Why I Pay Too Much in Taxes

At 10:24 PM 5/4/96, Black Unicorn wrote:

>An organization that is efficent at enforcing a immensely complex set of
>regulations incomprehensible to joe sixpack is not a good thing.


As if anybody didn't already know, the tax code is incomprehensible to more
than just "Joe Sixpack." I find it imcomprehensible, with "carryback
callback offshore allowances" and "alternative minimum taxes" and all that
garbage.

I started using "Macintax" many years ago, then decided to wing it manually
for many years, but have recently gone back to the Intuit product (called
Macintax, but a cross with TurboTax).

I answer a bunch of questions it asks me, making educated guesses where I
don't understand something, and then I do the process a _second_ time,
usually with different results. I use the lower tax bill of the two and
send that instance in. Sometimes the IRS and its partners (the Franchise
Tax Board, where California taxes are approaching what Federal rates for
most people were a scant decade or two ago) tells me I underpaid and must
send in additional taxes, penalties, interest charges, etc. (They won't
prosecute for such minor things, so long as the money is paid and there was
no gross hiding of income.)

I am gradually losing all track of what is going on, and I suspect I'm not
alone (my friends who use tax preparers, human ones, report the same
situation).

It seems to me that Jordan was referring to the compliance rate and the
cost of the overhead, not considering the overall tax burden. (Italy is a
fascinating example. The country appears to be moderately poor, based on
tax receipts, but spending is quite high...it is clear that a large
fraction of Italy's overall income is unreported.)

Not wanting to join in this bashing of taxes--my views are clear, as
evidenced in the title of this thread--but I have to point out that I paid
approximately 60% of everything I made last year to the tax collectors!
This counts the Federal income tax (about 32%), the California income tax
(about 11%), the "self-employment tax" (FICA) for some consulting I did
(15%), property tax on my old residence ($2200), property tax on my new
residence ($4200), sales tax on purchases (8.25%), gasoline taxes (about
30-40 cents per gallon), a special tax on my Ford Explorer ($300), and
probably some miscellaneous other taxes I have neglected.

And of course the corporations that pay me dividends and whose stock price
shows gains have _already_ paid roughly 45% or so in taxes, depending on
how clever they were at allocating costs to minimize taxes. This is the
famous "double taxation" of corporate earnings one hears about. Intel, for
example, pays 45% of its considerable income in taxes, sends some of the
remaining profits to me in the form of capital gains and dividends, and I
then pay another 40% or so in income taxes on this share. The math is
pretty simple...there ain't much left over. (The much-derided Laffer Curve
is actually quite important here...when overall tax rates get high enough,
people choose to do less work. Some of us even retire early.)

Considering that a growing fraction of the population is not working at
all, and is living on "entitlements" that they essentially get from me, and
considering that the American Revolution was at least partly in response to
the perception that taxes collected by King George were a bit too high (at
a _tiny fraction_ of the amount I cited above), the resentment many of us
feel is understandable.

One area where I mostly agree with Jordan Hayes and disagree with Sandy,
Uni, and Duncan, is that I don't think it's as easy as they sometimes claim
it is to avoid taxes by the offshore stratagems they espouse. Believe me, I
looked into this a while back (it is never illegal to investigate ways to
minimize tax burdens), and even considered moving out of the U.S. to a tax
haven of some sort.

It turns out, as it does for many people I know, that my assets are
relatively traceable. Salaries and even consulting fees are reported
assiduously. Stocks can certainly be moved offshore, but the IRS obviously
knows where they are (the institutions that keep records of stock ownership
will tell them, for one thing...this may take a few years for the records
to catch up, but they ultimately will).

Certainly I could liquidate one form of my assets (stocks, real estate,
etc.) and simply move the money out of the country. Tax evasion is always
an option. But the price paid if one gets caught tends to be rather high.

(Despite what you hear anecdotally about the IRS "settling" for pennies on
the dollar.)

Call me a skeptic.

