Thursday, July 24, 2008

Instinct v. Antilife

A reflection on some of the ways instinct fights antilife

Tribism (such as racism): antilife because it guides the mind into closing off possibilities for mating, cooperation, learning and growing. It encourages fear and violence. To its most extreme degree, it would lead individuals to resist interaction (and thus, mating and social cooperation) with all those unlike themselves. To a lesser degree, it simply weakens a society

Life fights back with empathy, which is a basic weapon in every case of antilife--however, empathy is too weak in many (or most) humans to overcome the fearful mind, and the social conditioning of tribism that the fearful mind clings to. A more important tool in life's arsenal is lust: powerful enough to cause mating that can force a genetic melding (think: Strom Thurmond) or even gradual socialization. Love for offspring is then forced onto at least the mother, and the melded appearance of the offspring (or the melded characteristics of class or caste, including a joint economic background) leads to greater possibilities for empathy from both the father's and the mother's tribes.

Frequently tied to lust is love or love-like attachment. Desire leads to attachment, which can be powerful enough to break down heavy social conditioning. The rich white girl can run off with the poorer latino guy. The rich kid, with a bright business future ahead of him, can fall for the white trash stripper in the college town, spoiling his parents' desires for a heiress.

Antilife, though, resists strongly through social ordering. Class or caste-based systems discouraging mating or mingling. Rich whites may curse "jungle fever." Youth are taught to conform to rigid notions of acceptable language, acceptable social intercourse, etc. by glorifying one group's historical tradition (which then de-glorifies another, and makes it harder for the close-minded youth to identify with a youth of another group). White protectionists, for example, may glorify or identify with Civil War ties to discourage much social intercourse with latino or black populations. Hispanic protectionists may use la raza to band together (i.e. discourage mingling).

With enough conditioning, the individual can be taught to reject the natural desire to explore and learn from different people. This exploring and learning is healthy--like pollen on the wind, it spreads ideas, diversifies the genetic base, and broadens the potential for an adaptable human future. And so, clannish antilife hates it.

Right now, as always, antilife fights powerfully are trying to change this. Major aristocrats used to exchange noble white blood across their courts, using titles and landholdings to divvy themselves up. As a result, their inbreeding resulted in mentally and physically stunted madmen running Europe through the Dark Ages and any number of wars. Our current inbred chimpanzee president traces his own ancestry to the British nobility, that cesspool of violent old blood that coined our modern perception of colonialism--and so do a good number of other American presidents.

The big landholdings morphed into the trusts and family wealth of America, which still, most often, marries among itself. This is the only way wealthy families can keep wealth concentrated; without intermarriage to other wealthy sons and daughters, great wealth would disperse out over the generations, as multiple children passed it on in multiple directions, and the fortunes of their relative abilities scattered it to the wind or clustered it somewhere else.

Hoarding, the same as genetic hoarding, prevents growth and development. Without breaking up the tendency of wealth to concentrate, business and social dynamism descends, and society grows weaker. Nonetheless, antilife leads to hoarding, because hoarding is the opposite of natural, healthy behavior.

This is why stupid businesses prefer to promote from outside--maintaining a class structure. Of course, the people they bring in don't know what is going on with the business, but they have the "right" background. And in the end, it harms the business, just as it harms the segregationist group.

Death Fantasy

The prime byproduct of our sentience is a high incidence of mental sickness, which inflicts most people to varying degrees. The mind recognizes its own existence, and simultaneously, the lack of absolute control over that existence. For existence itself is surrender; it is a lack of absolute control, and for humans, a lack of very much control at all. If sickness takes hold to some degree, it becomes the fearful mind; its functions become tainted, and its every action is affected by the underlying plague. Term it nonexistence throwback, death reversion or ragnarism.

The death fantasy comes into play here as the ultimate expression of antilife desire. At its core is the underlying tenet of the fearful mind: namely, that the world is a place of imperfection, impurity and fear. As such, to end the fearful uncertainty, the world must be destroyed.

Life fights against this antilife. One of the most potent tools is, of course, instinct, which can keep even the most zealously sick minds acting in facially normal ways. The swirling, random energies of love, desire and self-perpetuation; the social instincts of family, friends and community; the fear of pain and nonexistence that itself sparks the sickness: all these things work against destruction.

But the sick mind will be invariably drawn to death fantasies. Even if never to attempt to carry them out, they are a security blanket for the mind; an imaginary friend with very large fists who will destroy the fearful impurity of the lesser world.

