14 February 2012

Justifying offshore banking

According to Smart Money, it's NOT for tax avoidance:
[Mitt Romney] has been criticized by some for having some of his vast fortune in the Caribbean offshore banking center. Yes, it was politically clumsy. But it was not uncommon, and -- assuming he has filed all the right disclosures -- it was perfectly legal.

But if you're not running for president, and don't have to worry about public relations, what are the legitimate reasons for moving money offshore?..

Contrary to popular opinion, it's not really to save on taxes.  That's because American taxpayers are taxed on their worldwide income -- so if you're making $10,000 (or $10 million) in interest on a bank account in, say, the Caymans or Switzerland, you're getting taxed by Uncle Sam as if you're making it in a bank account here...

There are two [reasons to do so], says Duggan: Litigation risk, and political risk.

Litigation risk is the old reason. You could get hit by a crazy lawsuit here in the U.S. The wealthy are an easy mark, and anything onshore is vulnerable. But the U.S. courts don't have jurisdiction overseas and if you plan things right you have at least some chance of protecting money held offshore, Duggan says. "It keeps you away from our court system and the caprices of our courts," he says.

The new reason, though, is political risk: "Diversification from our government, policies, and banking systems," says Duggan. The last few years have shaken faith in our system. Duggan says growing numbers of his clients are worried about the financial system, confiscation -- the whole shebang. "They're concerned about our government, and where our society is headed. There's a lot of socialistic tendencies, capital controls, the redistribution of wealth."

Once again it's easy to scoff. Financially, the very wealthy have probably never had it so good in this country. Corporate profits and financial assets are booming. Tax rates on dividends and long-term capital gains are very, very low. But Duggan says the wealthy feel under attack, and government rhetoric is making them nervous.


  1. I only wish the uber-rich really were under some kind of real and effective attack.

    Their contempt for our legal system is synonymous with contempt for democracy. Ironic, since they're the group who can afford to employ the legal system to serve their own ends.

  2. There's a lot of socialistic tendencies, capital controls, the redistribution of wealth."

    What a crock. This country's seen increased neoliberal policy-making for decades. Now we're reaping the benefits: Gross income inequality, and the natural unrest that always follows. The President's staff is a who's who of Wall St. friendly elites. The tax burden on the elites is lighter than ever. What they should be paranoid about is an ever increasing amount of people waking up and realizing how they've been had by decades of supply-side economic voodoo. The only "socialistic" policies have been the policies of handing out (no strings attached) money to the very people complaining. Psychopaths.

  3. You can argue whether they are justified in feeling the way they do until you're blue in the face, but it really won't change anything. Meanwhile, justified or not, if the concerns of the wealthy about confiscation are causing them to make moves to "protect" their wealth, could that be prolonging the return of the economy? If our intentions as "the 99%" are NOT to confiscate their wealth, wouldn't it make sense to re-affirm that intention legislatively? Worst case, nothing happens; best case, they start to re-invest their off shore wealth into businesses & investments that create the additional wealth (oh, and jobs) that the rest of us rely on.


    1. Cam:

      No one (outside of a small fringe of idiots) has ever said that they want to confiscate all of the money of the wealthiest, nor do they want to raise taxes of anyone to unreasonable heights. But the wealthy still act as if we want to raise their taxes up to 90% from its current 35% or thereabout (for the highest rates). What people HAVE said is that they want the wealthiest people to pay their fair share of taxes, for which 35% is high enough, and not have to only legally pay the 15% (or less) that some millionaires et al pay.

    2. When you say 15%, I assume you're referring to capital gains taxes, which are significantly lower than income taxes. As a matter of fact, it might have been on this very blog several months ago where I was enlightened as to why cap gains are taxed so much lower than income... it's to the effect of "capital gains are money earned by investing extra income that has *already* been taxed at that entity's income tax level (35%)."

      I understand that to mean that the millionaires already paid their 35% when they earned their income initially. When they didn't spend all of it, they invested the remainder, which earned them a profit.
      In theory, the government wants us to save some of our money, which is why they create incentives for us to do so. When that money is invested, it creates businesses & jobs that benefit all of us. Anything that would discourage the wealthy from investing their money (real - i.e. increased tax rates, or imagined i.e. "confiscation") is counter productive.

    3. It was on this blog, Cameron [and congrats on working out the sign-in method], but for the life of me, I can't find the exact post right now.

      As I understand it, the justification for the lower rate on cap gains is not so much that the money has been "previously taxed" as the fact that it has been invested for a long time.

