Quote of the Day: Mark Zuckerberg's "Charity" as Tax Shield

Like any parent, they want their child to grow up in a better world.

And they outlined their vision to make this happen, including taking risks and making long-term investments, building technology, and backing strong, independent leaders and visionaries.

This sounds conspicuously like the mission statement for any number of high-end Silicon Valley venture capital firms.

In a way, this is what the Zuckerbergs have created.

At the end of the letter, they pledge to contribute 99% of their Facebook shares, currently worth about $45 billion, to “advance this mission”.

The New York Times jumped on this immediately: “Mark Zuckerberg vows to donate 99% of his Facebook shares for charity.”

Incorrect. This isn’t charity.

The Zuckerbergs formed a limited liability company (LLC). It’s not a non-profit or charitable trust.

The Chan Zuckerberg Initiative is a for-profit, privately held vehicle that’s intended to make investments that will advance their vision.

Over the course of their lives, they’ll transfer Facebook shares to the LLC.

But as that transfer is considered a donation, the Zuckerbergs will be able to completely eliminate capital gains tax from their Facebook shares.

Plus they’ll be able to shield billions of dollars of other income from tax by writing off the donation as a charitable contribution.

Perhaps the biggest benefit is that the Facebook shares could now entirely avoid US federal estate tax.

At the end of the day, Mr. Zuckerberg gets to retain -control- of his fortune and shares, directing funds as he sees fit into for-profit, private investments, while drastically reducing his tax bill.

This is no surprise. Zuckerberg has already proven tremendously adept at minimizing taxes.

Facebook paid $178 million in net tax on pre-tax profit of $4.91 billion in 2014, an effective tax rate of 3.6%.

And there is no shortage of critics who have a major problem with this.

These hopelessly delusional and misguided people still actually believe that the way to make the world a better place is to give incompetent, corrupt politicians more money.

And in a height of arrogance, they think they are entitled to some claim on Mark Zuckerberg’s wealth.

Sorry, but this is complete lunacy.

This excerpt is from Sovereign Man founder Simon Black's latest article at his website.

The establishment of the Chan-Zuckerberg Initiative charitable trust represents a deft and an ingenious move: conversion of the Zuchkerberg's Facebook assets to a tax shield which was publicized as charity. It's like hitting two birds with one stone: The move, through PR means, reduce the populist politically incorrect rap on them, as well as, to starve ever esurient Leviathan beast

For Many Greeks, Taxes have been seen as Theft…

…and thus massive tax avoidance and the huge informal economy.

The Wall Street Journal explains: (bold mine)

Of all the challenges Greece has faced in recent years, prodding its citizens to pay their taxes has been one of the most difficult.

At the end of 2014, Greeks owed their government about €76 billion ($86 billion) in unpaid taxes accrued over decades, though mostly since 2009. The government says most of that has been lost to insolvency and only €9 billion can be recovered.

Billions more in taxes are owed on never-reported revenue from Greece’s vast underground economy, which was estimated before the crisis to equal more than a quarter of the country’s gross domestic product.

The International Monetary Fund and Greece’s other creditors have argued for years that the country’s debt crisis could be largely resolved if the government just cracked down on tax evasion. Tax debts in Greece equal about 90% of annual tax revenue, the highest shortfall among industrialized nations, according to the Organization for Economic Cooperation and Development.

Greece’s new government, scrambling to secure more short-term funding, agreed on Tuesday to make tax collection a top priority on a long list of measures. Yet previous governments have made similar promises, only to fall short.

Tax rates in Greece are broadly in line with those elsewhere in Europe. But Greeks have a widespread aversion to paying what they owe the state, an attitude often blamed on cultural and historical forces.

During the country’s centuries long occupation by the Ottomans, avoiding taxes was a sign of patriotism. Today, that distrust is focused on the government, which many Greeks see as corrupt, inefficient and unreliable.

“Greeks consider taxes as theft,” said Aristides Hatzis, an associate professor of law and economics at the University of Athens. “Normally taxes are considered the price you have to pay for a just state, but this is not accepted by the Greek mentality.”

The above article manifests of rich political economic insights.

 

One, the typical approach by political agents in addressing economic disorders has mainly been to focus on superficiality or the immediacy—in particular “could be largely resolved if the government just cracked down on tax evasion”. 

Political solutions that fail to understand the incentives guiding the average Greeks has been the reason why tax policies continue to falter.