Rapture, resurrection: mainstream examples. Monotheism, and its traditional obsession with absolutes and order, is the polar opposite of life. This is why the major monotheisms are obsessed, in varying degrees, with godly holocausts and eternal punishment. Christianity, which dominates America and American thought, is a necromancer's dream. Everything which exists is tainted by virtue of being part of the lesser world. God "loves" it, but He will destroy it and bring people away from life on Earth to Heaven, in which there will be an undead paradise; immortals who endure with "everlasting life," but who are not actually alive on Earth. The use of the term everlasting "life" helps one overlook the fact that death will occur on Earth. Death itself is the end goal; Christianity the fantasy that you will someday die, and be the better for it.

In fact, everyone will die: Christians will die and go to Heaven, and non-Christians will die and go to Hell. Jesus' death and rebirth is exalted, and hymnals of meeting him, and speaking to him someday, are love songs for the death on Earth that will bring the Christian to a better place.

Smaller groups have a long, deadly, documented history of this type of behavior, often linked to larger monotheistic movements. Having had their minds sickened by St. John's Revelations and cultural approval of Christianity, people in Christianized countries easily make the leap from believing that Jesus may return and start the Rapture at any time, to believing that some other force wants them to exit the world now.

In the meantime, life struggles against it--getting the better of most mainstream Christians. Love, family and community tug against the death fantasy. Good Christians waiting for the rapture still feel for their children, families and friends. But death is always there, calling to them and waiting in the shadows--or under the brightest lights.

All casually accepted. Conversation is peppered with little reminders. "God, what a day." What does it mean? That there exists a perfect God, the existence of whom marginalizes the importance of this petty lesser life. And so, ragnarism wins: the fearful mind spends its life believing that life is something lesser; a means to an end.

What a day indeed--what a terrible way to frame an outlook on the world. No wonder, then, that religious fervor so often goes hand in hand with war.

Tuesday, July 22, 2008

Tax Theft, Part 6

Part 5

Business Valuation Schemes

Business valuation schemes use the estate tax rules to extract from the body politic. Once you understand the many humorous fictional entities that live among us, such as businesses and trusts (as discussed in Part 5), it is easy to see how business valuation schemes work.

What business valuation schemes are good at is pretending that assets are worth less than they are actually worth (similar to how the artificial IOUs worked between Owner and Trust in Part 5). Lying about the actual worth of assets is a simple way to avoid tax. For example, pretend that Worker 1 works for a year and earns $20,000. The tax rate is 10%, so he owes $2,000. However, if he lies to the rest of us, and says that he only earned $10,000, then he will only have to pay $1,000 in tax, and he has successfully stolen $1,000.

Now imagine that, instead of lying about his earnings for a year, Owner A has $12 million in the bank, and that there is a 50% estate tax, and a $2 million estate tax exemption. Owner A dies. $2m of his $12m is exempted from estate tax, leaving $10m subject to estate tax. At the 50% rate, that is a $5 million bill.

So, to solve this problem, Owner A lies about his net worth. He tells the IRS that he only has $7 million, rather than $12 million.

If he gets away with this lie (rather, if his heirs get away with it, since he is dead), he will be taxed $2.5 million instead of $5 million ($7m of acknowledged assets - $2m exemption = $5m subject to tax, x 50% rate = $2.5m). Thus, he will appropriate $2.5m from the rest of us.

Of course, he will not get away with this lie as it stands. Rather, he will need to rework the untruth into an acceptable form. The Internal Revenue Code is designed to be complicated, long and obtuse in order that only certain people--the wealthy, with their lawyers and financial advisers--can take advantage of it.

To lie successfully, Owner A must "sell" his assets to a business he owns. Just like the fictional trust, our society accepts that if Owner A writes down business rules on paper (sort of like writing the attributes of a monster in a dungeons & dragons game) then the business comes to life and exists, and can do things independent of its creator.

This is antilife; logos; godplay; ragnarism; mental sickness. Our society nurtures and loves these imaginary Frankenstein's monsters exactly because they do not exist: they are sick creations of fearful minds. For, reasonably, imaginary things cannot "own" or "do" or anything else. Imaginary things only have life among those who believe in them. So, "Jedi Knights" can exist to Star Wars fans, but if we write Jedi Knights into our legal code and allow them and their statutory lightsabers to "do" things, we have a problem.

