Friday, October 21, 2011

Tax Theft 5

Continuing from Part 4.

Interest deduction schemes

Short and simple. Home mortgage interest deductions offered by the IRS are familiar to many people. These work by subtracting the amount you pay as interest on a loan from your taxable income, effectively lowering your income tax.

So, if your income is $50K, the tax rate is 10%, and you pay $10K for renting an apartment, you pay $5K in taxes (10% of $50K). If your income is $50K, and you pay $10K in mortgage interest, you pay $4K in taxes (10% of $40K, or 10% of $50K income minus $10K mortgage interest deduction).

Two things about the interest deduction are important to tax theft. The first is, this deduction is available for commercial loans, not just for regular American citizens trying to afford the house they live in. The commercial transactions discussed in Part 4, where the wealthy transfer properties between one another, are facilitated by commercial interest deductions.

Here's how it works: we already know that the aristocracy avoids tax by using the step-up in basis at death to wipe out any tax when huge amounts of appreciation income are transferred between dynasty generations. We also know that, in order to transfer property before death without being taxed, they use reinvestment in similar industry schemes to swap properties between families without having to pay tax. So then, where do they get liquid cash to buy luxury cars, home furnishings, vacations, et cetera.?

(Note: when considering all these tax theft plots, do not forget that other types of investments--from cash to stocks to bonds--are also being held and used by the wealthy. When these accounts grow in value, income tax is primarily cheated through the step-up in basis: each generation holds funds that grow in value, with the growth being wiped out at the older generation's death. In the meantime, dividends, interest and rents--the benefits of nobility--are still being kicked out to the owners. There is some income tax actually paid, but at a massively reduced rate from the income that is actually occurring. The wealthy do pay some taxes, but the brilliance of the theft is that they are not perceived as being totally exempt from taxes, and thus, the schemes continue. This is part of where the "CEO pays at a lower rate than his secretary" anecdote comes from.)

Back to liquidity. When nobles sell real estate at huge gains, and want to reinvest the gains (via a business) into a "similar industry" in order to avoid paying tax on their gains, they do not actually reinvest those gains. Instead, they keep them for fun and spending, or for other investment purposes. The place that they get the money to "reinvest" is through a commercial loan. Commercial loans come from banks, like mortgage loans, and the interest that the wealthy pay on them (again, through corporations and trusts) is deductible from the income tax they would otherwise be fairly paying.

Dizzying, if one tries to accept this as fair or reasonable--this type of scheme being why taxes are considered so complicated. They are complicated, so as to make it more difficult for a tax-ignorant lower caste to perceive how they are being had.

Basically, what the interest deduction means is that regular taxpayers--the body politic--subsidize the aristocracy's business transactions. Let's say that, after dodging as much tax as he possibly can using other tricks, Donald Trump owes tax on a taxable income of $5 million. In essence, this means that the city/state/country he lives in needs $5 million more to run society--pay for police, fire, schools, military protection, road-building, etc. The services actually offered to the lower caste are inadequate, which is where zoning and physical segregation come in, but there needs to be a facade of such services in order to establish an efficient aristocracy that has to deal less often with expensive rebellions.

What does Donald Trump do? To get out of paying that tax, he simply borrows $100 million at 5% interest on a commercial loan, and invests it in an expensive, fancy building. He pays his friends at the bank $5 million a year interest, which he then deducts from his taxable income using the interest deduction. And, his tax liability goes down $5 million, which means that the rest of the body politic has to pick up the tab.

Understanding how commercial loans are justified by the nobility requires understanding the basics of our money system. Thankfully, both are simple, and they stem from the idea of impartial money.

Impartial money (which is something of a redundant phrase) refers to the idea that money--numbers on a page or cash in the hand--is detached from the effort that created it. I.e., if I work hard to dig a hole and am paid $5, I can walk down the street and get mugged. The mugger then has the $5. When he goes to buy beef jerky with that $5, the clerk taking the bill does not know that the $5 was earned by digging a hole, or even that it was earned by mugging. He just knows that it is $5, so it is "worth" something.

This is the price that regular people pay for living in a system where the means of exchange--money--is divorced from the means of creation--work. Without impartial money, people who did nothing but sat on their asses and "owned" things for a living would starve off, because their efforts--zero--would produce nothing of value. If the economy were based on reputation, hard work, and individual effort, then the means of exchange could be attributed to the person who did the work. This might not have been possible once, but it is now, with technology--similar to ebay feedback, with the kind of conscientious fund-tracking that modern banks are capable of--our means of exchange could be tagged, so that we know where every dollar and cent originated, and through whom it passed. The aristocracy's banking system, however, does not allow this option to enter into feasibility, because impartial money is required for most of their schemes.

Impartial money works in commercial loans because it helps smokescreen the source of funds. As discussed in the previous section, reinvestment in similar industry is used to justify postponing (forever) income tax caused by an increase in the value of a property. It relies upon the assumption that there is no income realized when a wealthy person sells a property, as long as they immediately reinvest those same funds in another property. How can I pay the tax, the wealthy person asks, if I just spent all the money I made on selling Property A by buying Property B? (Of course, the person of average means may not protest that he spent all his taxable income on rent, food, and retirement savings, and should therefore be exempted from tax. He would end up in jail and have his accounts emptied.)

The joke comes, however, in between the wealthy person's sale of Property A and purchase of Property B. Once Donald Trump sells Property A, and puts the $10 million from its sale in his bank account along with all his other millions, the impartial money mixes together. It is indistinguishable from all of the other millions that are already in his bank account. How can you tell if he "reinvested" those exact funds in a "similar industry"?

You can't. So, the aristocracy just gets the benefit of the doubt every single time. The wealthy owner sells a property, pockets the proceeds, and then buys another property later. It doesn't matter if he keeps all the cash from the sale in one account, and uses money from a commercial loan to buy the new property. Once the impartial money from the commercial loan enters his bank account, it is indistinguishable from the funds he received from the sale of Property A--it's all transacted in impartial dollars, with no beginning or end.

So, anytime he wants to sell a property that has a huge gain in value, he sells the property, keeps all the money, then takes out a commercial loan to buy something else--and doesn't have to pay tax on the first sale, because he has "reinvested." Then, he gets to deduct his tax even more by using "interest deductions."

The picture described in Part 3 now grows even more fun. The wealthy spend their days engaged in commercial real estate transactions (okay, let's be fair; they have people to do that for them while they sleep and/or golf), acting out a Game of Houses by buying and selling different properties, and loaning money back and forth between each other--and with every single transaction, they get a deduction! Owner A sells Property Z to Owner B. Owner B gets a loan from Bank Y (which is owned by Owner C's three corporations, four trust funds and two LLCs) and deducts the interest. Owner A buys Property X from Owner B and gets a loan for it from Bank Y. Owner B wipes out his income tax on Property X by buying Property Z, while Owner A wipes out his income tax on Property Z by buying Property X. All of their lawyers get a respectable slice of the pie, and then they all fly to New Zealand for a two month vacation before returning home to sign a new set of papers, sponsor a new deal, and make another few million bucks. Fun!

Resumed in Part 6.

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