Two, just to be sure that non-payment of taxes hasn’t been the reason why Greeks have been struggling…

Nominal government spending based on tradingeconomics.com and Eurostat data

The above represents Greek’s government spending relative to GDP

Greece’s government debt relative to GDP (tradingeconomics and Eurostat)

Greece and Europe’s welfare state in % of GDP based on OECD data

As one can see in the above, the controversial “austerity” exists only in the mindset of the statist occult. The Greek government continues to spend at a rate more than the statistical economy and thus the ballooning debt which consequently translates to heightened economic burden on the Greek society.

Three, Greece’s (and the Eurozone’s) boom bust cycle have only exposed on the chink in the armor of Greece’s big government.

The dilemma facing Greece today exemplifies the paragon of radical changes in fiscal conditions when the bust phase of the boom cycle emerges.

This can be seen from the article: (bold mine) 

The reason isn’t just political, but economic. The country’s depression has already pushed many small businesses to the brink of collapse. Forcing them to pay more in taxes would put even more out of business—and more Greeks out of work.

“The Greek economy would collapse if the government were to force these people to pay taxes,” one senior government official said.

So the above data shows why many Greeks see their government as “corrupt, inefficient and unreliable” for them to “consider taxes as theft”

It doesn’t require a libertarian of the Rothbardian persuasion to see how taxes are theft. 

All it takes is for one to see with two eyes the real nature of how governments operates. This has been best described in the article as “corrupt, inefficient and unreliable”. 

Nonetheless here is the dean of Austrian Economics, the great Murray N. Rothbard on taxes. (For A New Liberty, The Libertarian Manifesto, p.30 )

Take, for example, the institution of taxation, which statists have claimed is in some sense really “voluntary.” Anyone who truly believes in the “voluntary” nature of taxation is invited to refuse to pay taxes and to see what then happens to him. If we analyze taxation, we find that, among all the persons and institutions in society, only the government acquires its revenues through coercive violence. Everyone else in society acquires income either through voluntary gift (lodge, charitable society, chess club) or through the sale of goods or services voluntarily purchased by consumers. If anyone but the government proceeded to “tax,” this would clearly be considered coercion and thinly disguised banditry. Yet the mystical trappings of “sovereignty” have so veiled the process that only libertarians are prepared to call taxation what it is: legalized and organized theft on a grand scale.

For the Greeks, the logical solution would seem as to dramatically pare down government spending and taxes or real austerity. These should ease tax burdens on the entrepreneurs or the productive agents that would allow them to channel resources to productive means. This should entail real economic growth.

In doing so, the informal economy should flourish and grow for the latter to integrate with the formal economy voluntarily.

But it’s not just taxes, there is the exigency to incentivize entrepreneurial activities via liberalization from excessive politicization of economic activities, specifically regulations, mandates, controls and all other politically erected anti-competition obstacles favoring entrenched interests. 

Importantly, the Greeks should embrace sound money by preventing the government from tinkering with interest rates, and the currency via the central bank and allow real competition in both the currency and the banking system.

Of course, given the size of the debt burden, debt that had benefited politicians and cronies of the past, such debt has to be defaulted on. Creditors who took the risk in financing the previous government excesses should pay their dues.

But of course, parasites would not want to end their privileges so this will hardly be the route taken. 

Politicians will continue to sell free lunch politics in order to get elected and stay the course. 

So after winning on such populist platform, the Tsipras government’s sellout to the Troika and the Eurogroup reinforces this dynamic

But since Greek’s problem has been about economics, the solution will always be about economics. Yet political solutions that fails to address the real (and not statistical) economic issues will have inevitable economic consequences.

I am reminded by this gem from author and professor Thomas Sowell:

The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.

Yet my ideal solution is the Rothbard solution; end organized theft.

FACTA: US IRS Forces 77,000 foreign financial institutions to ‘Share’ Information; End of the US dollar standard?

This is incredible; 77,000 financial institutions have “agreed” to “share” information data with the US IRS supposedly to counter tax evasion and money laundering.

From the AP/CNBC (bold mine)

It will soon get a lot harder to use overseas accounts to hide income and assets from the Internal Revenue Service.

More than 77,000 foreign banks, investment funds and other financial institutions have agreed to share information about U.S. account holders with the IRS as part of a crackdown on offshore tax evasion, the Treasury Department announced Monday.

The list includes 515 Russian financial institutions. Russian banks had to apply directly to the IRS because the U.S. broke off negotiations with the Russian government over an information-sharing agreement because of Russia's actions in Ukraine.

Nearly 70 countries have agreed to share information from their banks as part of a U.S. law that targets Americans hiding assets overseas. Participating countries include the world's financial giants, as well as many places where Americans have traditionally hid assets, including Switzerland, the Cayman Islands and the Bahamas.