Once Owner A has created Business B, and sold his $12m of assets to Business B, he is ready to prepare for the business valuation scheme and cheat us all out of $2.5m in taxes. He now "divides up" his imaginary Jedi-Knight business into pieces, and hands them out to his children and friends before he dies. So, out of Business B, he cuts 5 slices:

Business B Piece 1
Business B Piece 2
Business B Piece 3
Business B Piece 4
Business B Piece 5

Each of these slices of Business B is 1/5, or 20%, of the whole.

So, the logical conclusion would be that each part is worth 20% of the total. But that is not what the IRS says, and that is how Owner A steals from the tax base. He argues that 1/5 of Business B is not actually worth 1/5 of Business B. Because it is only 1/5, it is a minority interest. Maybe he put a restriction on it (as in the advanced trust schemes discussed in Part 5) for sale, so that it can only be sold to other family members. Thus, he can say it is worth even less, because it is not freely marketable. And so, using these excuses, he (and his heirs) can pretend that all the pieces of Business B are worth much less than they actually are.

So, each 1/5 piece gets valued at less than it is actually worth. When you add up all five of those values, the sum total is less than what Business B was worth to begin with--a lie you can achieve just by imagining such an entity as Business B, then imagining that you sell your things to it, then imagining that you divide it up like pie.

Of course, the only reason Owner A divided up the business this way was to perform the tax cheat. Once he dies, his heirs--the same people who would have gotten the business anyway--file an estate tax return listing the phony value for Business B. Then, they consolidate their shares in the family, and either sell them off at market value (i.e., the actual worth of the business), or they keep running the business themselves. And the value of the business has successfully done a skip and a jump right over the estate tax into the dynasty's next generation.

Tuesday, July 15, 2008

Tax Theft, Part 5

Part 4

Advanced trust schemes

Using bypass trusts to double up the estate tax exemption amount is sufficient to eliminate estate tax liability when the holdings of a dead noble are under double the exemption amount. For example, if the exemption amount is $2 million per person, and Owner A and Wife B own $4 million of assets, they can use the bypass trust trick to shield the full $4 million from estate tax.

When the exemption amount goes up to $3.5 million per person in 2009, the bypass trust trick will shield $7 million (3.5 x 2) from estate tax.

However, once a noble house has more than $7 million in assets, even the bypass trust cannot protect those additional dollars from tax. While the family will certainly use the bypass trust to protect $7 million of assets, each dollar owned above $7 million will be taxed at the full estate tax rate. So, if the estate tax rate is 50%, and the family's assets are $7,000,001.00, the tax due will be 0.50, or 50 cents (the bypass trust will protect $7 million from tax, and so the remaining $1.00 will be subject to tax at a 50% rate). If the family's assets go up to $8 million, the family will owe $500,000 in tax (bypass trust protects $7 million from tax, so the remaining $1 million is subject to tax at a 50% rate).

How can the family then avoid paying its fair share of tax on amounts about the exemption they have already doubled with their bypass trust? Luckily for them, it is still possible. It will take a more experienced (and expensive) tax-planning lawyer to come up with further trust schemes, but the results will be well worth the investment, and both the lawyer and the wealthy family will be happy. The only one to suffer will be everyone else.

Advanced trust schemes are actually quite simple, once you accept the legitimacy of various assumptions on which our society is based. One of these we have already learned to accept: the bypass trust. For example, if a wealthy person says, "I have a trust," we all agree to be nice and pretend that there is an imaginary person called Mr. Trust who owns property and does other things. Accepting that various trusts can be independent entities is a vital part of our economy, without which tax theft could not continue: nobles need to be able to make up imaginary people who can do business with them in order to keep the wheels running. So, we all accept that if someone creates a business or a trust, that entity can own property, pay taxes, make income, take actions, make decisions, have interests, etc.

So: for advanced trust schemes to work, we must all accept that a person, Owner A, can create Trust A, and that Trust A is then its own separate entity, distinct from Owner A. Of course, Owner A can do just about anything he wants with property that "belongs to" Trust A. But by law, Trust A can be a separate entity from Owner A.

This is where the fun part comes in. Assume that Owner A has $17 million of assets, he is very old, and he expects he will die in a few years. He has a bypass trust, Trust A, all set up so that he doesn't have to pay taxes on $7 million of those assets. This means that, unfortunately, he has $10 million of assets subject to tax (17 - 7 = 10), at a very high estate tax rate (say, 50%). That's a "tax liability" of $5 million; in other words, when he dies, he will owe the country $5 million.

