Secrets of the rich

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Asbury Park Press
By: Michael L. Diamond
August 26, 2012

Secrets of the rich

In the trenches of class warfare, the wealthy are winning.

They are armed with an array of weapons not available to you: a federal tax code that prefers investing to working; employment contracts that ensure they can avoid the unemployment line if they lose their job; private bankers, lawyers and accountants to advise them every step of the way.

"The system works much better the more successful you are in the first place," said Ida Rademacher, chief program officer for the Corporation for Enterprise Development, a Washington, research group that studies ways for low-income people to build wealth.
From a friendly tax code to bankers who embrace them, the wealthy have taken advantage of a system that helps them keep their riches and make more.

They are stepping into the spotlight as the federal government wrestles with a huge budget deficit and tax cuts that are set to expire at the end of the year. And it isn't a comfortable place to be.
Republican presidential candidate Mitt Romney and his wife, Ann, paid an effective tax rate of 13.9 percent on $21.6 million in income in 2010, about the same rate as a married couple that reported combined income of $70,000. He estimated that he paid an effective tax rate of 15.4 percent on $21.9 million in 2011.

The issue is more incendiary given an economy that has seen the income gap between the rich and everyone else widen. And jobs that could help narrow the gap have been hard to come by. The Internal Revenue Service places the top income tax bracket of 35 percent at households making more than $388,350.

While liberal groups have most vociferously called attention to the widening gap, it isn't a partisan issue. U.S. Sen. Tom Coburn, R-Okla., released a report last November called "Subsidies of the Rich and Famous," detailing how the wealthy benefited so much from giveaways and tax breaks that almost 1,500 millionaires paid no federal income tax in 2009.

"We should never demonize those who are successful," he wrote. "Nor should we pamper them with unnecessary welfare to create an appearance everyone is benefiting from federal programs."

It stands in contrast to Michael Nunziato, 59, of Howell, who gets few of those breaks. He juggles three part-time jobs -- driving a bus, working for the Census Bureau and selling insurance.
He hasn't had a full-time job since the economy fell into a recession in 2008. When he was laid off, he collected $510 a week in unemployment. He estimates that the value of his house has fallen by $110,000. His property taxes recently rose $400, to $8,400 a year.
He has two children in college. He doesn't have health insurance.

"You'll never be rich if you curse the rich," he said, standing outside the unemployment office in Neptune one Friday afternoon in August. He said he feels "maybe a little more envy or jealous. I can't worry about the rich, just feeding my family in this economy. I worry every day."

Defenders of the system say there is a method to what can appear to be madness. Ideally, investors such as Romney hand their money to companies. Companies use it to operate their business, hire workers, spend money with vendors. The money trickles throughout the economy. And investors get a return.

Meantime, the wealthy are taking a hit to finance President Barack Obama's health care reform law. Beginning in 2013, individuals making more than $200,000 and married couples making $250,000 will pay 3.8 percent more on capital gains.

"The tax code is designed to, in many cases, act as a stimulant to make investments, to incentivize the success of certain industries," said David Hryck, the head of international tax at SNR Denton, a New York law firm. "I don't know if it's designed for wealthy folks, but in order to get the benefits in many cases you have to spend money."

Of course, it's easier to spend money if you already have it. Here are seven ways the system ensures that that adage doesn't change.

• Income taxes. The federal income tax system rises from 10 percent to 35 percent depending on how much you make. But not all income is treated equally; income you make through investments is taxed at 15 percent -- the same as some blue-collar workers pay.
The result: A janitor making $30,000 a year can be taxed at the same rate as a hedge fund manager who rakes in hundreds of millions of dollars a year.

"It's hidden in plain sight," said Jay Soled, an accounting and information systems professor at Rutgers Business School in Newark and New Brunswick. "It's not subterfuge as to why the wealthy pay less in taxes."

• Farmland assessment. In New Jersey, home owners with acres of undeveloped land can qualify for lower property taxes if they turn the land into a working farm.

They need to sell at least $500 a year on average in products from the first five acres -- and $5 an acre for each acre after that. (Except woodlands and wetlands, where it is 50 cents per acre after five). It could include honey from bees, wool from alpacas, Christmas trees.

In Colts Neck, David Harris and Linda Marroccoli have put their 15,560-square-foot home on the market for $13.9 million. Featured in the Wall Street Journal in July, the home sits on an acre and features a swimming pool, a home theater and a sports complex with an indoor ice skating rink. They also own nine acres that house alpacas and horses, allowing the land to be assessed as a farm.

