
What they do is not illegal. They just use the tax code creatively to get as many deductions as possible, they segmentize their money, re-invest their money, park their money, and even move it away from the shores of the United States to avoid excess taxation.
Your typical American worker receives a paycheck, deposits that money in a bank account, and files a W-2 tax return every year based on the payment records from their employer. Because of this, the average American worker thinks that rich Americans do the same thing.
However, nothing could be further from the truth. Rich Americans instead rely on a strategy of “asset protection,” in which not only their money, but everything they own is protected from both government taxation and lawsuits.
Understand - many rich and wealthy Americans are entrepreneurs and investors. In that sense, they are their own bosses, and own the entities through which they do business.
This means they do not have to pay taxes right away on the money they earn. Your typical working American has money automatically deducted from his paycheck by his employer for taxes before he even gets his check. People who work for themselves do not have to do this. Instead, they can pay taxes on a quarterly or yearly basis. This means they get to use (and spend, and hide) their money before the government does, as opposed to working Americans who never get the chance.
This might not seem like a big deal, but it is, because when you have access to your money before the government does, that gives you more leeway to spend it in ways that allow you to claim less earnings, which can mean less taxes in the long run.
The rich hide their wealth by creating what are known as “holding companies.” These are corporations and other business entities created for the sole purpose of holding assets. Typically, asset protection takes place in three phases…
1. Public Companies: These are the companies that do business that the public can see, that are directly linkable to the rich (for instance, Microsoft and Bill Gates).
2. Mother Companies: These are the business entities that public companies funnel their assets to. The public typically doesn’t know about these, and they are hard to trace. These can also take the form of Trusts and Foundations.
3. Holding companies: These are companies that are designed to do nothing but hold assets. These are typically hidden as well.
By using these asset protection strategies, the wealthy and rich are able to preserve their wealth, not only from lawsuits, but also from taxes.
No One Knows Who’s Rich
There are hundreds of people in the world whose names you might never know but who own millions — if not billions — of dollars.
These wealthy individuals often go out of their way to hide their assets from scrutiny — sometimes from the public and sometimes from their own government.
Russians, for instance, are reportedly pouring record amounts of cash into London monetary markets to hedge against any future political retribution should the communist and “wealth redistributors” ever come back into power in Russia.
Figuring out how much money someone has is not an easy task.
Even Forbes magazine, which comes out with an annual list of the richest 400 Americans, acknowledges that its figures are just estimates and are “deliberately conservative.”
But in the United States there is very little information about how much the super-rich earn in general.
The federal government’s income surveys stop at $150,000 a year.
America has very, very bad information on the income of high-income people. This makes it hard for the government to determine what tax bracket they fall into. In fact, many of the richest and wealthiest people in the world actually own nothing. On paper, they are dirt-poor.
There are a lot of public records and ways to find out what somebody is worth, but unless you have access to somebody’s bank account you can’t know it all. And the IRS doesn’t have some magic wand that tells them how much money flowed through your bank account, unless they specifically target you.
Forbes says it goes through Securities and Exchange Commission filings, court records and calls analysts, employees, competitors, and even ex-wives to figure out who the world’s wealthiest people are for their list.
“We do not pretend to know everything on a private balance sheet,” the magazine states when explaining its methodology.
Forbes says it tries to include everything, from stakes in publicly traded or privately held companies, to real estate, art, yachts and mansions.
But in the end, it’s an educated guess. When Forbes says somebody is worth $7 billion, it means that the person is worth at least $7 billion. But keep in mind this number is determined by ASSESTS, not dollars in the bank. And though the wealthy may have access to assets, they don’t actually own those assets.
So if a rich or wealthy individual or business is particularly skilled at protecting and hiding their assets, this means that the federal government may never know how much money they truly make.
How Wealth Is Protected
Most rich and wealthy people are not motivated to avoid taxes — they are motivated to protect their wealth. They want to make it so that their hard-earned wealth remains theirs and can be passed down to their families.
(If you were wealthy, wouldn’t you want the same thing?)
It just so happens that protecting wealth means giving less of it to the government in the form of taxes.
The best way to protect wealth is to create separate entities to hold that wealth and and move it outside of the jurisdiction of the United State’s tax code. So instead of having a savings account that has $1,000,000 in it, they may have five corporations who have savings accounts with $200,000 each in them.
This is important, because the owner of these companies can claim legal tax deductions under the corporation which he spends his money under.
For instance, he’s allowed to deduct the half the expense of his meals if it is related to the business. So if he takes his family out to dinner and uses one of the company cards, half the expense of that meal is tax deductible.
And then, before they have to file a tax return, they can funnel money into an offshore corporation in a more tax friendly country, so they really don’t have to pay United States taxes on that money.
Think this sounds complicated? Well, keep in mind if you have enough money, you can hire as many accountants and lawyers as you need to set this up for you.