To get out of having to pay this, he comes up with an idea. First, he creates Trust B. Then, he sells Trust B $10 million of his assets. (Those assets might include an apartment building, a plot of land in a gate community that someone could build a house upon, a commercial building, ownership interests in other businesses, oil/gas rights, etc.)

The fair market value of these assets is $10 million, which is what would be included in Owner A's estate when he dies, and thus be subject to tax. However, Owner A is clever, and when he sells the property to Trust B, he writes the deals in a strange way.

Firstly, Trust B does not have any money to buy the assets--certainly not $10 million. So, Trust B gives Owner A an IOU instead of cash.

Then, instead of Trust B having to pay a market rate of interest (which is the rate of interest anyone else would charge Trust B for borrowing $10 million), Trust B pays the lowest possible federal rate. This is often several points of interest lower than the market rate.

For example, let's say the market rate is 7%. This means that if you borrow $1 million for one year, you will have to pay back $1 million, $70,000.

So, if you borrowed money from someone at less than the market rate (say, 5%), and then reinvested it, you could turn a profit: for example, if you borrowed $1 million at 5%, you would be expected to pay back $1 million, $50,000 at the end of the year. Thus, if you were clever, you could borrow $1 million at 5%, invest it at 7%, and receive $1 million, $70,000 on your investment. Then, you would pay back your original loan for $1 million, $50,000, and have a $20,000 profit.

For this reason, if the market rate is 7% (or near 7%), no one would loan you money for 5%. Why would they? That would just cost them the 2% difference; i.e., if they loaned you $1 million at 5%, they would be losing $20,000 that year. The only reason someone would do that is if 1) they were gambling that the rate would go down lower than 5% during the year, so that they would be making money on your loan by locking you into that rate, or 2) it wasn't really a loan, but a gift of the amount of difference in interest.

The IRS, though, is very nice to the wealthy. It establishes the federal rate, which is the rate you can make loans at without them being considered gifts (and being subject to gift/estate taxation). The federal rate is very low compared to the market rate--it is usually around 3%, while the market rate is several points higher.

So, clever people can transfer wealth without having to pay gift or estate tax by using sham loans at the federal rate. As I said before, no one actually gives loans to someone at such a low rate, unless it is a gift--the purpose of the lower federal rate is to allow clever people to structure gift transactions as "loans" so that they can transfer wealth between generations of a dynasty without that wealth having to pass through the estate or gift tax process.

But, returning to the main subject of advanced trust schemes: Owner A has just sold his trust, Trust B, $10 million of assets. And, he has made the sale at the federal rate, rather than at the market rate. This means that his imaginary friend, Trust B, is getting a huge deal--$10 million of assets that he can invest at market rate, which he only had to pay federal rate to acquire.

This isn't small potatoes: if market rate is 7% and the rate of the loan Trust B took out to buy the assets (federal rate) is 3%, Trust B can invest the $10 million, make $700,000 in the first year (7% of $10 million), pay $300,000 interest on the "loan" to Owner A (3% of $10 million), and have a $400,000 tax free gift in the trust.

This gift of the extra money the trust made will ultimately go to the trust's beneficiaries, i.e., the same people who would have inherited that money directly from Owner A if he had died without making up Trust B first. However, that money would have been in Owner A's estate, and subject to estate tax. This fake "sale," where Owner A pretends he is selling his assets to an imaginary person named Trust B, is one of the tricks used to get Owner A out of paying taxes based on what he is actually worth.

A nice savings. If Owner A had invested the $10 million himself (rather than having his imaginary friend Trust B invest it), he would have had the $400,000 of income in his estate when he died at the end of the year. That $400,000 would have been taxed at the high estate tax rate (say, 50%), so by making up that imaginary person (Trust B), he just avoided $200,000 of tax. If he lives for another year, and the trust makes another $400,000, there's another $200,000 of savings. If he creates the trust 5 years before he dies--well, the "savings" just goes up.

The savings on Trust B's earnings, though, is just one way to get out of taxes using the "selling assets to your imaginary friend" trick. An even better part of the trick, which Owner A has already used, is that the debt Trust B gave him in order to purchase his $10 million of assets is nowhere near $10 million.

How does that work? Well, think about it from Owner A's perspective. He sold assets to Trust B so that they would not be "his" anymore, and therefore subject to that nasty estate tax. However, doesn't it seem like if he sells $10 million of assets in exchange for a $10 million debt (Trust B's promise to repay him for the assets), his estate did not actually get any smaller? For example, reasonably speaking, if Owner A sells Trust B $10 million of assets in exchange for a $10 million debt with interest, and then Owner A dies, that debt--that IOU--is worth $10 million, right?

