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“A rebellion against the government is necessary every twenty years”, Thomas Jefferson.
It is a fact that the US Supreme Court once ruled that income taxes are unconstitutional. What happened? At what point do taxpayers say enough is enough and take measures into their own hands? How do half of American taxpayers avoid paying any income taxes? And does paying taxes really need to be this difficult? Since it is tax time in America, it’s appropriate these questions and more are the subject of today’s newsletter.
Our last newsletter, if you missed it, revealed the IRS Dirty Dozen. These are the tax topics that most infuriate the IRS. In turn, these are the most targeted taxpayer issues.
Does it Really Need to be this Difficult?
Our forefathers for millennium were consistently unwilling to tolerate taxation above 10%. Imagine that…a 10% tax rate. Today, a meager 10% tax rate would be welcome tax relief. Somehow this generation has been lulled and bullied into tax complacency to tolerate excessive taxation far in excess of all generations before us. But for how much longer? Thomas Jefferson would have despised the aggressiveness of the US government attacking taxpayers and Swiss banking.
An excellent book on the history of taxes, For Good and Evil, by Charles Adams, was written about the impact of taxes throughout the course of civilization. Adams, a former US tax lawyer, spent over twenty years researching the history of taxation and its impact on civilizations, and presents it in a clever, witty fashion.
For over 5,000 years, beginning with the Greeks, then the Roman era, during medieval times, throughout the days of the Enlightenment, and up until this past century, history repeated itself with tax revolts after tax revolts. The lesson is clear: That at some point, over-taxed citizens said enough-is-enough and took the law into their own hands. Beheading kings, over-throwing governments, and killing tax collectors for excessive taxation, runs constant throughout history. Lest we forget the Boston Tea Party and the foundation that America was built upon.
Beheading our leaders – now that would get their attention!
Generally, most honest, hard-working individuals are willing to pay a fair and reasonable price in the form of taxes to live in a civilized society with modern conveniences. But history teaches us that at some point when the price outweighs the benefits, individuals will take measures into their own hands. It starts with legal, aggressive planning, then a culture of tax evasion is borne, and finally force and violence is used.
Half Don’t Pay Income Taxes
According to the latest available IRS information, the top 1% of income earners paid 38% of income tax revenue, while earning only 20% of the income reported. The top 5% of income earners paid 59% of the total income tax revenue, while earning only 35% of the income reported. The top 10% paid 70% of all taxes, earning only 46%, and the top 50% paid 97% or more of all taxes. This leaves the bottom 50% paying 3% or less of the taxes collected.
Recent IRS data confirms that the US tax burden, contrary to popular myth, is disproportionately borne by higher income earners.
The Tax Foundation, a Washington DC think-tank founded in 1937, reports that under the current US tax system, as a general rule, the top 1% of earners paid more than the bottom 95% combined. And the Heritage Foundation - another Washington think-tank founded in 1973 - released supporting data and a chart that shows beginning tax year 2009, a whopping 49.5% of all Americans do not pay income taxes. This is an incredible statistic. Half of all Americans do not pay income taxes. While I’ve rarely agreed with President Obama, he is correct that everyone needs to pay their share of taxes, and this should begin with those 50% that don’t pay a dime.
The current income tax system, which is the government’s largest revenue source, is too progressive and redistributive. It is horrible for a democracy to exempt half the country and disconnect such a percentage of voters from the cost of government, while also receiving the entitlements and other benefits. The bottom half pays no taxes yet receive the largest government benefits and entitlements, making it even more unfair for the top half earners. At what point do we say I’ve had enough and I'm not going to take it anymore?
When Income Taxes Where Unconstitutional
The US federal income tax was first enacted in 1861 to support the American Civil War effort. The tax rate was a flat rate tax of 3% on income above $800. The government, in need of more tax dollars, raised the tax the following year, replacing it with a graduated tax of 3-5% on income above $600. After the end of the Civil War in 1872 it was eliminated, but then revived twenty two years later in 1894.