They paid $56,822 in property taxes for the acre of property that includes the home. And they paid $117.85 for the other nine acres, according to property records.

Claude Ranieri, their broker from American Realty Associates in Colts Neck, said home owners with farmland assessment only save a couple thousand dollars a year in property taxes.

Meantime, it protects land from development -- and the extra municipal services that taxpayers would need to pay for.

"The benefit is, people don't develop as much," Ranieri said.

• Home ownership deductions. Home owners who itemize their tax returns are eligible to deduct the interest they pay on their mortgage loans and their property taxes.

Taxpayers who own vacation homes -- and even yachts if they can prove the live there at least two weeks a year -- are eligible for the deduction, too, Coburn's report said.

It stands to reason that the wealthy typically have bigger mortgages and usually are in a higher tax bracket; the write-off for someone in the 35 percent bracket is more than the same write-off from someone in the 15 percent bracket.

The result: A taxpayer with household income of $250,000 and more saves $8,396 a year through mortgage interest and property tax deductions, more than 10 times as much as a taxpayer with household income of $40,000 to $75,000, according to a 2008 study by Todd Sinai from the University of Pennsylvania and James Poterba from the Massachusetts Institute of Technology.

• Perquisites. The compensation for the top-paid workers, usually corporate executives, doesn't end with salaries, or even bonuses and stock options.

It includes personal use of the corporate jet, a car and driver, tax preparation and financial planning, and country club memberships. And if they lose their jobs through no fault of their own, they have golden parachutes that give them millions of dollars rather than a weekly unemployment check.

For example, Kenneth C. Frazier, chairman, president and chief executive officer of Merck & Co. Inc., the Readington-based drug maker, was paid $1.5 million in salary last year. But he received perks that increased his compensation to $13.3 million, according to the company's proxy statement.
He would pay taxes on his benefits at his regular income tax rate, likely 35 percent, Monmouth University accounting professor Paul Savoth said.

"I've been to companies where they have an executive dining room," said Paul R. Dorf, managing director of Compensation Resources Inc., a compensation consulting firm in Upper Saddle River.

"The food is unbelievably gourmet-ish every day of the week. There's no comparable cafeteria for employees. And if there is, (employees are) paying for it.

• No-fee checking. The wealthy don't have to worry about bank fees: checking fees, overdraft fees, late fees. They can save money more easily by getting higher interest rates. And they can borrow money less expensively by getting lower interest rates.

The incentives get better the more money you have. Bank of America has a program called Advantage with Tiered Interest Checking. A customer with a balance of less than $10,000 is offered .05 percent a year. A customer with $100,000 or more is offered .1 percent a year.

It includes special rates on some loans and lines of credit, a discounted safe deposit box rental and unlimited check writing. And the $25 monthly fee is waived for customers with at least $10,000 with the bank.

For banks, it isn't a complicated calculation. The wealthy are more likely to use more services and repay the banks' loans.

"There's a pretty significant competition for those who are considered prime customers, especially a prime customer who is going to spend a lot of money," said Anisha Sekar, vice president of credit and debit products for NerdWallet, a San Francisco-based personal finance web site.

• A team of
Bankers, accountants and attorneys at their disposal.

They can press up against legal boundaries, too. Private bankers have access to offshore accounts, in Switzerland or the Cayman Islands, for example. While taxpayers are required to report offshore income to the IRS, many of those countries have strict privacy laws, making it difficult to enforce.

James S. Henry former chief economist of McKinsey & Co., a consulting firm, recently wrote a report estimating U.S. citizens have at least $2 trillion to $3 trillion offshore.

"At some level, we all have to agree to put down these extreme positions and say we've got teachers and firefighters and police and an army to pay for," Henry said in an interview.

"I don't think it's an extreme liberal position," he said. "It's kind of like pragmatically speaking, how are we going to pay for government and what are the schemes to do that without killing the golden goose?"

• Initial Public Offerings. Companies that go public often generate excitement among Main Street investors hoping to get in on the ground floor of the next big thing.

But the initial price discussed in the media typically is available only to the best customers of the investment firms that underwrite the offering; everyone else has to wait until it starts trading, said Robert Giunco Jr., vice president at the George McKelvey Group in Sea Girt, an investment company.

It explains why, for example, Facebook's IPO price was $38 a share, but the opening bids on May 18 were about $42 a share. In hindsight, it wasn't such a good deal for the wealthy. Facebook's stock was less than $20 a share last week.

"Up until Facebook, (IPOs) were a gigantic break for the wealthy," Giunco said.

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This page contains a single entry by CFED published on August 27, 2012 4:43 PM.

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