A common use of profit share is also for those with a family office to legally deduct investment expenses that regular people can’t via a family office. Hedge funds and private equity is incredibly expensive to administer. Cash management, tax planning, and compliance costs go through the roof. Since Trump’s 2017 tax law change these 2% floor deductions are no longer deductible at any level.
Here’s how it works. You have investment partnerships that give a family office a profit share. That profit share is never taxed by the underlying investors since it is a reduction of income not an expense no longer deductible. The family office is a legit professional services business. The profit share funds the family office and the family office can pay then deduct the legal, professional, and tax compliance expenses that wouldn’t be deductible if directly paid by the underlying investors.
Normal people can’t do it because they directly pay their financial advisors and CPAs or other tax return preparer. ETFs and mutual funds have internal fees most investors never see. Many pay less sophisticated advisors a fee on top. Even more sophisticated people that hire a financial advisor to directly invest in stocks and bonds - which offers huge tax benefits well below the ultra wealthy because you maintain control over the timing and lots sold to minimize income tax expenses - still must pay the advisory fee and their CPA directly and it’s not deductible.
There are all kinds of loopholes like this and people who cared enough to get rich tend to use them. Every time rates go up, so does complexity. It’s a full employment act for folks like me, but it’s not a good economic plan. Generally speaking “tax the rich” schemes have very little impact on the already very wealthy, but crush strivers and innovators in their tracks. They can prevent new people from becoming very wealthy by taxing away their ability to accumulate wealth. By design.
My father, a CPA, was a lifelong activist Democrat. He often spoke of the government's ability to "lift people up" and felt using federal tax dollars for this purpose was not just legitimate, but also praiseworthy. Yet, at the same time, his tax avoidance strategies were so complex that after his death, a team of top-drawer tax attorneys had difficulty unwinding them and even understanding them. I see this sort of dissonance often among people who wish to be generous with other peoples' money.
The tax code should fit on a single page. Three different rates, kicking in at different thresholds. Maybe the elite's widespread contempt for us originates from us letting them get away with this crooked scheme?
Lee, you have my sustained support as a subscriber. You have been doing excellent investigative journalism for years and deserve sustained support from your many readers. These first few years on substack are important to the success of your endeavour and I hope every reader will pitch in with a paid subscription and distribute your articles so that more will subscribe. The future of journalism now depends on its readers.
One of the difficulties with an income tax is deciding what income is. Though the idea of income is clear conceptually, in practice it is cloudy, if not obscure. I cannot remember his name right now but when the original methodology for NIPA was released one of the earliest criticisms of it was how consumption expenditures are defined. Wage earners have expenses related to going to work and also perhaps clothing for work. These are counted as consumption expenditures but really they are costs of earning income. I would dare to venture that most transportation expenditures are for commuting to and from work and are not really consumption expenditures. When it comes to business income it is even more complicated and this complication is what creates a lot of things that are called loopholes.
It should also be pointed out that capital gains can be eliminated if a taxpayer has a large enough portfolio to have offsetting loses. This is why high capital gains taxes don’t harm the already wealthy but do harm savers who invest in equities or small businesses. Finally, if the rate of inflation is 5% and a person earns an investment return of 10%, the real tax rate on his earnings is higher than the statutory rate. If income is $100, real income is only $50, but taxes are paid on $100 instead of $50. A tax rate if 50% would yield a real after tax income of $0. (I am assuming a $1000 investment.)
In the end, the masters all look the same. George Orwell saw that in Animal Farm. Why should the elites, Democrat or Republican, pay their fair share? That's for little people.
Hypocisy of the highest order, matched only by his arrogance, hubris and narcissism.
A common use of profit share is also for those with a family office to legally deduct investment expenses that regular people can’t via a family office. Hedge funds and private equity is incredibly expensive to administer. Cash management, tax planning, and compliance costs go through the roof. Since Trump’s 2017 tax law change these 2% floor deductions are no longer deductible at any level.