But the following year, in 1895, federal income taxes were declared unconstitutional by the US Supreme Court in Pollock v. Farmers Loan & Trust Co. (157 U.S. 429 (1895)), in a 5-4 decision. The court ruled that unapportioned income taxes on interest, dividends and rents imposed by the Income Tax Act were unconstitutional because they violated that direct taxes be apportioned.
Unfortunately, the US Supreme Court decision was nullified eighteen years later in 1913 by the 16th Amendment to the US Constitution making income tax a permanent fixture in the US tax system. Where are these brave Supreme Court judges today?
The Federal income tax rates in the United States have varied widely since 1913. For example, in 1913, the top tax rate was 7% on incomes above $500,000 ($10 million in 2012 dollars). During World War I, the top rate rose to 77% and the income threshold for the top bracket increased to $1,000,000 ($16 million in 2012 dollars). After the war, the top rate was scaled down to a low of 24% and the income threshold for paying this rate fell to a low of $100,000 ($1 million in 2012 dollars).
During the Great Depression and World War II, the top income tax rate rose from pre-war levels. In 1939, the top rate was 75% applied to incomes above $5,000,000 ($75 million in 2012 dollars). Towards the end of WW II, in 1944 and 1945, the top rate was its all-time high at 94% applied to income above $200,000 ($2 million is 2012 dollars). Since 1964, the threshold for paying the top income tax rate has generally been between $200,000 and $400,000. The one exception is the period from 1982–1992 when the top income tax brackets were removed and incomes above around $100,000 (varied by year) paid the top rate. From 1988–1990, the threshold for paying the top rate was even lower, with incomes above $29,750 to $32,450 ($51,000 in 2012 dollars) paying the top rate of 28% in those years.
When US income tax became law in 1913, the entire Internal Revenue Code (IRC) fit into 173 pages. As recent as 1940 there were roughly 500 pages to the US tax code. Today, the US tax code weighs in at somewhere around 71,684 pages, or 5.6 million words, and 7 times longer than the Bible. I have no idea if those numbers are exact, but they seem sufficiently absurd to be the truth. If it takes the equivalent of 55 War and Peaces to explain how to do your taxes, it begs the question whether the tax code qualifies for ‘void for vagueness’.
As discussed in our last newsletter, the IRS Dirty Dozen, void for vagueness is a legal concept in American constitutional law that states that a given statute is void and unenforceable if it is too vague for the average citizen to understand. Legally, there are several ways a statute might be considered vague. In general, a statute might be void for vagueness when an average citizen cannot generally determine what persons are regulated, what conduct is prohibited, what punishment may be imposed, or what is legally required.
What’s worse, according to the US Government Accounting Office (GAO), the estimated annual compliance costs today are over $200 billion – more than it costs to produce every US car, truck and van - to prepare US tax returns.
Think for a moment how many of the following taxes you pay every year, either directly or indirectly: Accounts Receivable Tax, Alternative Minimum Tax (AMT), Building Permit Tax, CDL license Tax, Cigarette Tax, Corporate Income Tax, Dog License Tax, Federal Income Tax, Federal Unemployment Tax (FUTA), Fishing License Tax, Food License Tax, Fuel permit tax, Gasoline Tax, Goods and Service Tax (GST) Hunting License Tax, Inheritance Tax, Interest expense, Inventory tax, IRS Interest Charges, IRS Penalties (tax on top of tax), Liquor Tax, Luxury Taxes, Marriage License Tax, Medicare Tax, Property Tax, Real Estate Tax, Service charge taxes, Social Security Tax, Road usage taxes, Sales Tax, Recreational Vehicle Tax, School Tax, State Income Tax, State Unemployment Tax (SUTA), Telephone federal excise tax, Telephone federal universal service fee tax, Telephone federal, state and local surcharge taxes, Telephone minimum usage surcharge tax, Telephone recurring and non-recurring charges tax, Telephone state and local tax, Telephone usage charge tax, Utility Taxes, Vehicle License Registration Tax, Vehicle Sales Tax, Watercraft registration Tax, Well Permit Tax, Workers Compensation Tax…. and how many other taxes did I fail to mention?