Starting in March 2015, these financial institutions have agreed to supply the IRS with names, account numbers and balances for accounts controlled by U.S. taxpayers.

Under the law, foreign banks that don't agree to share information with the IRS face steep penalties when doing business in the U.S. The law requires American banks to withhold 30 percent of certain payments to foreign banks that don't participate in the program—a significant price for access to the world's largest economy.

The 2010 law is known as FATCA, which stands for the Foreign Account Tax Compliance Act. It was designed to encourage—some say force—foreign financial institutions to share information about U.S. account holders with the IRS, making it more difficult for Americans to use overseas accounts to evade U.S. taxes.

Well this is hardly about “agreeing” since foreign banks will face “steep penalties” amounting to withholding “30% of certain payments” when doing business with the US. 

Given the US dollar as the de facto global currency standard where much of the global financial transactions revolve around US banks, the US government has been able to compel foreign banks to do its bidding.

This is imperialism enforced or imposed through the sphere of finance.

This also represents how financially desperate the US government have been to do arm serious twisting measures of foreign financial institutions.

And worst, Americans with asset overseas seem to have been presumed by FACTA and the US government as tax evaders or money launderers.

And this may not even be just about finances. This may be a part of the grand scheme of actions by cash strapped governments to end tax competition and to impose a unified global tax.

Nick Giambruno at the International explains:

FATCA’s real purpose is not to collect money, but rather to pave the way for a global FATCA, informally known as GATCA.

You see, complying with FATCA often breaks the privacy laws of other countries. To get around this problem, the US government has been negotiating bilateral agreements with pretty much every country in the world.

However, it’s not practical for each and every country to create their own version of FATCA and accompanying web of bilateral agreements. It would be a very slow and tedious process.

So to address this issue, the central planners at the G20 and OECD devised what they call a new “global standard” of automatic financial information exchange between governments (i.e., GATCA) modeled on the US’s FATCA.

In other words, unaccountable bureaucrats from these supranational institutions are foisting upon the world a FATCA on steroids.

However, GATCA would have never been possible in the first place had the US not cleared the path with FATCA.

The G20 and OECD needed the US—the sole financial superpower (for now at least)—to strong-arm and cram down the throats of the rest of the world this privacy-killing measure. There’s no other entity on the planet with the capability to do so.

The very big stick the US wielded was access to the US financial system and the world’s premier reserve currency. Don’t sign up for FATCA and forget about accessing the US dollar or US financial system, and by extension the vast majority of international trade. It wasn’t long before most of the world fell in line.

Now that FATCA has become a fait accompli, the foundation has been laid for GATCA.

Unfortunately GATCA also will likely become an irreversible reality in the not-so-distant future.

I believe it’s highly probably that the OECD, the G20, and others will sanction or otherwise blackmail countries that don’t comply with GATCA. The pressure will likely be too enormous for the vast majority of countries to bear.

In the end, this means a permanent record of every penny you have ever earned, saved, borrowed, or spent anywhere in the world will be available in an instant to be analyzed and scrutinized, and shared with any number of local and global government agencies, all regardless of any actual or suspected wrongdoing.

But wait, there’s more!

If FATCA wasn’t the end game, don’t expect GATCA to be either.

Let’s peel back the final layer of the onion.

What Comes Next

Did you really think that all these governments would go through all the trouble of creating the architecture to gather all this global financial data with GATCA and then just let it collect dust? Of course not. They’re going to leverage this data as much as they can.

It’s no secret that collectivists the world over have long fantasized about creating a global tax with a planetary taxation authority. Whether it’s the global carbon tax, a worldwide tax on financial transactions, or a UN tax on air and sea travel, all prior attempts at creating a global tax haven’t really worked, as the infrastructure for collecting the data and enforcement wasn’t in place.

However, that could all change with GATCA, which could provide a platform to make the disturbing dream of a global tax a reality.

Yet what the governments desires and how the public reacts are two different matters.    

There will be serious unintended repercussions on this.  Signs of these has already been surfacing.

While it may be true that initially foreign banks will accommodate the US IRS, these institutions are most likely to shy away from accepting business from US citizens.

Here is an example, from CNN Money (September 2013) [bold mine]

The U.S. Foreign Account Tax Compliance Act, which requires businesses to report all assets held by Americans, aims to recoup the hundreds of billions the U.S. says it loses each year from tax evasion. But it's also leading global banks big and small to dump U.S. customers rather than wrestle with the complicated law.