Wrong--and therein lies the best part of the "selling assets to your imaginary friend" plot. For a number of reasons, the IRS allows Owner A to pretend that his IOU of $10 million is worth less than $10 million.

One reason might be that the interest rate is so low. But wait--I thought, if Trust B promised to pay the federal rate, then the transaction was completely acceptable and legitimate. Well, it was--except that, once it has been deemed legitimate, Owner A can say that the IOU is worth less than $10 million, because it is not paying a market rate of interest. Owner A's argument is, "This debt is not even paying me market rate! So, I am losing money on it, because if I had invested my $10 million of assets elsewhere, they could be making a higher profit than federal rate!"

Luckily for Owner A, he is allowed to have his cake and eat it, too. So, because the IOU is at lower than market rate, he can value it at, say, $9.5 million instead of $10 million.

Thus, $500,000 more of assets are exempted from estate tax because they are owned by an imaginary friend who gave him an IOU worth less than the assets. This is considered intelligent American tax planning.

But we're not done yet. There's another problem with the IOU that Owner A has. Can you guess? That's right: it's an unsecured loan. Unlike your typical home mortgage, which is secured by an interest in the house (until the buyer pays the bank off), the IOU that Trust B gave Owner A is not secured by an interest in any of the assets that Owner A sold Trust B. So, clearly, Owner A's IOU is not even worth $9.5 million. As Owner A would say, "No one else would buy this risky IOU for $9.5 million--not without security!" So, he is allowed to value it at, say, $8.5 million instead.

Another $1 million saved from estate tax. But wait--you guessed it. There is still another problem with the IOU that Trust B gave Owner A. It has limitations on transfer. As part of the IOU agreement, Owner A agreed to limitations on how he could trade the IOU for someone else's IOU. For example, the IOU contract might say, "This debt is non-transferable on the third, seventh, and nineteenth days of any month" (or some other similar nonsense).

Because of this "transferability problem," Owner A could argue that, on the free market, he couldn't get $8.5 million for his IOU, because potential buyers would be put off by the limitation on what days of the month the IOU could be transferred at. So, Owner A gets to value the IOU even less. Let's say down to $8.3 million.

And so on. In the end, Owner A will actually end up paying some tax, but he will avoid hundreds of thousands of dollars (or millions and millions, depending on how many assets are "sold" to how many "trusts") of his fair share. He might sell the IOU to someone else in exchange for a different IOU to another wealthy person's trust, or he might sell it for other business interests, and in doing so, cause it to be "worth" even less.

Now, in a sane world, someone might point out that the whole reason there are so many "problems" with the IOU is because Owner A doesn't really have an IOU from his imaginary friend; rather, he is just playing pretend with his assets so that he can act like they are worth less, and skip out on his tax. But in America, that viewpoint holds no water, and whoever advocates it clearly just does not understand the legal tradition.

Trust B, as just described above, is the Intentionally Defective Grantor Trust, or IDGT ("I dig it"), which is one of the most commonly-used tools for reducing estate tax for nobles with estates larger than the doubled exemption amount (post bypass trust planning).

Business valuation schemes next, for real this time.

Wednesday, July 9, 2008

New Jon Benet DNA

New DNA evidence

The new claim is that the parents were not the killers because twelve years after the killing, a new DNA test showed that there may have been a spot of DNA from a male who was not a family member on the murdered girl's clothes.

Putting aside what happened in over a decade of storage and handling by however many police detectives, janitors, lawyers, and the like--sent-out laundry and visitors to the home and a dozen other possibilities suggest themselves as explanations. Also, the fact that this was such a miniscule find that it took a highly-advanced test not available until today to turn it up, and that a killer involved in direct physical strangulation might just possibly leave more than such a tiny spec on his victim.

For those not acquainted with the case, a short rundown of revealing facts:

* No footprints of any kind outside the house in the fresh snowfall during or immediately after the time of the murder.

* No broken windows or locks of any kind on the house during or immediately after the time of the murder. Doors were locked after the murder, and no one was in the house in the morning except the family.

* No sign of struggle or abduction between the girl's upstairs bedroom and the basement downstairs where she died. No one reported noise or struggle. Someone the girl knew and trusted brought her downstairs into the basement before strangling her.

