Tags: tax | rich | foundations | Buffett

Tax the Rich Foundations, Not the "Rich"

Monday, 17 Dec 2012 07:37 AM

By Denis Kleinfeld

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Blurbs on the Internet from Truthout.org made me suddenly realize that the "rich" that everyone is arguing about taxing really are not the same rich who should be taxed.

The blurb talked about some letter signed by more than "30 of the wealthiest Americans" that allegedly argued that the estate tax should be raised, not lowered.

In the flash of a second, I understood the problem and solution.

It's almost impossible to define the "rich" by income. Nobody actually knows what "income" is other than mystically divining it from some 70,000 pages of the Internal Revenue Code.

However, I think that everyone — left wing, right wing and those with no wings at all — can agree that people who have the kind of assets that can be given away to some foundation are rich.

This defines the rich not by income, but by actual wealth.

People, like Warren Buffett, who are so publicly in the forefront of getting other people to pay more income tax while they, of course, have an army of tax pros who figure out how not to pay taxes.

The total amount being held in private foundations is hundreds of billions, if not trillions, of dollars.

Setting up a private foundation takes a lot of money. Not income necessarily, but the kind of money that is so far in excess of the founder's needs that giving it away will not change their lifestyle in the least.

Besides, the tax benefits of setting up a private foundation are a delightful basket of goodies for those in the Buffett level of rich.

In simple terms here is how this works.

At some point, people who are rich find that even with buying more houses, artwork, yachts, planes and other toys they don't stand out in their crowd.

But they begin to realize that they had a hidden passion for helping others with education, scientific endeavors or religious pursuits. This realization is spurred on when the tax advisors inform their client that giving is a good tax shelter and a good way to get recognition, public accolade and honored at award dinners.

The government allows private foundations on the banner of being 501(c)(3).

So, their tax pros set up the foundation, get it blessed by the IRS and the donor now makes the donation.

In return, they can claim a big deduction on their income tax return. And the earnings (except for unrelated business income) of the foundation are income-tax free.

In effect, since the foundations do not pay tax on earnings, then the other taxpayers are paying extra to cover the taxes the foundation would have otherwise paid on its income.

Many take the tax saved because of the charitable deduction and buy life insurance. The result is that they can wind up having an even bigger estate to leave to the wife and kids — and it all passes free of any estate tax.

Of course, the family joins the foundation's board of directors and are entitled to the first-class benefits as befits those charged with investing rather large amounts of money and deciding who gets to be blessed with some of it.

An article by The Associated Press pointed out that a study by the California Attorney General found only about half the money received as donations actually winds up with the charities. Over half is taken up by "expenses."

Truthout.org, for example, shows in the latest annual report I could find, that it raised $1,641,573, but after "expenses" only $424,743 was left.

Some 501(c)(3)s are not even that good.

Just so there are no misunderstandings, there are any numbers of foundations that use 100 percent of the donations received for the stated foundation's purposes.

Overlooked in the histrionics over taxing the "rich" is actually taxing those who are rich.

Billions of dollars can be collected in tax by eliminating the earnings of 501(c)(3)s for income tax purposes and taxing the income of the money that the rich donate in spite of the lack of a tax deduction. Repeal the estate tax, as the money has already been taxed.

Importantly, who would complain?

The rich gave the money away since they don't need it. The beneficiaries are getting money that they otherwise would never have had. The government collects tax from the actual rich.

Taxing the rich is not all that controversial. It just depends on who you think are the rich and how best to tax that wealth.

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