Here’s how it works. You have investment partnerships that give a family office a profit share. That profit share is never taxed by the underlying investors since it is a reduction of income not an expense no longer deductible. The family office is a legit professional services business. The profit share funds the family office and the family office can pay then deduct the legal, professional, and tax compliance expenses that wouldn’t be deductible if directly paid by the underlying investors.
Normal people can’t do it because they directly pay their financial advisors and CPAs or other tax return preparer. ETFs and mutual funds have internal fees most investors never see. Many pay less sophisticated advisors a fee on top. Even more sophisticated people that hire a financial advisor to directly invest in stocks and bonds - which offers huge tax benefits well below the ultra wealthy because you maintain control over the timing and lots sold to minimize income tax expenses - still must pay the advisory fee and their CPA directly and it’s not deductible.
There are all kinds of loopholes like this and people who cared enough to get rich tend to use them. Every time rates go up, so does complexity. It’s a full employment act for folks like me, but it’s not a good economic plan. Generally speaking “tax the rich” schemes have very little impact on the already very wealthy, but crush strivers and innovators in their tracks. They can prevent new people from becoming very wealthy by taxing away their ability to accumulate wealth. By design.
My father, a CPA, was a lifelong activist Democrat. He often spoke of the government's ability to "lift people up" and felt using federal tax dollars for this purpose was not just legitimate, but also praiseworthy. Yet, at the same time, his tax avoidance strategies were so complex that after his death, a team of top-drawer tax attorneys had difficulty unwinding them and even understanding them. I see this sort of dissonance often among people who wish to be generous with other peoples' money.
I think President Jimmy Carter is the only past president who does not use these tax tools for personal gain.
This subscription is so worth it. I hope Lee is able to leverage the support of his subscribers to do even more.
Good reporting. Interesting to see the nuts of bolts of hypocrisy.
Great reporting! I am a very happy subscriber to your Substack!
The tax code should fit on a single page. Three different rates, kicking in at different thresholds. Maybe the elite's widespread contempt for us originates from us letting them get away with this crooked scheme?
Tax capital gains at the same rate--or even higher--as wage income. Impose wealth tax
Problem solved
Lee, you have my sustained support as a subscriber. You have been doing excellent investigative journalism for years and deserve sustained support from your many readers. These first few years on substack are important to the success of your endeavour and I hope every reader will pitch in with a paid subscription and distribute your articles so that more will subscribe. The future of journalism now depends on its readers.
One of the difficulties with an income tax is deciding what income is. Though the idea of income is clear conceptually, in practice it is cloudy, if not obscure. I cannot remember his name right now but when the original methodology for NIPA was released one of the earliest criticisms of it was how consumption expenditures are defined. Wage earners have expenses related to going to work and also perhaps clothing for work. These are counted as consumption expenditures but really they are costs of earning income. I would dare to venture that most transportation expenditures are for commuting to and from work and are not really consumption expenditures. When it comes to business income it is even more complicated and this complication is what creates a lot of things that are called loopholes.
It should also be pointed out that capital gains can be eliminated if a taxpayer has a large enough portfolio to have offsetting loses. This is why high capital gains taxes don’t harm the already wealthy but do harm savers who invest in equities or small businesses. Finally, if the rate of inflation is 5% and a person earns an investment return of 10%, the real tax rate on his earnings is higher than the statutory rate. If income is $100, real income is only $50, but taxes are paid on $100 instead of $50. A tax rate if 50% would yield a real after tax income of $0. (I am assuming a $1000 investment.)
Thanks Lee
In the end, the masters all look the same. George Orwell saw that in Animal Farm. Why should the elites, Democrat or Republican, pay their fair share? That's for little people.
Beachfront property....ah yes, climate change. Ill be sure to eat the bugs and get rid of my gas stove ASAP. We’re in this together.
Thank you !! “Hope and Change” fraud -- selected and nominated by his alma mater -- CIA.
Choom Gang Barry - A once and forever hypocrite.