A Quick Tutorial In Tax Law and Undemocracy

Deferred Compensation and Accelerated Charitable Remainder Trusts: A Quick Tutorial in Tax Law

For those of you who wonder at how the current undemocratic two party system truly benefits the richest of the rich, I've composed the following brief synopsis that will examine two features which enable very rich individuals to skirt tax laws that affect the rest of us.

The first is deferred compensation. Deferred Compensation means that one simply takes a portion of their compensation and defers it to a later time. Rather than being paid their compensation immediately, the individual in question puts off being paid and the money typically goes into an interest bearing investment account, where it accrues interest for a period of time until such time as the individual decides to withdraw it.

Now you and I don't get deferred compensation. We couldn't afford to defer a portion of our income to a later date, say five years in the future. However, a CEO or company executive whose base salary is a mere two million or so dollars can afford to defer his or her compensation for a few years or so. In fact, they can't afford not to defer their compensation. Why? Because they can avoid the income taxes that would immediately be due on the compensation, and double their money in the process.

That's right, they avoid the income taxes and they double their money. You see, when a corporation doesn't pay the individual in question their money, that individual isn't immediately liable for the compensation in question. Who is, you ask? The corporation itself is. That is, the shareholders, workers, and company pay the taxes on the deferred compensation, because so long as it isn't paid out immediately, they can't claim it against their pretax profits. The ultimate result is that while the executive may have deferred a million dollars or so of his or her income into the future, the company itself bears a $350,000 tax liability on the million dollars…because corporate pretax profits are taxed at 35%.

This means that the executive in question not only avoids the taxes on the compensation that they defer, but they shove an additional tax liability onto their company which means that workers must either perform at a more productive or efficient level in order to keep up the shareholder dividend payouts, or the workers will face things like cuts in their pension plans and health insurance if the company fails to meet earnings estimates and deliver the expected payout to their shareholders. The workers will face the additional insult of having such benefits cuts be labeled as necessary to trim costs…but in reality, one could lop off the costs in question simply by forbidding deferred compensation.

It gets better: the deferred income sits in an interest bearing account, where it accrues interest. Very often, this interest isn't what you or I would receive if we were to take our pennies down to the bank and start a savings account. We'd get around 3% or so. Executives who defer their compensation get a little more than the average Joe does in interest. They can receive up to a 14% annual rate of interest on their deferred compensation. Is the company really getting a savings or investment account that pays such an exorbitant amount of interest? No. It's footing the bill for the interest itself, in addition to the 35% tax liability, and all the while the company's executives tell their employees that costs have to be cut…that benefits and pensions have to be on the table for labor management negotiations so that the company can continue without losing profit! Why do they do this? At 14% interest, they can defer their compensation for five years and come out with the even million they started with after taxes! That's right…they will nearly double their money! If they had taken the million way back when, they'd have had a tax liability that could easily have eaten away thirty percent of their million.

The second item up for your consideration is something called the accelerated charitable remainder trust. This tax avoidance scheme was the brainchild of one William Blattmachr. You have never heard of him, because you don't have enough money to ever retain his services as your tax attorney. Only the very richest of the rich do.

An accelerated charitable remainder trust enables one to donate an asset to a charitable trust. What a wonderful idea! A rich person donating their assets to a charitable trust…so that the trust may in turn use the proceeds from that asset to fund socially conscious charitable outreach! Not exactly. The person who donates the assets also controls the charitable trust. In essence, they are donating the asset to themselves.

You see, a charitable trust doesn't have to pay taxes on any asset that is donated to it. Let's say you have a mere two hundred million or so in stock that you want to sell. Let's say that you're looking to avoid paying the fifteen percent or so in capital gains tax that you'd have to pay-some thirty million dollars. Of course, were it not for a very friendly tax break ushered in under the Bush Administration, your tax liability would be in the fifty million dollar range.