      If I bought something last week for $100 and sold it today for $114, then I would pay income tax on $14. But if I bought it ten years ago for $100 and sold it today for $114, then my gain has been effectively eroded by inflation, and I should pay a lower rate. The way it's set up with an arbitrary year-and-a-day cutoff is ridiculous, but I suppose adjusting the rate for the exact length of investment is too mathematically complicated to impose on the general public.

    4. Regarding the 13.9% that a guy like Romney pays:

      Rentier Capitalism:

      The beneficiaries of this income are a property-owning social class who, it is argued, play no productive role in the economy themselves but who monopolise the access to physical assets, financial assets, and technologies. They make money not from producing anything new themselves, but purely from their ownership of property (which provides a claim to a revenue stream) and dealing in that property

    5. Steve, I don't quite understand that argument. If I buy something on eBay (an old book, a piece of art) and later sell it on eBay for a profit, I've made money. But all I've done is own it. I didn't create it, I didn't improve it.

      Why would I be demonized "purely for [my] ownership of property" which increased in value while I owned it ???

    6. I don't think you would, that's much different than actually doing nothing, like an extremely wealthy person like Romney (or Buffet) and getting richer off your existing riches. The fact that (in the U.S.) such members of the wealthy elite, particularly a guy like Romney who was born rich, pay such a little amount (vs. regular workers) just illustrates that the system is tilted and designed to benefit those that are already extremely wealthy. To kick away the ladder so to speak. The term I mentioned goes back to European landed gentry/peerage and those that basically inherited their wealth and kept getting wealthy off the very fact that they had wealth. See Downton Abbey....lol. ;)

      Scandinavian countries handle these problems by having a simple wealth tax for everybody who has assets over a certain amount, but at the same time tries to keep policy business friendly. F/e a tech company is driving job creation, while a person who's collecting interest off existing amassed wealth? Not so much.

      This is a great article comparing this model vs. ours.

    7. I'll also add that we're talking about people who make millions and million (to billions) here. Not somebody that wants to gift his rare book collection to a family member or something.

  4. If this is true, then I clearly need to better understand the term "tax shelter." According to this excerpt, they don't exist, but anecdotes strongly point to their widespread use.

  5. The argument about cap gains being taxed lower because the investment is held a long time is spurious. Even in the most traditional long term investment, the investor will endeavor to ensure their return target accounts for both taxes and the time value of money. It isn't up to other taxpayers to ease their pain if they're not recovering that time value of money. Moreover, many 'investments' that are taxed at a capital gains rate are not long term at all: 1 year + 1 day is definitely not long term.

    As to the 15% being justified because the original capital invested had already been taxed at 35% , that would only make any sense at all if you were being taxed on the gross amount, including the original investment, rather than the net gain. That net gain hasn't ever been taxed (not in the hands of the investor).

    Maybe what was meant is that the gain comes (in an 'pure' investment world, ie. in theory) from gains in the underlying fundamental increase in value of the company, which value is in its purest sense may be considered representative of the total book value of the company (which boils down to original shareholder investment plus accumulated after tax profits less dividends returned to investors) divided by number of shares. So a portion of that, indeed, has already been taxed in the hands of the company.

    But let's step into the real world: the company pays tax on taxable income, which is not the same as the accounting income which accumulates on its balance sheet and is used to calculate the book value of the company; the company pays taxes at widely varying tax rates depending on a bazillion factors, certainly not an average of 35%; the share value and most important any increase or decrease in share value of a company is in many cases only loosely connected to its pure fundamental value, so only a portion of any capital gains in the hands of an investors can be attributed to the income which is taxed in the hands of the company; and so on.

    As to the US government and its world wide tax reach, the reality is that there are many ways to shelter overseas income. There are any number of companies with huge capital embedded overseas, which they haven't brought 'home' and aren't using to pay dividends...because to bring that money into the US would trigger immense tax liabilities. They are working to get bring-it-home tax holidays to permit companies to bring it back to the US without those penalties. Sure, theoretically, and in many cases in reality, worldwide income is taxed...but it's not nearly as straightforward or as evenly applied as you might think (hope).

    Steve, I fully believe in a progressive tax system. But I have no problem with someone whose place in the puzzle is to invest significant capital in the economy. Not every investment must be (can be) sweat-of-brow and not every investment must (can) result in the production of something tangible. Capital investment and intangibles like vision and good management skills are of great value. I wouldn't punish rich people for simply being rich enough that they can live off nothing more than putting their capital to use in the economy. I reiterate, however, I believe in a progressive tax system. People who have little should not, can not, pay the same as or more tax on a percentage basis than those who have much.

    Sorry, this was long, I know. And I know it's grossly oversimplified and there's lots of room for debate on some of my definitions and simplifications, but rough as it is, still hopefully it adds to this thread.


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