We’re From the Government and Here to Help
The complexity of the US tax system is no secret. Many provisions granting or removing benefits require significant definition of terms, but the definitions of terms are often unclear or convoluted. Further, many international tax treaties and state income tax laws do not conform with Federal tax law in material respects. These factors and others have resulted in substantial complexity and uncertainty even amongst the so-called tax experts.
In the US, tax codes are often legislatures’ favored policy instrument for encouraging numerous undertakings deemed socially useful. Special tax rebates granted for any purpose increases complexity, irrespective of the system’s flatness, or lack thereof.
The tax code is so complex even the IRS can’t figure it out. A US Treasury investigation found that IRS employees gave the wrong answer about 50% of the time in response to taxpayers’ questions. If you flipped a coin, your chances would be just as accurate as contacting the IRS help line where you'd have to listen to the automated telephone options and wait in a queue for 40 minutes. And as published by the GAO in Pub. 94-120, in auditing 45 random IRS transactions, 16 were properly calculated and 29 were wrong, an error rate of 64%! You would think that the over-bloated 115,000 employee IRS bureaucracy - where the number of federal workers earning more than $150,000 has soared ten-fold between 2006 and 2012 - could do better.
But if the IRS and the so called tax experts are all unable to interpret the tax rules, then how is the average person supposed to comply with the rules? Unfortunately, ignorance of the law is no defense.
Accountant vs. Attorney Confidential Communications
And beware: Consultation with an accountant is not protected as a privileged communication as is a consultation with an attorney. An attorney cannot be compelled to testify in court as to the nature of a client consultation. However, an accountant or other tax preparer can be compelled to testify. So if a taxpayer discusses a matter with an accountant, the accountant could later be compelled to disclose the details of the discussion.
Privacy tip: The best opportunity for confidentiality is therefore to retain an attorney who then hires the accountant to discuss tax matters with you on your behalf.
International Tax Organizations Are Queuing Up
Regrettably, politicians and bureaucrats everywhere seem to think that the answer to every alleged social ill and political problem is imposing higher taxes. It must be in their DNA. Worse yet, now the United Nations wants to create an International Tax Organization (ITO) with the power to interfere with national tax policies. This crazy idea first surfaced in a U.N. report titled High-Level Panel on Financing for Development. The bottom line is that the U.N. bureaucrats are calling for the creation of a global tax commission. An international tax organization would certainly mean higher taxes and bigger government...and more headaches for all of us.
And U.N. officials have been quite open about their intentions. The chairman of the U.N. panel endorsed the creation of the ITO indicating it would “take a lead role in restraining tax competition.” According to the U.N. mentality, it’s unfair for one country to have lower taxes than another. (Unfair? Then maybe the high-tax country should lower their rates.) And no surprise is what surfaced next in the report: The U.N. also desires to levy its own taxes. The Paris-based OECD (Organization for Economic Cooperation and Development) and its inter-governmental body the FATF (Financial Action Task Force) already targets ‘harmful tax competition’ by black listing so-called tax havens, and the Brussels-based European Union enthusiastically backs ‘tax harmonization.’
The original U.N. report looked at two options, a tax on currency transactions and a tax on energy consumption. This is only the tip of the iceberg as the U.N. has endorsed taxation of the Internet, specifically a tax on email.
During the unfolding of the global financial crisis and the European Union (EU) financial disaster, more international taxes were again suggested. Both the EU and IMF both proposed financial transaction taxes to be paid during currency transfers and foreign exchange transactions. At present these additional taxes are on hold, but the international organizations looking to finance their activities are desperate for your dollars.
