Last year 5,400 US citizens gave up their passports. Most of them did it to avoid having to pay US taxes on their worldwide income forever (the US charges its passport holders tax on all their income regardless of how much it is, where it is earned, where it is held, or where they live). Those people will be mildly irritated to read an article in this week's Wall Street Journal on the matter of offshore income and US taxation.
It turns out that there was an easier way to avoid paying tax. Be a hedge fund manager. Yup, according to the WSJ, hedge fund managers have "for years accumulated offshore gains without paying federal and state taxes".
America's Internal Revenue Service (IRS) often allows businesses to let executives defer taking compensation (and hence paying tax) as that means that short-term company profits, and hence corporate tax receipts, are higher.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
But as everyone now knows, US companies (unlike most US citizens) do not pay tax on non-US earnings unless the cash is repatriated, so this works very much in the favour of the managers of offshore hedge funds. They get to defer taking their compensation and let it roll up tax free outside the US year after year after year while also paying no US corporation tax. "They just kept rolling and rolling the money," Richard Zarin, a partner at Morgan, Lewis & Bockius LLP told the WSJ. It looks like they won't be rolling it any more.
The loop hole was technically closed in 2008 but with a ten-year lead time for the hedge-fund managers to get used to the idea of writing huge cheques to the IRS (some face personal tax bills of over $100m) and explore every possible way of not doing so (hello charitable foundation).
So there you have it. For years ordinary Americans have been paying tax on all their income; a special group of the super-rich have not. That this inequality is coming to an end makes sense. That it has lasted so long just doesn't.
-
Beating inflation takes more luck than skill – but are we about to get lucky?Opinion The US Federal Reserve managed to beat inflation in the 1980s. But much of that was down to pure luck. Thankfully, says Merryn Somerset Webb, the Bank of England may be about to get lucky.
-
Rishi Sunak can’t fix all our problems – so why try?Opinion Rishi Sunak’s Spring Statement is an attempt to plaster over problems the chancellor can’t fix. So should he even bother trying, asks Merryn Somerset Webb?
-
Young people are becoming a scarce resource – we should value them more highlyOpinion In the last two years adults have been bizarrely unkind to children and young people. That doesn’t bode well for the future, says Merryn Somerset Webb.
-
Ask for a pay rise – everyone else isOpinion As inflation bites and the labour market remains tight, many of the nation's employees are asking for a pay rise. Merryn Somerset Webb explains why you should do that too.
-
Why central banks should stick to controlling inflationOpinion The world’s central bankers are stepping out of their traditional roles and becoming much more political. That’s a mistake, says Merryn Somerset Webb.
-
How St Ives became St Tropez as the recovery drives prices sky highOpinion Merryn Somerset Webb finds herself at the epicentre of Britain’s V-shaped recovery as pent-up demand flows straight into Cornwall’s restaurants and beaches.
-
The real problem of Universal Basic Income (UBI)Merryn's Blog April employment numbers showed 75 per cent fewer people in the US returned to employment compared to expectations. Merryn Somerset-Webb explains how excessive government support is causing a shortage of labour.
-
Why an ageing population is not necessarily the disaster many people think it isOpinion We’ve got used to the idea that an ageing population is a bad thing. But that’s not necessarily true, says Merryn Somerset Webb.