* Ransom note discovered is in mother's handwriting, and makes a demand for the precise amount of money ($118,000) the father had just received as a Christmas bonus earlier that week, a figure unknown at that time except to the family and the employer.

* After the father reports the girl "missing," he immediately calls his lawyer, then invites several friends over to help him "search" the inside of the house. He keeps them out of the basement, where Jon Benet's body is. Police then search the inside of the house and find no evidence of struggle or kidnapping. Because of the ransom note, they suggest waiting for a call. Father then goes down to the basement "to get something" and "finds" the body.

* Mother had recently returned from membership in a Christian extremist group that used the acronym SBTC, for "saved by the Cross." "SBTC!" is referenced in the ransom note.

* Jon Benet's body had been bathed after it was killed, to remove evidence. That means someone took it up to a bathtub before replacing it in the basement. Father and mother claim to have heard nothing.

Now, because some unknown boy or man at the laundry service may have brushed by one of Jon Benet's pieces of clothing, or left it at her house and had it picked up by her clothing, or left it on her mother's or father's clothing and had it picked up by her clothing, case solved.

The father, who still lives, will be pleased with this news, and like O.J., he can now continue his vigilant search for the real killer. Who floats over the snow. And can walk through walls. And knew Jon Benet enough to trick her down to the basement. And who then strangled her in the house knowing her family was upstairs the whole time. And then who carried her back upstairs to give her a bath before returning her to the basement. And who then exited the house and locked the doors on his way out and floated over the snow to leave.

Tax Theft, Part 4

Part 3

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, thereby 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 3, where the wealthy transfer properties between one another, are facilitated by commercial interest deductions. In fact, interest deductions are one of the major reasons behind those transactions to begin with.

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 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, etc.?

(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.

Basically, what this 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.

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, and 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 who it passed through. 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 it" 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 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, 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, and 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 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.

Next up: business valuation schemes

Tuesday, July 8, 2008

Tax Theft, Part 3


Part 1

Part 2

Reinvestment in similar industry (Sec. 1031) schemes

After understanding the larceny possible with the step up in basis, the "reinvestment" scheme is remarkably easy to understand. It stems from the concept of realization, the trick used to postpone paying income tax on the investments of ownership (in contrast to the investments of work, which are valued taxed paycheck to paycheck, and yearly). A quick review: realization is in imaginary leap referring to the time when income is "realized," and thus taxed: thus, the aristocracy can employ realization to shield their income from taxation. So, if a wealthy man owns land that goes up $100 in value, and an average man works and earns $100, the average man is taxed, while the wealthy man says, "I have not realized my income until I sell the land."

What happens, though, when the wealthy man sells his land? Is he taxed then, after being able to put it off for as long as he wants (or forever, using the step-up in basis technique)?

No. He is again protected from taxation, through the trick "reinvestment in a similar industry." The citation for this scheme is IRC Section 1031.

How it works is this: the wealthy man owns his property through a business. Let us say that Wealthy Man A owns Business B, which owns Land C. So, A owns B, which owns C.

C goes up in value $100. B (at the direction of A) then sells C, thereby realizing $100 of gain (the realization scheme relies upon the fiction that income is postponed until the time of sale). Then, A wants to avoid tax, so he has his business use the proceeds of the sale to buy another piece of property, a factory, a building, a farm, etc. The "reinvestment in similar industry" rules allow him, if he buys another piece of property like this, to not pay tax yet again.

Why is this allowed? The aristocracy justifies it by arguing that it would "stifle business investment" if the wealthy were forced to pay taxes when they sold property to buy other property, because then wealthy people would refuse to sell property just to avoid having to realize their income, and be taxed. (Of course, the only reason they would have such motivations to hold property in the first place is because of the realization scheme that helps them postpone taxes until sale.)

Thus, the aristocracy argues that postponing tax yet again allows them to buy and sell properties freely (literally "freely," since they are avoiding tax), which helps the economy, which helps everyone. In actuality, it helps the aristocracy to never have to pay tax.

(There are some qualifications to this rule, of course; little technicalities to ensure that only the savvy wealthy whom the scheme is designed for (with lawyers and family wealth planning) can take advantage of it. They are weak qualifications, the strongest being that you have to "reinvest" the proceeds of sale (i.e., buy a new piece of property) within 45 days.)

