Evading Taxes, Legally

Clever public relations make millions believe that taxes are “too high,” as if all citizens and all businesses were in the same boat when it comes to paying taxes.  Actually, we are in different boats, some sailing, some stalled, and some sinking.  Taxes on some of us are indeed high or too high, but others of “us” enjoy low or no taxes.

Taxes on property show this all too clearly.  Cities and towns across this country rely heavily on taxing chiefly land, buildings (homes, stores, factories, and office buildings), and vehicles.  This kind of property is called tangible property.  However another kind of property, called intangible, is almost never taxed, not by cities and towns nor by states or the federal government.  Intangible property includes stocks, bonds, cash, accounts receivable, and so on.

For example, suppose you own two houses in the US, each worth $300,000.  You must pay a property tax on each house to the town(s) where they are located.  However, if you sell one house and invest the $300,000 proceeds in stocks or bonds, you pay NO property tax on those stocks or bonds.  In short, for those rich enough to own significant quantities of stocks and bonds, that intangible property is not subject to property taxation.  How very nice for them.

Keep in mind the difference between property taxes and income taxes.  The income earned from tangible property (like rent from land or houses) is taxable, just like the income from intangible property (like dividends and interest).  But the property itself is taxable only if it is tangible and not if it is intangible.  Tangible property that produces income to its owner is thus taxed twice (on the value of the property and on the income from the property), while intangible property pays tax only once (on the income from it, not on the property’s value).

The total value of just stocks and bonds in the US amounts to many trillions of dollars of currently untaxed intangible property.  A very low tax rate could raise a great deal of money for federal, state, and local governments, more than enough to allow other taxes to fall and government spending on social programs to rise or both.  How low a rate?  An answer emerges from some rare, recent experiences with intangible property taxes in the US.  Americans of courage and principle have sometimes taxed intangible property.

Kentucky is one of very few states currently taxing intangible property.  It levies 1.5 cents per $100 on businesses’ accounts receivable and certain other “intangible property rights.”  In 1931, the state of Florida passed a law imposing a property tax on common stocks.  After a lobbying effort of eight years, in August, 2006, Governor Jeb Bush proudly signed the repeal of that 1931 law.  In its last year, the law brought the state of Florida $ 130 million in tax revenues.  All Floridians with more than $370,000 in stocks were required to pay.  Those with intangible property worth less that $370,001 were exempt.  In its last year, 180,000 Floridians paid property taxes on intangible property they owned.  Given the state’s population then of approximately 18 million people, that works out to 1 per cent of Floridians who paid intangible property taxes.  The tax fell on those most able to pay — and only on them — which is why their man Bush worked so hard to kill it.

Governor Bush’s explanations for his effort did not improve his family’s reputation for smarts.  He denounced the state’s intangible property tax for “penalizing those who chose to work, save and invest.”  The good Governor probably forgot that his constant support for tangible property taxes continually penalizes those who chose to work, save, and invest in land or homes or local stores, office buildings, and factories in Florida.

Florida legislators who voted to repeal the tax on intangibles justified their action by arguing that rich Floridians could and did legally transfer their intangible property out of Florida to escape the taxes.  In short, the legislators used the fact of tax evasion not to tighten the intangible property tax laws.  Instead, they pointed to evasion of the property tax law as a reason to repeal the law.  How very nice for Florida’s wealthiest.

A tax on intangible property would work best at the federal level.  That way, moving assets from one state to another would provide no tax evasion.  The current technology of tracking stock and bond transactions, the requirement to list income from intangible property on existing IRS tax returns, and tax law agreements between the US and other countries would do much to prevent tax evasion by moving intangible wealth abroad.  Tax evasion is, after all, a problem for all types of taxes levied in the US (as in other countries).  It is hardly a reason to eliminate them.

To avoid hurting those owning modest amounts of intangible property — accumulated for retirement, children’s educations, etc. — the federal government might copy Florida and exempt the first several hundreds of thousands of dollars (or, alternatively, exempt specifically accumulations of intangible property in pension funds or retirement accounts, etc.).  Capable legislators could easily find and, with experience, refine the laws needed to tap the one major kind of property that has gone untaxed in most of this country for most of the last century.

During the last twenty years, the US experienced a rapid rise in the values of tangible property (especially real estate) and intangible property (especially stocks).  For the many in our country who own their own homes, rising home values raised their property taxes.  For the many who rent, the rising tangible property taxes paid by their landlords were passed on to them as higher rents.  For the relatively few who own significant amounts of stocks and bonds — whose values skyrocketed — their increased intangible property holdings escaped all property taxes.  How very nice for them.  How costly for everyone else.

Rick Wolff Rick Wolff is Professor of Economics at University of Massachusetts at Amherst. He is the author of many books and articles, including (with Stephen Resnick) Class Theory and History: Capitalism and Communism in the U.S.S.R. (Routledge, 2002) and (with Stephen Resnick) New Departures in Marxian Theory (Routledge, 2006).  

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