But the No. 1 bad idea belongs to a U.N. proposal to give governments permanent taxing rights over emigrants. The U.N. thinks it is “unfair” when talented people leave high-tax socialist nations and move to freer countries offering better opportunities. The bureaucrats are proposing to let governments tax expatriate's income earned in other nations. These narrow-minded bureaucrats simply don’t understand that money and people go to where they are treated best.
A good bureaucrat has never seen a tax he or she didn’t like. You should worry about the U.N., EU and IMF plans as they are just several international bureaucracies working to undermine fiscal sovereignty and dictate higher taxes against you and me. In particular, the U.S., UK, EU, and AU governments are all looking for more taxing opportunities.
Yes, government bureaucrats have all the answers and are best suited to regulate your way of life. And I am Caesar.
At What Point Do Taxpayers Rebel?
Governments are often heard claiming that all is wrong offshore, and always looking for someone else to blame. The attacks on offshore have been plentiful. But even assuming for sake of argument that there is more tax evasion to be found offshore – which we doubt is any different than at home - if we look closer at the root of the problem, it’s easy to understand that a more reasonable tax system wouldn’t force so many people to seek out these drastic, illegal measures wherever located.
I certainly don’t promote tax evasion – quite the contrary - but we need to be honest and address the real culprit as excessive taxation and burdensome compliance measures, based upon oversized and wasteful governments.
Those that believe in the fundamental rights of individual liberty and sovereignty, and advocating the minimization of the state, believe no individual or institution has a right to take another individual’s property without their permission, at least without due process of law. Some holding this view say that the only way government can enforce its power is through coercion; thus, such individuals sometimes view taxation as equivalent to theft. Numerous recent tax protester arguments have been raised again asserting that the federal income tax is unconstitutional, including discredited claims that the Sixteenth Amendment was not properly ratified. The list of challenges before the Supreme Court since the 16th Amendment was enacted in 1913 is long. Unfortunately, all such claims have been repeatedly rejected by the judicial branch as frivolous.
Over the centuries, taxpayers who felt they were overburdened by taxes often voted with their feet. They left their home country to pursue opportunity in countries with less government, and therefore with fewer taxes.
Less is More
In many ways, less is more. This is particularly true when it comes to government burdens, invasion of privacy, and taxes. Looking beyond your borders can often offer less, which is more.
Are there opportunities for legal tax minimization when going offshore? Yes, but they are fewer in number than in decades past. And if you've learned nothing else from our past newsletters and books, know that going offshore has potentially significant tax and compliance consequences, so its important to get it right. But going offshore also offers a great new world of opportunities and shouldn’t be feared. As you go offshore, it’s important to understand the issues, and once understood, the compliace issues aren't so concerning.
Today, international trusts are increasingly popular for asset protection with integrated estate planning, investment diversification, pre-migration planning, privacy, and more. It’s important to start somewhere and learn how you reach your objectives. Begin now.
And if you would like to get serious about how you can protect your hard-earned assets, then contact me to discuss how you can proceed with a confidential initial review.
Until next time….
David
David A Tanzer, Esq.
JD, BSc, Ph.D (Hon)
David A Tanzer & Assoc., PC.
Datlegal@aol.com
DAT@DavidTanzer.com
www.DavidTanzer.com
Vail, CO USA:
Tel. (970) 476-6100
Fax (720) 293-2272
Auckland, New Zealand:
Tel. (64) 9 353-1328
Fax (64) 9 353-1328
Brisbane, Australia:
Tel. (61) 7 3319 6999
Fax (61) 7 3319 6999
(Licensed to Practice Law in U.S. States & Federal Courts; Assoc. Member Auckland, N.Z. District Law Society - Foreign Lawyer; & Assoc. Member Queensland Law Society, AU - Foreign Lawyer)
The comments herein are not intended to constitute a legal or tax opinion regarding any specific legal or tax issue as additional issues may exist; does not reach a conclusion with respect to any specific legal or tax issue addressed herein or any additional issues not included; and cannot be used for the purpose of avoiding legal or tax obligations or penalties with respect to issues in or outside the scope of matters discussed herein.
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