This absurd ‘imperialist’ regulation will also create barriers for US citizens investing abroad. Another example from SwissInfo.ch (May 2013)

Yet Bartolini admitted he had heard of various problems, such as claims Americans were being pushed out of business deals and prevented from climbing the corporate ladder allegedly due to their US nationality and perceptions about tax reporting and FATCA. If a foreign corporation has a ten per cent ownership by an American, under Fatca the firm is obliged to report that ownership to the US.

Not only that there has been a negative spillover to US-foreign intermarriages. From the same article…

Facta is also causing tensions within mixed couples, say critics. If financial assets are jointly held, FATCA requires the disclosure of the identity of the non-US spouse.

“My Bernese husband is furious,” said Salvisberg, who has to report to the IRS how much money her husband had in his account last year. “He says it’s none of their business what he has in his account. He’s absolutely right but if I don’t report it’s a criminal act.”

And FACTA has prompted a record exodus or renunciation of US citizenship. From Forbes: (February 2014) (bold mine, bold italics original)

America is a great land and lures immigrants worldwide, yet record numbers of U.S. citizens and permanent residents are giving up their citizenship or residency. For all the immigrant arrivals the trickle the other direction is increasing. The number is still small, with the “published” expatriates for the quarter 630 for the last quarter of 2013.

That brings the total number to 2,999 for all of 2013. The previous record high for a year was 1,781 set in 2011. It’s a 221% increase over the 932 who left in 2012. You can call it a shaming or a public record, but the Treasury Department is required to publish a quarterly list of Americans who renounced their U.S. Citizenship or terminated their long-term U.S. residency. The public outing puts Americans on notice who relinquished their rights.

Those seem like tiny numbers, yet the total thus far for 2013 is 2,369. See Number of Taxpayers Who Renounced U.S. Citizenship Skyrockets to All-Time Record High, quoting Andrew Mitchel. Under U.S. tax law, it is not relevant why someone expatriates. Whether the expatriation was motivated by tax avoidance or something else used to matter, but the law was changed in 2004….

The coup de grace is FATCA, which is ramping up now worldwide. It requires an annual Form 8938 to be filed with income tax returns for foreign assets meeting a threshold. And foreign banks are sufficiently worried about keeping the IRS happy that many simply do not want American account holders. Americans abroad can be pariahs shunned by banks for daily banking activities.

If the world will vastly reduce doing business and or hiring of US citizens, as well as, if more and more productive Americans ditch their citizenship, then the demand for the US dollar and US dollar based assets will materially decline. By erecting global financial barriers, FACTA, thus, represents financial protectionism.

The US government hardly recognizes that FACTA extrapolates to a death warrant of the US dollar as the world’s currency reserve.

Don’t worry, be happy; stocks are bound for the heavens!

Cayman Islands: Success Story and the Coming Risk from Revenue Starved Governments

At the Lew Rockwell.com, historian Eric Margolis describes the success story of Cayman Islands.

Two things happened to change Cayman from insect hell to the world’s second most important tax haven after Switzerland, and the fifth largest banking center.

First, an intense mosquito control campaign and swamp drainage killed most of the island’s insects. Second, the British Crown colony adopted a no tax policy and removed any restraints on the flow of funds.

The New York and London principals of the West Indies port, land and shipping group for which I was working at the time sent me to Cayman to open up banks. I chartered three, including my favorite brainchild, the German-Atlantic Bank.

Would that I had stayed in the banking business. My principals had remarkable foresight. Forty-four years later, Cayman hosts almost 300 banks, insurance firms of every type, and over 10,000 hedge funds managing some $36 billion in funds, as well as registries for ships and aircraft.

The population has grown to 56,000, nearly a third of whom are expatriate financial executives. The inflow of bank business has allowed life without personal taxes and a per capita income of $47,000, giving Cayman the highest living standard in the West Indies. Over 50% of government revenue comes from the finance industry.

With its azure waters, beautiful beaches, fine hotels, well-regarded restaurants, highly developed communications and public infrastructure, Cayman is a paradise for tourists and finance.

Now the coming risk:

By contrast, tax collectors everywhere hate Cayman.

The island’s ultra discreet banks are awash with hot money, particularly from Russia. In fact, almost every major business deal in Russia is run through either Cayman, Switzerland, or Cyprus (though it’s gone bust). This island is a world center for legitimate business but also financial hanky-panky and shielding money from taxes, angry ex-wives and lawsuits.

