GET THE RICH – “Spitting Into The Wind”

Author Tony DeMaio

It’s a funny ding, but all us upstanding good folk are upset about the Kelo decision (where they took some guy’s house and gave it to a developer).　 All the good solons are running around and are gonna stop this here obviously unconstitutional, despicable, obscene, reprehensible, wrong practice.　 If I ever get a chance, I will ask them:

What is the difference between taking my house and giving it to a developer or taking my money and giving it to a bum? You have been taking the (generic) property (money) of folks and giving it away for years.　 Didn’t you see this as the next logical step in the process?　 Why are you shocked?　 Is it that you are not “shocked” but terrified that it may happen to YOU; not the “rich folks” you think you have been robbing for the past many years? Do you not see the parallel between limiting the home deduction to under a million dollars to get the rich–and then being surprised when they lower it to $300,000 to get YOU?

Trust me, it is immoral and unjust to take from those that earn to give to those that spend.

It never ceases to amaze me that every time you try to “get” the rich folks, you end up shooting yourself in the foot—or a little higher. Think about it a bit—the rich didn’t get rich by being stupid or allowing folks to steal their money. Your attempt to take the money and property of the rich and play Robin Hood is somewhat amusing. The “rich” are smart enough to let you THINK you’re successful so you get a little satisfaction and leave them alone for a while. After things “settle down”, it is obvious that you’ve just hurt yourself and probably helped the rich. At best, you didn’t hurt yourself, but you also didn’t “get the rich”.

Consider the millionaire tax. This law prohibits companies from deducting the salaries of employees making over a million dollars a year. (As a political payback, sports figures and actors are excluded.) It turns out that a company paying an executive 5 million dollars a year salary simply restructures his income so that it is a million dollars a year salary and 4 million dollars “bonus”. That way, everybody’s happy—the company, the employee, and the citizens who think they “got” the rich.

I remember well the “yacht tax”. This was an attempt to “get” the rich folks that buy yachts. A tax was imposed upon all new yacht sales. The rich bought their yachts off shore, so NO tax money was collected, but the yacht industry in this country went broke. The yacht builders, artisans, suppliers, etc. all took terrible hits, got laid off, and found other jobs. The “rich” were happy, they still got their yachts—often cheaper. The yacht industry was devastated. Congress later revoked the tax, AFTER all the poor folk lost their jobs and the industry collapsed. It has never recovered. They didn’t “get the rich”.

I like the way charities “help the poor”. Doctor Jones has a 50% marginal tax rate—40% fed, 10% state. He buys a $100,000 yacht for “business”, and depreciates it over 5 years. Thus, he gets a $20,000 deduction each year—$100,000 tax write-off. At the end of 5 years, he has a “worthless” boat. He then has the boat appraised and it is worth $80,000. He gives it to a charity—thus collecting another $80,000 in tax benefits. He has owned the boat for 5 years at a total cost of $10,000.

BUT, it gets better. Dr. Jones gives the boat to a charity as a “Charitable Remainder Trust”, which means he gets a lifetime interest in the “gift”. The charity sells the boat for $80,000, pays no taxes since it is non-profit, and places the money into a bond fund that pays 10% interest. The charity sends Dr. Jones a check for $8,000/yr until he dies—then the charity gets the money. He may even repurchase the boat himself and “recycle” it.

The “Charitable Remainder Trust” is a particularly good idea. Consider a rental house purchased for $50k that has appreciated to $100k while the owner has depreciated it down to zero ($50k tax shelter). If the owner were to sell that house, he would pay $50k in taxes. If, instead he were to GIVE the house to a charity, the charity would sell the house and place the $100k into an account that would pay the person $10k/yr. The person would claim a “charitable contribution” of $100k and thus would shelter $100k of his income from taxes ($150k total)—in addition to getting $10k/yr for the rest of his life. In many cases, the person gives the money to his personal “foundation” which he has set up, retains control of the money, and gives it to various charitable causes—like his kid’s college education. He may claim “fair market value” for the amount of the contribution, thus he gets the appraised value as the deduction. HOWEVER, the foundation can well sell the house back to the donor at a “reduced price”, and the same house can be recycled over and over. The poor do not have the luxury of “giving away” a house, nor are they in a tax bracket to make it pay.