The larger effects of this theft can be staggering when the reinvestment in similar industry provisions are combined with the realization provisions and the step-up in basis. Here's how it works:

1) The realization provision allows you to postpone paying income tax until a property is sold;

2) The reinvestment in similar industry ("like-kind") provisions allow you to postpone paying income tax even when you sell a property, as long as you buy another property within 45 days;

3) The step-up in basis provisions allow you to eliminate any income tax inherent in an unsold property whenever a wealthy owner dies.

Can you see where this is going? What this system amounts to is a pass to the wealthy against ever paying income taxes at all on their greatest pieces of property. All the wealthy need to do is hold property, watch its value rise, and enjoy the increase in their dynasty's net worth. As long as they wait until the death of a family member, and distribute ownership interests accordingly, the step-up in basis protects each generation from ever paying income tax. And, if they ever want to sell a property without waiting for a death, they simply have to find another noble family in a similar predicament, and switch properties.

This is much of what commercial land deals are: "businesses" (owned by the wealthy, through trusts or other businesses) such as commercial real estate, apartment buildings, etc., being switched back and forth between different dynasties, who each use the transaction as a justification for bringing in IRC 1031, and canceling out any income tax on all the gain they got from the increase in their property's value.

On paper, it seems like two (or a dozen, in a big, happy circle) different businesses are making different investments for the purpose of profitability and bolstering the economy. In fact, the nobility is playing hide the pellet, and is exchanging the properties around primarily to wipe out income tax without using the step-up in basis at death. With each new transaction, income is "deferred," and the dynasty can buy and sell and move whatever it wants without tax, until finally someone dies at some point, and the step-up in basis frees up the next generation to do the same thing, without ever paying its fair share to the rest of the country.

Entire industries within the legal, financial services, and property appraisal fields have sprang up to serve these transactions, by generating official-looking paper trails, earning fees, and ensuring that the wealthy families fairly compensate one another for the properties they switch between their respective businesses and trusts. But, the money spent on these middlemen is nothing compared to the vast amounts stolen from the body politic through these overlapping tax schemes.

Next up: interest schemes

Thursday, July 3, 2008

Tax Theft, Part 2


Part 1

Step-up in basis

The step-up in basis scheme is an even greater theft from the body politic than the bypass trust. This is because the step-up in basis scheme is a means for avoiding the income tax, which is a tax of greater importance than the estate tax. While the estate tax at first seems like it will be of greater concern to the wealthy, that is not in fact the case: the estate tax taxes the accumulated holdings of the wealthy, while the income tax taxes their phenomenal gains in wealth built up during each generation's lifetime. Given the combination of inflation, increasing money supply, economic development, and general rises in price and accredited value, the income tax that can accrue over the decades-long lifetime of a burgeoning lordling can be a great deal more troubling to he or she than the estate tax.

There are, however, many ways of stealing that tax from the masses. An introduction to the concept of basis is necessary to understand how most of these work, including the most devious of all, the "step-up" in basis.

Basis calls for a look at the underlying philosophy of the income tax system. Under income tax, "income" is theoretically taxed. However, there is a duality in the tax system that represents the first opportunity for the aristocracy to take advantage. This duality is the split between work and ownership. As ever since the inception of the aristocracy, owning something is viewed as more important than working for something. This is because owning is a concept that depends upon human perception, while effort/sweat/labor is a tangible part of the real world. Owning is thus more attractive to the nobility than working, because owning involves doing nothing more than sitting there, while working involves work. Which can be hard and can take effort.

The nobility makes money primarily by "owning" things. For example, Lord/Businessman A "owns" a field. Peasant/Employee B works in that field. During Year 1, L/B A sits on his ass, while P/E B works his ass off. At the end of the year, Fruit X is produced. For his ownership, L/B A receives 90% of the Fruit. For his work, P/E B receives 10% of the Fruit.

The justification for this system is that Owner has taken a risk by investing his resources (which he, of course, "owned" before, in a dazzling feat of circular logic) in Field. The problem with this argument is that Worker has also taken a greater risk--he has invested a year of his life working in the Field. The justification only works, then, if one views money/resources as more important than life; i.e., it is a ragnarist justification ( and ). Nonetheless, this is a tax discussion, not a property rights discussion, so leave this point for now.

Returning to the amounts of Fruit X received by Owner and Worker in Year 1: both of them have received income. However, it is unacceptable to the Owner that he pay income tax on his income. Nonetheless, someone has to pay the tax. So, that burden has to fall on Worker. The problem is, an "income" tax is supposed to tax income, so it would seem that Owner owes a tax the same as Worker.

