this post was submitted on 20 Oct 2024
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Explain Like I'm Five
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The rich use a multiparty trick to stay rich:
Put their money in an offshore account that doesn't tax them based on wealth in the country. Typically the deal is the managers get some very small amounts, single digit percentages, to charge the customer for moving money in or out of the country. Then they never touch this money again unless it is an emergency.
The rich then use their bank account full of money as collateral for a loan that is much smaller, like a few million borrowed with a secured loan linked to the millions/billions in the account. The banks easily accept the terms because they can't lose - if the loan defaults the amount is pulled from the account. But the rich usually try to make their payments so that account money isn't touched.
The rich spend their loaned money and make payments from the dividends, annuities, funds, and/or interest on their principal amount. This way the bank gave the person money that they can spend and it's not income so they aren't taxed on it, unless there is a sales tax. It's basically free money.
As they spend this free money, the government for the country that they live in doesn't know how much money the rich person actually has so they are unable to create an accurate amount to tax them. This is partially why folks like Bezos and Buffet pay a few hundred thousand dollars on hundreds of billions in actual wealth. Stock valuations are an entirely other beast but functions roughly the same way as having wealth to borrow money against.
The rich stays rich and get free money because the banking system was made by them and they are educated by their accountants and financial advisors on how to pay the least amount of money they can to get the most out of each cent.
How much money makes this worthwhile? Asking for a friend.
This. Why is this system not exploitable by us? What do we need ti make this work for us? Also: if the system is known, why is nothing done about it?
It’s not that easy to do something about it. Generally you’re taxed in the country where you earn money, but corporations have options in where they count income and where they count losses, to most benefit them.
A regular person in the US can’t do this because their employer reports salary income to the IRS as US income. What income do you have that you can claim was earned in a low tax country? Have you done all the legal work and paid appropriate taxes in that country?
Sometimes you’ll read about repatriating money. How do you legally use that money you have in a low tax country without incurring taxes bringing it back to wherever you are?
I personally know someone who uses something he calls "Dutch reach-around" and while I'm hazy on the details, I know it starts with some complex setup of a charitable foundation in your home country, with real people and real money and a network of firms and other foundations in the Netherlands that are somehow interwoven. He told me "setup is cheap, only 5 million dollars up front, you can ask my tax attorney for the deets"....
That was a nice move, but no thank you, this is not the kind of money I have lying around.
Bonus how us firms do it, I imagine this costs also a lot of money up front...
The system is created by the people who use it.
Simple. It's purely by design.