What makes Cayman so attractive is that it remains a British colony, meaning no revolutions or coups by wild-eyed fanatics. The island offers still largely impenetrable secrecy and a safe place for money. And, to quote Somerset Maugham’s wonderful description of Monaco, “a sunny place for shady people.”…

But Cayman, like other tax havens, is now under heavy fire from abroad. Last year, President Barack Obama singled out Cayman as a major financial malefactor. Revenue hungry governments across the globe are closing in on Cayman.

See the complete article here

If "revenue hungry government across the globe" have been intensifying their leeching of their captive taxpayers, think of what may likely happen when a Black Swan event occurs.

Warren Buffett’s Berkshire Share Buy Backs: Do What I Say and Not What I Do

When people talk or preach about politics, the best measure of candidness is to see how they act rather than to simply adhere to what they say. In Austrian economics lingo this is called demonstrated preference.

Crony Warren Buffett is a wonderful example. As a major beneficiary of Mr. Obama’s policies, he continues to promote President Obama’s class warfare “tax-the-rich” policies. That’s because the yoke of his proposed taxation will be borne more by his peers as he deftly applies tax avoidance schemes. So taxes becomes an anti-competition or protective “moat” for his companies.

Recently, along with other cronies such as Mr. George Soros, Mr. Buffett even signed a petition to increase estate taxes.

Because of his political rhetoric you’d probably have the impression that Mr. Buffett would have no qualms with paying the US government on what he believe are his "obligations".

Yet in real life, Mr. Buffett does the opposite: he fervently avoids taxes.

From the Guardian.co.uk

Billionaire Warren Buffett's conglomerate Berkshire Hathaway spent $1.2bn buying its own shares from the estate of an unnamed investor. The anonymous purchase was made at $131,000, or 117% of book value. Berkshire said it bought 9,200 Class A shares from "the estate of a long-time shareholder". The shares represent 1% of Berkshire's Class A stock.

Buffett – known as the Sage of Omaha – has always been reluctant to conduct share buybacks and agreed to it last year only after Berkshire hit historically low valuations. In its most recent filing, Berkshire said it had not made any repurchases in the first nine months of 2012, and spent just $67.5m on buybacks in 2011.

Berkshire's Class A shares rose after its announcement, up 2.8% at $134,500.

The repurchase came less than a month before the looming "fiscal cliff", automatic tax rises and spending cuts set for 1 January that the White House and members of Congress are negotiating to avoid.

Among other levies, the estate tax is expected to rise in the new year package by as much as 20 percentage points.

Buffett was a signatory to an open letter released on Tuesday that called for a lower starting point for the tax and a higher tax rate, beginning at 45%.

So Berkshire's recent buyback has been meant to protect “the estate of a long-time shareholder” from the same estate taxes which he proposes to raise.

I'd see this as galling pretentiousness.

Tax Avoidance: U.S. Banks Spawn 10,000 Subsidiaries Worldwide

Below is a great example of what is called as tax avoidance which Wikipedia.org defines as

legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law.

For the politically endowed US banks, tax avoidance means establishing numerous subsidiaries around the world.

From Bloomberg,

The biggest U.S. banks created more than 10,000 subsidiaries in the past 22 years as they expanded, using legal structures to pay lower taxes and escape tighter regulation, according to a Federal Reserve study.

JPMorgan Chase & Co. (JPM), the largest U.S. lender, has the most units at 3,391, followed by Goldman Sachs Group Inc., Morgan Stanley and Bank of America Corp. (BAC) with more than 2,000 each, the study by the Federal Reserve Bank of New York shows. Citigroup Inc. (C), the third-largest lender, has 1,645.

Critics including Thomas Hoenig, a Federal Deposit Insurance Corp. board member, say the biggest firms are too complicated to manage. The 2010 Dodd-Frank Act asked the FDIC and Fed to make sure the largest banks, if they get into trouble, can be wound down without collapsing the rest of the financial system. U.S. Senator Sherrod Brown has proposed legislation to force their breakup.

“When regulators are left to curtail the risk of trillion- dollar megabanks with hundreds of affiliates, we know that too big to fail is also too big to manage” said Brown, an Ohio Democrat and member of the Senate Banking Committee.

Well this is just the banking system, I would conjecture that many significantly sized companies, as well as, the wealthy, do the same. The rich according to CNBC has an estimated $21 to $32 trillion stashed overseas. Of course this claim has been made by political parasites eyeing to seize their property.

The lesson here is that people will respond to changes in tax regimes. So any puritanical statist idea of imposing taxes to generate revenue without considering people's responses are likely to fail.