Consider the minimum wage—a program designed to “help the poor”. Let us assume that minimum wage folks are to get a 10% raise. Between time off, holidays, Social Security, Medicare, unemployment insurance, workman’s compensation, insurance, etc., it generally costs the employer twice as much as the employee gets, so the employer is going to have to pay 20% more to give the employee 10% more. Also, due to the tax structure in this country, if an employee gets a 10% raise, he generally will see only 5%. A business generally works on a percentage mark-up of the product and most products are 66% labor. Hence, the business is going to mark up the price of his product by 2/3 x 20% or about 16%, whereas the employee is only going to see 5% of the money. Of course, if the business involves raw material products that are increasing in price due to a higher minimum wage, the price will be marked up even higher. Who gets hurt? The low paid employee who will eventually pay more for his products than his raise, or the businessman who is going to achieve a much higher profit margin?

I really am amused by the naiveté’ of the folks that want to raise the tax rate, increase tax money to the government, and punish the rich. Consider a 90% tax rate and a lawyer that makes $100/hr. The lawyer wants a cord of wood, which costs $100. Assume that the lawyer could cut the wood himself in 5 hours. If the lawyer went to work, he would have to work ten hours to make $1,000, pay the government $900, and have $100 left over to buy the wood. The lawyer would probably go out and spend five hours cutting his own wood. NOW, suppose the tax rate were 50%. The lawyer would go out and work two hours, make $200, pay the government $100, and buy the wood from the wood splitter for $100 (who would pay the government $50). Under a 50% tax rate, not only does the government make $150, but the wood splitter has $50 to feed his family. With a 90% tax rate, no one benefits; with a 50% tax rate EVERYONE benefits. Who gets “hurt” with a 90% tax rate? The rich??? I don’t think so. Three “folks” get hurt: the government who didn’t get the tax money; the “poor” that didn’t get that tax money for social programs; and the wood splitter that didn’t get to sell his wood. Do you NOW understand why lowering the tax RATE results in more tax REVENUE?

I think it is wonderful the way the inheritance tax (or death tax) “gets” the rich. I recall one of my lefty friends expressing shocked disbelief that the population would actually vote to eliminate it, since “They could get all that money and most of them don’t have to pay at all.” (I have found that there is absolutely no morality or ethics in the philosophy of the left.) However, let us look at the death tax from a pragmatic point of view. It has been said the death tax is “voluntary”, as there are so many ways around it. One way to avoid the it is simply place the money in an offshore numbered account and leave the number to your kids. Such a process is easily available to the rich folk that travel a lot. Another way is to simply buy a million dollars of paid up life insurance with your money. Set up properly, life insurance proceeds are not taxable. It is simple enough to pay a life insurance company $1,005,000 for a million dollars of life insurance. That effectively takes a million dollars out of your estate. (The $5,000 is for the expense of handling the transaction.) Of course, this requires that you are rich enough to have enough cash lying around to buy the life insurance. Another way is to slander your kids and have them sue you—proceeds from lawsuits are not taxable. Another way is to set up various trusts that “never die”. Closely akin to trusts is to set up a charitable foundation, place your kids in charge of it, and donate all your wealth to the foundation. Who DOES get hurt? Well, it’s the folks that don’t have enough money to buy the brains to set up these strategies, but do have enough money to exceed the normal exemption.

Real estate has always been a favorite of the rich and thus a target for IRS. I have already discussed how “the rich” can buy real estate, depreciate it, then “give” the property to the foundation/charity they founded and get multiple benefits. It is somewhat entertaining to watch the machinations IRS goes through to “get” the rich. One rule is that you cannot use a rental for more than two weeks a year and still deduct that rental as a business. Fair enough—the rich merely have SEVERAL rentals (coast, mountains, lake, etc.) where they can spend two weeks at each one. The folks that can only afford ONE rental? Well, that’s THEIR problem. Then, there is the mortgage deduction—limited to a million dollars. The “rich” have options—they can borrow the money on their home and invest in stocks—thus making it “investment interest” and deduct it. Alternatively, they can simply pay down the mortgage to where it is less than a million dollars, and THEN deduct it. In terms of deducting a “second home”, the rich merely rent it out to their friends a few weeks a year, then the mortgage interest is “investment interest”. The last major attempt to “get the rich” by a major change in the real estate tax laws resulted in “the rich” dumping their investment property and plunging the country into a recession that cost millions of poor people their jobs.