Enron, for example, had 881 offshore subsidiaries, including 692 in the Cayman Islands alone, and many more in Turks and Caicos, Mauritius, and Bermuda. Scandal-plagued companies like Parmalat and Halliburton use similar devices in the Cayman Islands.
So even though they are not “skipping out” on paying taxes, they are taking advantage of tax deductions which allow them to claim less income than they really make and tax shelters which allow them to keep more of their own money.
Not only that, but they can also take advantage of off-shore banks which are friendly to people looking to protect their assets. Typically, off-shore banks are used because it’s harder for the U.S. government to tell exactly how much money the rich and wealthy have in these banks because they are outside the reach of the accounting jurisdiction of the I.R.S. Remember, I.R.S. stands for INTERNAL Revenue System. If you money is EXTERNAL (i.e. in a foreign country) they can’t get to it.
This allows the rich to park money outside of the U.S. tax system.
For example, let’s say a wealthy business owner sets up a corporation in the Cayman Islands. He can pay his money to that corporation for some type of “service.” (usually a management fee of some type) That money is then put into the company’s bank account in the Cayman Islands, and protected from U.S. taxation. And the owner of both companies can take a tax deduction for the money sent to that account because it can be considered a “business expense.”
Wealth can also be transferred into Trust funds. One of the best ways is to set up a revocable living trust.
Putting assets in such a trust doesn’t always shield them completely, but makes them harder to find.
Many trusts are set up in somebody’s initials. So, for instance, if you were searching for Bill Gates in a computer database of land records he wouldn’t show up because the property might be under the name of the B.G. 2007 Trust.
Limited Liability companies are also used to shelter assets. The rich and wealthy usually have their homes, cars, stocks, bonds, etc. all owned by separate LLC companies.
So one LLC owns their house, while a different LLC owns their car, and yet another separate LLC owns their stock holdings.
This is a way to protect themselves from being sued. If a car they own hurts someone, they can’t be personally liable for the injury because they don’t own the car, the LLC does - and the total value of the LLC is the net worth of the only asset it owns, which is the car. So if someone sues, they sue the LLC, which can only be liable for the total amount of assets it owns.
But it also protects them from the government. Should the IRS ever start seizing assets, they would have to track down every LLC which holds that asset, and if the LLC’s aren’t directly linked to the person undergoing the asset seizure, it makes it very difficult for the IRS to truly take everything.
What This Means Under An Obama Tax Plan
Obama plans on taxing individuals and businesses that make more than $250,000 a year.
If there is a business that makes $1,000,000 per year, all that business has to do is create five other corporations and divide its revenue up between them.
So instead of paying taxes on $1,000,000, they pay five sets of taxes on $200,000, which is below the Obama tax increase level.
This is perfectly legal, because the company can claim it bought services from those companies, and it is a legitimate expense that can be deducted.
The wealthy can also transfer their wealth off-shore, which will see more currency leave the United States, which means it is not being spent in the United States, which means a contraction of the currency supply, which could lead to economic depression.
Many wealthy Americans can also pay significantly lower income tax than they should, since they can have their corporations and holding companies hold their wealth. Remember - if you set your asset protection up properly, you own nothing! Most rich and wealthy Americans take a salary big enough to keep them from raising red flags at the IRS.
If you look at Warren Buffet, he is worth $65 billion, but his yearly salary is only $100,000 - well below the $250,000 cap Barack Obama proposes.
So Warren Buffet actually pays income taxes on his $100,000 salary. And under the Obama Tax Plan, he actually pays less money than most small businesses.
Other wealthy and rich people do the same. They may only claim a salary of $30,000-$50,000 per year, and shelter the rest of their wealth either off-shore or in holding companies.
The people who would pay their fair share of the tax code are small businesses making over $250,000 a year who don’t know how to protect their assets.
So the wealthiest Americans, who Barack Obama has targeted to pay more taxes, actually don’t pay their fair share (and most likely never will, no matter how many loopholes you close), while the burden falls to those hard-working middle-class business owners who’ve never dealt with or thought about asset protection before.
Remember - the rich are rich for a reason! They understand how money works and they’re smart enough to know how to protect it.
Many Americans just don’t understand the extent the wealthy will go to in order to hide and protect their wealth. The IRS tries very hard to make sure people pay their fair share, but they can’t get everybody. With creative accounting, any wealthy American can get out of paying his fair share of taxes - and do so legally.
Just keep in mind that the last time the United States saw as high of tax rates on the wealthy as Barack Obama is imposing, it was under President Jimmy Carter in the 1970s, which caused a huge transfer of wealth to occur, with the wealthy moving their assets outside of the United States. This was a large reason for the increase in government spending and runaway inflation under President Jimmy Carter.
The rich have the ability to move away from an oppressive tax system, and history has shown that they will do so. Corporations have also shown a similar habit. Whenever higher tax rates are imposed, you see wealth leave the country, and that means the tax burden ultimately falls onto the people who remain - the lower and middle-income citizens.
History has a way of repeating itself. And under Barack Obama’s tax-the-rich plan, it most likely will.