I will do my best not to be drawn into a debate that has been held here
several times before. If Sandy, Duncan, etc., believe it is so easy to
avoid taxes--on the resources we are talking about, not sheltering small
amounts--or if they claim that I am obviously not following their advice,
I'll let them make these claims without any attempt to rebut them. I've
been there and done that before.

I have no doubt that "tax planning" works for some people, and I think
certain people like Vince Cate may do well in places like Anguilla,
essentially starting a business from scratch. I even have longterm hopes
for tax havens, cyberspace tax havens, anonymous systems, etc. But this
ain't happening soon.

But I see no clear way that X shares of Apple, Y shares of Sun, Z shares of
Intel, etc. can be converted into other forms without taxes being paid, or
evaded. (Evaded, not avoided.) I recall Sandy claiming some scheme where I
would use my shares as collateral and borrow tax-free against them. Sure,
it's what I do everyday with my margin account. But to ultimately pay off a
margin debt by selling assets involves taking capital gains (if there were
any, of course--a safe bet in the last 10 years), and at this point the IRS
and California Franchise Tax Board want their 40-45% cut.

Not being prepared to risk imprisonment for tax evasion, and being desirous
of living in the United States rather than on a coral atoll, I answer the
questions that Macintax asks me, gulp when I see the final figure, and
write out a check (which I then have to sell even more stock to
cover...perpetuating the cycle).

--Tim May


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Sat, 4 May 1996, Timothy C. May wrote:

> Not wanting to join in this bashing of taxes--my views are clear, as
> evidenced in the title of this thread--but I have to point out that I paid
> approximately 60% of everything I made last year to the tax collectors!
> This counts the Federal income tax (about 32%), the California income tax
> (about 11%), the "self-employment tax" (FICA) for some consulting I did
> (15%), property tax on my old residence ($2200), property tax on my new
> residence ($4200), sales tax on purchases (8.25%), gasoline taxes (about
> 30-40 cents per gallon), a special tax on my Ford Explorer ($300), and
> probably some miscellaneous other taxes I have neglected.

Here in Estonia there was a proposal made in the parliament to remove
taxation on corporate income (right now there is a proportional corporate
income tax of 26%), which should bring more foreign investments into
Estonia and also make Estonian economy develop faster. Estonia I think is
one of few countries where there is a possibility of accepting this kind
of law. Of course European countries, USA and different international
financial organisations are very against this kind of law. This law would 
apply both to companies and to self-employed private persons (farmers for
example).

Other main taxes in Estonia are 26% proportional income tax for private
persons and 18% sales tax. There is also 33% tax on salaries paid which
includes social security and medical insurance.

Of course the government taxation is not working very effectively and a
big percentage of private persons and companies pay much less than what
they are supposed to. I believe this is common to many young Eastern and
Central European countries. Off-shore companies are also popular,
including Delaware, where people as I understand just do not pay the taxes
they are supposed to. Also many people use one-time off-shore corporations
for just one bigger business deal.

Juri Kaljundi
jk@stallion.ee
AS Stallion

On Sat, 4 May 1996, Timothy C. May wrote:


[Much about Mr. May's taxes and methods of filing as well as
interesting discussion about entitlements and taxes deleted]

> One area where I mostly agree with Jordan Hayes and disagree with Sandy,
> Uni, and Duncan, is that I don't think it's as easy as they sometimes claim
> it is to avoid taxes by the offshore stratagems they espouse. Believe me, I
> looked into this a while back (it is never illegal to investigate ways to
> minimize tax burdens), and even considered moving out of the U.S. to a tax
> haven of some sort.

You don't have to disagree with me here.  I've said this all along.  It
can be expensive and difficult to set up a system to reduce tax offshore.
But the expense is mostly in setup costs and very front ended.  Once a
structure is in place, it's not that hard to continue to benefit.

> It turns out, as it does for many people I know, that my assets are
> relatively traceable. Salaries and even consulting fees are reported
> assiduously. Stocks can certainly be moved offshore, but the IRS obviously
> knows where they are (the institutions that keep records of stock ownership
> will tell them, for one thing...this may take a few years for the records
> to catch up, but they ultimately will).

