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.170 HOW RICH IS TOO RICH?OTHER INCOME EXEMPTIONS, DEDUCTIONS, ANDGENERAL SUBTRACTIONSTwo examples above, wind and farming, are often instances of syn-dicated or marketed shelters.But there are many more exemptions anddeductions built into the tax codes for those with enough wealth and in-come to take advantage of them.There are dozens or hundreds scatteredthrough the 2100 pages of the tax codes.Let us return to the grandparents shelter proposed by Senator Bent-sen.In 1986, Congress passed its Tax Reform Act, closing down manyshelters.But like a drunk who needs just one more for the road, Con-gress just could not bring itself to quit cold.For many years before 1986,part of the law was the "generation skipping transfer,"18 wherebywealthy people shifted assets to their grandchildren without paying taxes.This cut out one level of estate tax, namely, assets shifted to children asopposed to grandchildren.Congress was apparently influenced by the wealthy wine-making Gallofamily of California to keep this provision for three more years.It wasto expire at the end of 1989, but not if Senator Bentsen had his way.Underthe "Gallo exemption," $2 million per grandchild could be transferredtax-free.Jack Porter of the accounting firm Ernst & Whinney noted thatthis might save about $1.6 million in taxes for each grandchild.There are other ways to keeping one's estate from paying taxes upondeath.A married couple can give away $20,000 per recipient annually,free of gift tax.19 This procedure can continue indefinitely.While itwould take centuries or millennia to exhaust the fortunes of a John Klugeor Sam Walton this way, many moderately wealthy individuals can avoidpaying gift taxes this way.And since Congress raised the tax-free limiton estates to $600,000, well beyond the assets of most Americans, thatpart of federal taxes is avoided by almost everybody.Most of the deductions that are argued about are taken by those nearthe top of the income pyramid.The following two examples show this.A Cliffhanger Legal DecisionBen Heineman, chairman of Northwest Industries, deducted the costof a summer office in Wisconsin from his income.20 The office was aquarter-million dollar one-room building suspended from the side of acliff.He said that the office was necessary to avoid the distractions ofChicago (his regular office) and its heat.In a decision that the Wall Street Journal described as a "cliff-hanger,"the judge to whom Mr.Heineman appealed allowed the claim.He saidthat the one-room structure was "appropriate and helpful" to Heineman'sduties."LITTLE PEOPLE PAY TAXES" 171The amount of Heineman's income was not given in the news report.Yet the cost of the office, $250,000, was substantial.Is it unreasonableto assume that his annual income was at least the cost of the office? Thiswould put him well within the Pareto range, in the top 1/2% of alltaxpayers.Assuming that the IRS did not reverse the decision on appeal,Mr.Heineman would have had greater real income than appeared onhis tax form.Solid Gold CadillacOur second example deals with luxury cars.In 1983, Congress votedto limit deductions that business people and professionals, like lawyersand doctors, take on these vehicles.21 According to the AmericanInternational Automobile Dealers Association's president, RobertMcElwaine, about half the 73,000 Mercedes-Benz cars sold in 1982 wereto corporations, lawyers, and doctors for use in business operations.Fred Chapman, a spokesman for the Mercedes-Benz company, wasunhappy about the proposal to limit the deductions for business autosto the first $15,000 of cost."Why cars, why isolate this product? Whatabout first-class air fares? What about Lear jets?.What's this penaltyfor trying to achieve excellence?"Why and what indeed.While the incomes of the taxpayers who receivethese deductions is not known, most are in the Pareto part the upper3% of the income curve.There may be a few relatively poor people whoscrimp and save to buy a Mercedes, but we think they are in a smallminority.The deductions of such items as expensive cottages and luxury carsmakes the economic income of the wealthy higher than is reported ontheir tax forms.In turn, it makes the slope of the Pareto region in Figure9.1 even steeper than shown on the solid line.'TIS A PUZZLEMENT COMPLICATED TAX LAWSOne of the reasons why the wealthy are able to show less incomeon their tax forms than they really garner is only indirectly connectedwith tax rulings or lawyers.It is based on the sheer complexity of thetax laws.Just before the first proposal for what eventually became the 1986 taxreform act was published, Bernard Shapiro spoke on this.22 He wasnational director for tax policy for Price Waterhouse & Co., a leadingaccounting firm, and a former staff director of the Congressional JointCommittee on Taxation.He said, "Much of the complication wouldremain even if a 'flat' tax proposal were enacted.the tax system willstill be complex even if reasonable simplification efforts are successful."172 HOW RICH IS TOO RICH?So it has come to pass.The number of tax brackets after 1986 was muchless than before, but the tax code itself is not much smaller [ Pobierz całość w formacie PDF ]