Real estate is such a favorite with government that it has established several programs to allow folks to buy a home—Fanny Mae, Freddy Mac, FHA. These programs usually “guarantee” a lending institution that they will be reimbursed if the client defaults on the loan. Hence, the lending institutions can lend money and be protected. Folks that normally could not afford a home can purchase one. I know you won’t believe me if I tell you these programs are for the rich, so let me explain. Suppose I have a home for sale for $100,000 and you wish to purchase that home but have no money. I give $20,000 to my “foundation” which gives YOU $20,000. You go to a bank and say you wish to buy my home for $120,000 and have $20,000 as a down payment. The bank checks your credit, finds that it is lacking, but since you are putting down $20,000 and the loan is guaranteed, they make the loan. I not only get my $20,000 back but I also get a tax deduction for making a “charitable contribution”. In all probability, you will default on the loan (you have no investment in time or money, thus you can default and walk away with impunity). Who gets hurt? The poor?? They get enticed into financial deals that they don’t understand and cannot afford. The rich?? They get the gravy. The bank gets their money back from the government, and I get the profit from the sale of the house. I may even buy the house back when it goes up for auction and do it again.

Several years ago during the tax law change debate, I heard a politico state, “I can see no reason why money earned by honest labor should be taxed at a different rate than money earned by money.” Apparently, that politico was unable to understand the concept of risk. When I go to work at a job, there is a good chance that I will receive a check for the work I did. When I invest in a company, there is a good chance that I will lose what I invested. However, let us look at how it REALLY works. A high investment tax (capital gains) simply drives money off shore. The rich invest in accounts in the Cayman Islands, Hong Kong, Belize, etc. where there is no investment tax. They leave the money in those accounts (perhaps even a foreign “trust”) and let it accumulate, and deprive this country of access to that capital. For the money they have in this country, they buy top quality stocks and never sell them, thus never freeing up capital for other investments. They do not “trade stocks” or invest in smaller companies because the reward is not worth the risk. If they DO make “a killing”, the government steps in and takes a good part of it. Thus, smaller more risky companies have a difficult time marketing their stocks, as there is no available capital. Venture capital is quite scarce.

Dividends, however, are very useful. Many of “the rich” receive a very modest salary. They are “incorporated” in their own business and take most of their pay as dividends. (In some cases, an older small businessman takes ALL his income as dividends—while collecting Social Security without penalty since dividends are not “earned income”.) In doing so, they avoid part of the medi-care tax and social security tax. As a corporation, they can use “excess money” to provide “employee benefits” (a car, a home, health care, pension plan) to themselves and family that will be business expenses and tax deductible. They can award “scholarships” and make them “charitable contributions”. If there is STILL excess money, there are many “tax benefits” available. Assume the company has a million dollars “left over”. If it is distributed as dividends, it will be taxed. If it is NOT distributed, it will be taxed as corporate profits. One “out” is to use the money to buy another business, thus making the original corporation bigger and DEDUCTING the cost of the acquired business from taxes. Even more suave is to purchase the new business via a 1031 exchange. This would involve giving the acquired corporation owners stock in the business, KEEPING the million dollars, and DEDUCTING the cost of the business from taxes. (As an added bonus, the person selling the business also pays no taxes, as it is simply “an exchange”.) As a last resort, companies can give to the foundation they founded and DEDUCT the “contribution”. The most amazing thing about this situation is everybody thinks that the government is “getting the rich”. They are only “getting” the middle class that invest in stocks and the pension plans that invest for the middle class.

It has been said that Social Security is the most successful government program ever created. I cannot dispute this. What IS surprising is that the statement is being made by SUPPORTERS of government. Let us look at Social Security from an analytical view. The “average” worker makes about $35,000/yr. Of this money, Social Security gets about $4,500/yr. If the average worker were to work for 40 years and pay that money into an 8% account (the average government bond rate) the worker would have well over a million dollars at retirement. The worker could then, at 8%, draw out a monthly pension of about $7,500/mo for the rest of his life and leave a million dollars to his children. If the worker could get 10% (the stock market has averaged 13%), he would amass about two million dollars and get a pension of over $16,000/mo. Contrast this with the average monthly Social Security check of $1,000/mo with total principal loss when the worker dies. How does this “help the poor” or “get the rich”? The rich don’t care—the $6,000/yr or so they pay is chump change to them. The poor have their money forcibly taken from them so they cannot invest in a manner that will benefit them and their heirs. It effectively keeps them down. THIS is the “most successful government program created?” (Medicare fares just as badly under a similar analysis.)