I have to strongly disagree here.  But now you're talking about evasion,
not avoidance.  It's trivial to hide stock ownership from the IRS.  This
is perhaps one of the easiest things one can do.  Consulting fees?  These
too can be concealed.  It takes more work, but its possible.

> Certainly I could liquidate one form of my assets (stocks, real estate,
> etc.) and simply move the money out of the country. Tax evasion is always
> an option. But the price paid if one gets caught tends to be rather high.

Were you to liquidate and move out of the country and renounce
citizenship, and consult from abroad, and if you did this properly with
your t's crossed, you could very easily and legally avoid (not evade) U.S.
tax.  The question is whether this is an option for you or not for other
practical reasons.

> (Despite what you hear anecdotally about the IRS "settling" for pennies on
> the dollar.)

The IRS almost never settles like this.  Not in my experience anyhow,
unless they have a feeling that an aggressive auditor was over zealous
with your returns (and this should have been caught before you get to the
settlement phase in any event).

> Call me a skeptic.

You're a skeptic, but a reasonable skeptic.

You have an idea about what you're willing to spend, and what your willing
to "pay."  Your decision seems to be (quite logically) based on those
factors.

> I will do my best not to be drawn into a debate that has been held here
> several times before. If Sandy, Duncan, etc., believe it is so easy to
> avoid taxes--on the resources we are talking about, not sheltering small
> amounts--or if they claim that I am obviously not following their advice,
> I'll let them make these claims without any attempt to rebut them. I've
> been there and done that before.

I'll not claim its easy, and I know too little about your financial
situation to make specific recommendations.  (This is not, by the way, an
invitation for discloseure of anyone's financial dealings).  I
will say it's possible, and your mileage will depend on several factors.
How much you're willing to spend.  What you're willing to risk.  How risky
you want to get. etc. etc.  The nature of some people's business
makes it costly, others, who have mostly passive income, have an
easier time of it.

> I have no doubt that "tax planning" works for some people, and I think
> certain people like Vince Cate may do well in places like Anguilla,
> essentially starting a business from scratch. I even have longterm hopes
> for tax havens, cyberspace tax havens, anonymous systems, etc. But this
> ain't happening soon.

Here I'm not so sure I agree.  Several of us are working on making it
happen, soon.

> But I see no clear way that X shares of Apple, Y shares of Sun, Z shares of
> Intel, etc. can be converted into other forms without taxes being paid, or
> evaded. (Evaded, not avoided.)

Expatriate, have your expatriation pass the "Furstenburg" test and be
certified as being made for non-tax avoidance reasons, and you will pay
$0.00 in capital gains when you liquidate.

Should you be unable to pass the "Furstenburg" test, you can still enjoy
your dividens for 10 years before liquidating tax free.

If you don't want to wait 10 years, you can do a installment sale of your
stock via an exchange mechanism, tax free.

All 100% legal, until the Clinton "Death on expatriation" tax reform bill
passes and is signed.

> I recall Sandy claiming some scheme where I
> would use my shares as collateral and borrow tax-free against them. Sure,
> it's what I do everyday with my margin account. But to ultimately pay off a
> margin debt by selling assets involves taking capital gains (if there were
> any, of course--a safe bet in the last 10 years), and at this point the IRS
> and California Franchise Tax Board want their 40-45% cut.

I don't know what Mr. Sandfort suggested exactly, but I suspect he was
talking about an exchange of stock for debt instruments.  In some cases
such an exchange can be a non-realization event.  A form of this is one
way IPO execs still get cash from their options without being able to
exercise them and thus avoid the time restrictions on sale of stock and
condequently, often the realization of such sale.  I have to brush up on
my U.S. tax to tell you exactly when this works.  Let me know if anyone is
interested.

> Not being prepared to risk imprisonment for tax evasion, and being desirous
> of living in the United States rather than on a coral atoll, I answer the
> questions that Macintax asks me, gulp when I see the final figure, and
> write out a check (which I then have to sell even more stock to
> cover...perpetuating the cycle).

Coral Atolls are not the only jurisdictions you can live in and enjoy low
or no tax.  Consider Monoco, Liechtenstein and Panama for starters.