Not so. The first way around this is for owner to make up different systems of tax classification. These are called ordinary income--which is the income earned by people who work, like Worker--and aristocratic income. Then, you decide that you tax those types of income at different rates. For example, ordinary income will be taxed at the full, or highest, rate. Aristocratic income will be taxed at a lower rate.

There are a lot of different types of aristocratic income. One of them is capital gains income. This represents the increase in price of things over time. So, if Owner owns Field G, which he paid $100 for, and ten years later, because of great harvests, Field G can be sold for $500, there have been $400 of capital gains. This is currently taxed at 15%, which is lower than the tax that Worker pays. So, if Worker works for four years, and earns $400 of income, it will be called ordinary income, and he will pay a higher tax on it than Owner will pay on his $400 of capital gains income.

Another clever way that the aristocracy has come up with to classify income is dividend income. Pretend that, instead of owning Field G directly, Owner owned an imaginary person (a "corporation"), called Fields, Inc. Fields, Inc. owns Field G. After 4 years, Fields, Inc. makes $400 of income from Field G. It pays that income back to its owner (Owner), who has $400 of income. However, unlike the income earned by Worker during that time, this is not ordinary income, but rather a special kind of income known as dividend income. And Owner gets to pay a reduced rate on it.

However, this is not even the most cunning part of the scheme. The cunning part is that Owner not only gets to pay a reduced rate on the most important part of his special income (his capital gains), but that he can put it off for a long time. Whereas Worker has to pay his tax right away that year (or the IRS will punish him severely), Owner can wait until he realizes his gain.

This is where basis comes in. The basis of Field G is the amount Owner paid for it--$100. When he sells it for $500, the profit is determined by subtracting the basis ($100) from the sales price ($500) to determine the capital gain ($400).

The discrepancy in treatment comes in when you look at the years before Owner sells Field G. During those years, Field G is going up in value--so Owner has income of that amount. In the first year, it is worth $100--the same he paid. In the second year, it goes up to $200; in the third year, $300; in the fourth year, $400, and in the fifth year, $500. However, because Owner is Owner, and because he is not Worker, he gets to put off paying taxes until his realization event, or the time that he sells the farm/field. Meanwhile, Worker has been earning $100 a year, and has been paying taxes on that every single year.

Owners rationalize this by saying it is difficult to value the improvement in the field's net worth each year, without being able to sell it. The problem with this argument is that it is also difficult for Worker to pay tax. Worker would prefer to keep his money and pay taxes later, just like Owner. However, Owner is the only one allowed to use arguments like that, so Worker has to pay taxes every year, while Owner can put them off until he sells his field. (Owners also argue that until they sell the field, they will not have the cash to pay the tax, so the tax should be put off. Workers would like to argue that they are low on cash to pay their taxes, too, but again, those arguments are only allowed to Owners)

Moving right along, the basis idea comes back. We have already covered how Owner does not have to pay tax until he sells his field. But what happens if Owner decides not to sell his field ever, so that he never has to pay the tax? Let's say that during his entire life, he owns the field, and it goes up in value, but he never sells it, never has the realization event, and is never taxed. Does he escape the tax entirely?

Yes. The aristocracy's trick for stealing that money is the step-up in basis. What this scheme does is declare that when someone dies, all their property gets a "step-up" in basis to the market value at the time of death.

So, let's say that Owner bought Field G for $100, owned it for 50 years, then died. During 50 years, it went up a lot in value--to $5,000. That is a huge increase (if you add some zeroes) in wealth, and a lot of income to Owner.

However, Owner is clever. When he dies, he passes Field G to his son, Owner 2. Owner 2 then sells the Field for $5,000. Because of the step-up in basis, Owner 2's basis in the field is $5,000--the market value at the time Owner 1 died--and Owner 2 does not owe income tax.

Congratulations to Owner 1 and Owner 2. By planning over the lifetimes of their dynasty, they have avoided paying income tax on $4,900 of income (add as many zeroes as is required to see how this effects the body politic). In the meantime, Worker 1 and Worker 2 (and all their family lines) will be paying income tax on their work, year after year after year.

The best way for the aristocracy to exploit this is to invest their resources each generation, using the death of any family member to be an event for "step-up in basis." With wealth reinvested after each death, the family can realize colossal income, and see its wealth go higher and higher, without ever paying tax on its monumental holdings.

Upcoming: interest schemes; reinvestment in similar industry schemes, and business valuation schemes