Akin to Social Security is the IRA—a saving’s plan whereby “the poor” can put up to $2,000 into a retirement plan and let it compound tax-free until retirement. The $2,000 is tax deductible. The “rich” are not allowed to deduct it and, in some cases, are not allowed to participate. Again, if you analyze the plan, you detect some “weaknesses”. The obvious one is that the poor, after paying $4,500 into Social Security, generally do not have $2,000 left over to put into the plan. The “rich” on the other hand can hire their children in the family business (or a friend’s family business), pay them to “work”, then place their earnings into an IRA and let them compound tax free until the child is of college age. If the funds are removed for education, they can be withdrawn tax-free. Hence, this retirement program “for the poor” allows the rich businessman to get a tax deductible (and probably tax free) government supported college education for his kids. For retirement, “the rich” have their 401(k) and KEOUGH plans.

One might also consider “fair trade” laws. These laws specify the MINIMUM price at which a product may be sold. It is said that it “protects the little guy” from big manufacturers selling products below that which a small manufacturer can sell the same product. Let us consider how it REALLY works. The first thing that comes to mind is that the consumer does not get the lowest price. The rich don’t care since they have the money to pay whatever price is asked. The second thing that comes to mind is that the government has no idea at what price a product should sell. They have to go ask the producer, who essentially engages in government enforced price fixing since everyone must charge the same price. The large companies have the advantage of being able to spend millions in advertising claiming their product is “best” and the smaller companies cannot compete by price.

The one place where we can say that a government program “helps the poor”, is student loans, right?? Wrong!! The two places where student loans are spent are trade schools and academic schools. In terms of academic schools, the availability of so much “free money” has driven the price of tuition up so high that only the wealthy can afford to go to college. When the “poor” attempt to go to college, they come out with massive debt—in favor of “the rich” (moneylenders). The loan is guaranteed by the government, so in many cases the money is loaned to people who should not be borrowing it and do not understand the implications of walking out of college with $50,000 of debt.

In the case of the trade schools, the situation can only be characterized as corrupt. “John” decides to open a “school”—e.g. “John’s Trucking School”. John hires a minority “Front Person” to apply for a small business loan to start the school. The school is opened in an “enterprise zone” for the various benefits. Students are enticed with the promise of “financial assistance” that is merely a federal student loan. The students are assisted in applying for the loans, and the entire tuition is paid. The students are recruited from the lower economic strata and “driven hard” so that they quit. After a few cycles, the school goes “bankrupt” and closes its doors. The minority “front” is paid off, and a search is made for another “Front Person” to open “John’s Beauty School”. The cycle is then repeated. (It is not well known but about 35% of student loans go to trade schools, not to accredited academic institutions. Over 70% of these loans are in default.) Who gets left holding the bag? The American taxpayer and the slum kid that is in hock. Who benefits? The rich moneylenders and the con artists.

So folks, face up to it. You ain’t gonna “get the rich”. If they are NOT too smart, they can HIRE the brains. There are 10,000 accountants in government trying to figure out how to “get the rich” and 100,000 accountants out in the world trying to figure out how to (ab)use the laws for the benefit of their employers. Who do YOU think is going to win? Business spends a lot of money bribing (oops, I mean giving campaign contributions to) government to pass or not pass the “right” laws. The citizens don’t have that kind of money to pass out.

What is somewhat disconcerting to ME is that our honorable legislators believe they have to act like they are “getting the rich” in order to be re-elected. It is somewhat alarming to me to believe that a large part (majority?) of our population is sufficiently larcenous, greedy, envious, and jealous that they want our representatives to take money from those that earned it and give it to others to spend. What does that say about our morals and ethics?

I cannot help but think of the story of the old Indian Chief that was talking with his grandchild. He said, “There are two spirits fighting inside of me. One is composed of hope, love, courage, generosity, friendship, trust, kindness, and charity. The other is composed of fear, greed, laziness, hate, anger, jealousy, bitterness, and envy.” The child asked, “Grandpa, which one will win?” The old man replied simply, “It depends upon which one I feed.”

What have we become? More important—upon what road do we walk? What WILL we become? I fear for my country.

Related posts:

1. How To Get Rich Part 1
2. THE RICH GET RICHER AND THE POOR GET POORER
3. How To Get Rich Part 2
4. Soak The Rich – Again and Again
5. WANT A JOB??

This entry was posted on Sunday, May 27th, 2012 at 4:55 pm and is filed under Authors, Economics, History, Opinion, Politics, Tony Demaio. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.