To avoid the taxes, you simply give the two hundred million in stock to an accelerated charitable remainder trust that you control. For two years, you pocket 80% of the proceeds…and at the end of the two years, you will effectively walk away with 192 million dollars of the original 200 million dollars you gave to the trust. You don't owe any taxes on either the 200 million you initially donated or the 192 million that you walked away with at end of the two years. The eight million-dollar difference does go to charity, and here's the real kick in the pants: it's deductible. That's right: in addition to avoiding the taxes on the two hundred million dollars in stock (some 30 to 50-plus million dollars depending on the time frame) you also get a deduction on your other taxes for donating eight million dollars to charity of around two million or so dollars. You total tax avoidance is anywhere from thirty-two to nearly sixty million dollars.
If you don't believe that this happened…it did. The two hundred million dollars was in Microsoft stock, and the person in question was Bill Gates. Blattmachr constructed the accelerated charitable remainder trust for Gates, and then sold the same trust to other clients afterwards. Hundreds of millions of tax dollars that should have been paid by the wealthy weren't…while the Treasury Department eventually closed the loophole and threatened action against anyone using accelerated charitable remainder trusts, the IRS ultimately did not pursue a single individual for using such trusts to avoid taxes. To date, there is no evidence that so much as one dollar in lost tax revenue has ever been recouped from those who engaged in such blatant tax evasion.

What's the price to the rest of us? A federal deficit, less money for education and social services, and an increasing concentration of wealth at the very top of the economic ladder that enables the wealthy to underwrite the campaign costs of the two major parties…which in turn enables them to access Congressmen, who in turn give them the laws and breaks necessary to avoid future tax liabilities while the rest of us have our taxes automatically deducted from our paychecks. We pay for this. Every dime that the federal government doesn't collect from the wealthy in taxes that they should collect is a dime that the federal government has to make up for by borrowing money from foreign banks and governments. Moreover, those dimes enable the wealthy to finance the campaigns of both major parties in elections.

Some 75% of the 1.5 billion dollars spent on campaigns in the 2006 congressional elections came from corporations. Those corporations are owned by the very same interests who love such ideas as deferred compensation and accelerated charitable remainder trusts. In the meantime, you have to work longer for less pay and fewer benefits so that your companies can afford to give executives their deferred compensation…and ultimately you'll pay more income taxes, sales taxes, and energy/gasoline taxes to offset the loss of tax revenue through such devices as the accelerated charitable remainder trust. You'll pay for it when your children's education funding is cut, when you can't access affordable healthcare and have to turn to government programs…which are no longer there. Your children will pay for it in a decreased standard of living and fewer economic opportunities. There is no free ride.

Tax loopholes for the wealthy amount to legalized tax evasion. While the Treasury Department threatened action against those who evaded taxes through accelerated charitable remainder trusts, it took no action whatsoever. Those individuals who had purchased the accelerated charitable remainder trusts simply went back to the man who had created them: William Blattmachr. He created a new version that is known now as son of accelerated charitable remainder trust. The game began anew.

The Movement's Proposed Solution

I cannot say this enough: the two party tyranny has to come to an end. The only way that you or I will see democratic interests represented in this country and elections determined by something other than the money and contributions of the wealthiest 1% of Americans is if viable third party alternatives are allowed onto the ballots in elections. The only way that will happen is if election laws are changed wholesale…or if we the common folk get out and register voters and get the necessary petitions in our states to get third party candidacies on the ballots in the federal and state elections.

I put out a petition demanding the wholesale resignation of every elected official of the federal government. In an ideal world, this is exactly what would happen. The masses would rise up, flood the streets in protests of the sorts of injustices outlined in the above paragraphs, and the government would have no choice but to respond and hold free elections that did not exclude third parties or independent political movements. However, we don't live in an ideal world.
We do live in a world where we can organize, find out the election laws of our respective states, and collect petitions on behalf of every alternative party candidate running in order to provide voters with some alternative to the two major parties. We can change the system…but that takes action. The time is coming where we cannot talk or debate amongst ourselves…deadlines for 2008 are approaching. We have to act. We can agree that something is wrong with the current system, but agreeing that there is a problem without acting towards a solution does nothing to change our situation.

Fight for your democracy in an active way! Get involved!

To The Movement,

Jay Bates.