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How to Avoid 70% Tax Rates

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There are few reasonable people in America who believe a return to the crushing tax rates of the 80s are a good idea, but these are not reasonable times.

Newly elected Congresswoman Alexandria Ocasio-Cortez has suggested a return to the 70% tax rates on high income earners that were normal during Carter era.

You would think that the economic power unleashed by the tax cuts shepherded through Congress by President Ronald Reagan would be enough evidence to have killed such punitive tax rates forever, but it would seem that some Americans have short memories, or in the case of the very youthful like Congresswoman Ocasio-Cortez, never learned about how detrimental such tax rates were in the first place.

The problem with such high tax rates is usually that the wealthy are very good at finding ways to avoid them. In The Wall Street Journal, Laura Saunders explains how the wealthy earners of America’s last flirtations with punitive taxation were able to avoid the highest rates. She writes:

Top earners avoided high rates in many ways. Then as now, a favorite strategy was to have income that qualified as long-term capital gains, which are usually taxed at far lower rates than ordinary income such as wages.

The rules defining gains were looser then. In 1948, when CBS offered Jack Benny more than $2 million to bring his radio show to the network, he was able to treat it as capital gain, reducing the tax rate to 25% and saving him perhaps $800,000.

Gen. Dwight Eisenhower also successfully argued that $635,000 he earned from his 1948 memoir, “Crusade in Europe,” should be treated as a capital gain, saving him as much as $400,000 of tax, says Joseph Thorndike, a historian with Tax Notes magazine.

Such capital-gains treatment isn’t available now, says Mr. Starkman.

Many top entertainers made strategic use of corporations, which also had lower rates than individuals. Stars like Bing Crosby, Errol Flynn and Bette Davis formed corporations that often collected their earnings from studios and paid tax on it at corporate rates. The income could stay there until needed and then be paid out or borrowed. In some cases, the corporation was later “collapsed” and its income taxed as capital gains.

The show-business publication Variety covered the twists and turns of these strategies. In 1955, one headline proclaimed, “‘Look, Ma, I’m a Corporation: Sole Way to Stars’ Riches.’” Another advised in 1957, “Don’t Make a Move—Without CPA.”

Some of the avoidance was illegal, because it was easier to hide income from the Internal Revenue Service back then. Alan Jay Lerner, the librettist of “My Fair Lady” and other hits, once advised a colleague that he would be foolish to pay all his taxes.

Instead, Lerner said, he should keep the money on the Isle of Wight and send his lawyer to bring back needed cash in a suitcase. The IRS battled Lerner on many issues and accepted a $730,000 settlement for 1977-1981, according to Mr. Starkman.

In the 1970s, a growing tax-shelter industry promised to counter high rates in a number of ways, such as by arranging for generous deductions on overvalued assets. This industry flourished although the top rate on “earned” income such as wages was reduced to 50% for most of the decade.

Read more here.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com