Imprisonment is another matter.  None of my clients have ever gone to
prison, only one has ever been audited.  (Issue was recommended for 
referal then dropped for lack of evidence)  Then again, I don't have as
many clients now as I once did.

Is it easy to minimize taxation?  No.  The United States has intentionally
made it so.  Is it impossible?  No.  Never will be.

Part of the problem is inertia.  There is a (not unreasonable) view that
taxes to the extent that the U.S. imposes them are a fact of life and that
no efforts can mitigate them which will not cost more to implement than
will be saved.  The truth of this view varies in degree with each
taxpayer.

As to the future, I predict powerful tax evasion options at the click of a
WWW button in 2-3 years.  Not that I would ever advise anyone to break
U.S. law.

> --Tim May

---
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<< " I paid approximately 60%...." >>


didn't the feudal vassels only pay 33% ?      To paraphrase - I forget 
which Presidential candidate of yore - "are you better off than you were 
a thousand years ago?"

ANd that's not even counting the interest you pay on your mortgage. Count 
that, and the vassels were head and shoulders above Californians.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
                          SANDY SANDFORT
 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

C'punks,

On Sun, 5 May 1996, Alan Horowitz wrote:

> didn't the feudal vassels only pay 33% ?

Actually, no.  When I used to edit a magazine, I commissioned an
article about how much "tax" slaves, serfs, etc. paid.  That is,
how much of what they produced, did they get to keep; how much
went to their masters.  The surprising, cross-cultural answer my
researcher/writer found was that they got to keep everthing they
produced except 5-10%.  That's a lot better, percentage-wise,
than for modern "tax slaves."


 S a n d y

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

On Sun, 5 May 1996, Alan Horowitz wrote:
> << " I paid approximately 60%...." >>
> didn't the feudal vassels only pay 33% ?      To paraphrase - I forget 
> which Presidential candidate of yore - "are you better off than you were 
> a thousand years ago?"

	The very fact that we are having this conversation in this manner 
would indicate to me that yes, we are.

> Not wanting to join in this bashing of taxes--my views are clear, as
> evidenced in the title of this thread--but I have to point out that I paid
> approximately 60% of everything I made last year to the tax collectors!
> This counts the Federal income tax (about 32%), the California income tax
> (about 11%), the "self-employment tax" (FICA) for some consulting I did
> (15%), property tax on my old residence ($2200), property tax on my new
> residence ($4200), sales tax on purchases (8.25%), gasoline taxes (about
> 30-40 cents per gallon), a special tax on my Ford Explorer ($300), and
> probably some miscellaneous other taxes I have neglected.
> 
> And of course the corporations that pay me dividends and whose stock price
> shows gains have _already_ paid roughly 45% or so in taxes, depending on
> how clever they were at allocating costs to minimize taxes. This is the
> famous "double taxation" of corporate earnings one hears about. Intel, for
> example, pays 45% of its considerable income in taxes, sends some of the
> remaining profits to me in the form of capital gains and dividends, and I
> then pay another 40% or so in income taxes on this share. The math is
> pretty simple...there ain't much left over. (The much-derided Laffer Curve
> is actually quite important here...when overall tax rates get high enough,
> people choose to do less work. Some of us even retire early.)

Although your viewpoint is well expressed, I feel you've
overlooked the possibility of socialism to solve the high
tax outrages detailed.

Socialism, a truly progressive economic system, would have
an actual graduated income tax, to discourage useless
make-work by the rich.

There are so many other benefits to patriotic socialism, it
would take a book the size of Das Kapitol just to list them.

For instance:

Taxes on trade, will act as a tonic on the national economy.

The tax on trade, of course, prevents it; relieving the
national security apparatus of 90% of its reason for being.

The state itself as a unifying theme, rather than patho
meanderings like crime, anti-racism, and religion.

Tcmay, you've already acted on your socialistic urges without
even knowing it; your successfully operating a free people's
spontaneous propaganda bureau.  Please develop this further
and thumb your nose at the members of your class.