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Language and Politics: Billionaires and Their Charitable Giving (Perspective)

Updated on January 30, 2016
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The first step is to know what you do not know. The second step is to ask the right questions. I reserve the right to lean on my ignorance.

a depiction of Daddy Warbucks from Annie.
a depiction of Daddy Warbucks from Annie. | Source

It is a beautiful thing when one gives money to charitable causes and organizations. That is to say, it is very beautiful to give money to charities, when he is also paying his taxes in full. However, it becomes less-than-beautiful to give money to charities, when said donor is simultaneously "cutting corners," to put it mildly, in paying his taxes.

It becomes still more ugly when his very charitable giving appears to actually be a function of his tax evasion. In this case, of course, we're looking at a situation in which he is giving a token to charity, while evading a legal obligation to the public treasury of multiple times more. And when you think about it, the profusion of this kind of activity among the American super rich, might very well be a major reason why we "need" so many charities.

Are you following me?

This series of essays is called "Language and Politics." In this series we're interested in examining words and their meaning. We are interested in the way that seemingly very simple words turn out to have vastly different meanings for the super rich and you and me.

What I am saying is this: It might be misleading to think that a billionaire is a good guy because he "gives generously to charity." Before we throw him a parade or something, we just need to be careful that his "generous charitable giving" is not a function of tax evasion, robbing the public treasury of multiple times more money which is his true tax obligation.

Does that make sense?

Example time!

Our source for this essay is a discussion, in a book by economic journalist David Cay Johnston: Perfectly Legal: The Covert Campaign To Rig Our Tax System To Benefit The Super Rich --- And Cheat Everybody Else (2003).

Stay with me.

First of all, we are given to understand that Bill Gates had access to a scheme (to be clear, we do not know whether or not he availed himself of the opportunity) to garner $200 million in profits on Microsoft stock, without paying the $56 million in capital gains taxes that federal law required at the time (1).

How so? you ask.

Well, for one thing, its all "perfectly legal."

Let's get into it.

The scheme was so lucrative that not only would Mr. Gates not have had to pay the tax, but he would have even been eligible for a six million dollar income tax deduction! And that was just the initial plan (2).

The concept could be applied ad infinitum to convert billions of dollars of Microsoft stock gains into cash over a period of many years. "So long as the Internal Revenue Service did not challenge the deals," wrote David Cay Johnston, "then Gates could realize unlimited capital gains without the pain of taxes" (3).

The trick is to manipulate the charitable trust!

Step 1:

You take an asset, like a stock or building which has appreciated, or increased, in value.

Step 2:

Instead of selling the asset and investing the after-tax proceeds, you donate the asset to a charitable trust that you control.

Step 3:

Then the trust sells the asset tax-free and invests the proceeds, giving the donating individual or couple an annual lifetime income of 6 percent.

Step 4:

When the donors die, what remains in the trust (usually half its value) goes to charity (4).

Pause

This is not the good stuff. This is not the deal which Mr. Gates had access to. We will come to that.

What we are looking at, here, is the routine procedure---as I understand it---that the wealthy use to donate money through charitable trusts.

Let us break this down.

Suppose Elmer Fudd is a wealthy rabbit hunter. Let us also suppose that he acquires a graphite processing plant in Colorado.

The graphite plant is a thriving, very profitable concern.

Stay with me. Let us now imagine that, instead of acquiring the plant and operating it on a free-standing basis as one of his operations --- he does something else. Mr. Fudd, immediately upon acquisition of the graphite plant in Colorado, transfers it to his charitable foundation.

Let's say Elmer Fudd has a charitable foundation called The Elmer Fudd Foundation for LGBT Runaway Teens.


Fudd takes that graphite plant and "donates" it to HIS charitable foundation.

Now, that graphite plant is covered by the tax-free shield of his foundation for runaway LGBT teens.

Elmer Fudd's Foundation for LGBT Runaway Teens sells the Colorado graphite plant, tax-free, to somebody or some corporation, it doesn't matter.

Elmer Fudd's tax-free Foundation for LGBT Runaway Teens gets the money for the sale of the Colorado graphite plant.



Stay with me.

The Elmer Fudd Foundation for LGBT Runaway Teens is now free to invest the proceeds garnered from the sale of the Colorado graphite plant.

Keep in mind that the money and the profits gained through investment are still protected by the shield of The Elmer Fudd Foundation for LGBT Runaway Teens.

Out of that Elmer Fudd himself (let's assume he's single) an annual lifetime income of 6 percent.

When Elmer Fudd dies, fifteen years later, what remains in the trust (usually half its value---of the money earned by the sale of the Colorado graphite plant and the profits gained by investing them) goes to charity, something no doubt to do with LGBT runaway teens.

There is one point I should have mentioned prior to now. Elmer Fudd may actually care about LGBT runaway teens or he may have set up his foundation as a matter of pragmatism. Or both may be the case. Either way the foundation is set up to handle the Colorado graphite plant.

Let's stay with it.

Let's suppose that Elmer Fudd got $40 million from the sale of the Colorado graphite plant. That forty million is earned by The Elmer Fudd Foundation for LGBT Runaway Teens, and is therefore, tax-free.

Mr. Fudd (or his people) invests a portion of that forty million dollars. Let's say that over a period of ten years he manages to stretch his original pot of gold into 100 million dollars.

All of this activity is sheltered behind the shield of the charitable foundation.

Let's say that one hundred million is the level at which Mr. Fudd's "portfolio" hovers around for the rest of his life. It is out of that from which he is getting his annual six percent.

Let's just say that by the time Mr. Fudd dies, five or ten years later, half the value of the trust remains. In this case that would be fifty million dollars for charity.



Fifty million dollars is a pretty good hunk of change, ain't it?

It is but don't forget that we are also talking about twenty or thirty years of zero taxes for the sale of the company, and the capital gains garnered through investment of the forty million gained through the sale of the company.

The amount of tax revenue lost over the years dwarfs the fifty million that Elmer's Fudd's estate leaves to charity.

Let's go back to the Bill Gates case. And remember, nobody knows if Mr. Gates took the deal or not.

As I said, Bill Gates had the opportunity to garner $200 million in profits on Microsoft stock without paying the $56 million in capital gains taxes, which federal law required.

Instead of taking six percent every year for life, the plan made available for Bill Gates, had called for the software CEO to take 80 percent for two years. Mr. Gates could have pocketed $192 million without paying any tax (5).

Next, the trust would fold and a charity would receive the remaining sum of less than $8 million (6).

Under the plan Gates could have converted more than 96 percent of his gains on Microsoft stock into cash, instead of the 72 percent he was entitled to under federal law, after federal capital gains. The scheme even created a tax deduction that was enough to reduce Gates' income taxes by about 2 million (7).

Here's the point: In my opinion society would have been better off, if the government got the $56 million in capital gains taxes, rather than a charity foundation or two getting eight million dollars.

If we replace Bill Gates with Elmer Fudd, I would say that far more could be done for LGBT runaway teens through government programs set up, by getting the fifty-six million dollars he owed in capital gains taxes, than by one or two charities getting the crumbs, multiple times less.

If you think about it, not only would we not need so many charities if the super rich paid their taxes properly; but it even appears, to a certain extent, that the tax evasion of the super rich actually fuels the proliferation of charitable foundations.

That's all, thank you for reading.

Ta-Ta!

References

1. Johnston, David Cay. Perfectly Legal: The Covert Campaign To Rig Our Tax System To Benefit The Super Rich --- And Cheat Everybody Else. Portfolio, 2003. 7

2. ibid

3. ibid

4. ibid,

5. ibid

6. ibid

7. ibid

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