Thursday, October 8, 2015

You Can't Tax the Rich

Concerning the post immediately below, and Williamson's allegation that the wealthy don't so much pay taxes as extract them from those with less leverage. I am reminded of stuff that went on before the Reagan tax cuts, ancient history for some of our younger readers.

In those days it was common to see a really glossy farming operation, or orchard, and be told "It is some doctor's tax shelter." That was shorthand for "he runs it at a loss, to counteract his earnings as a surgeon."

In the process of running a farm or orchard at a loss, he did maintenance that could have been deferred, kept everything painted, repaired, and shiny, and used too much fertilizer and boutique seeds or livestock. His desire to make no profit, while increasing the value of his investment, made him murderous competition for those individuals trying to make a living from their farms.

One of the best tax dodges was planting an orchard, which generates nothing but expenses for several years until the trees begin to produce. However, the whole while you are pruning, watering, spraying, and cultivating as the trees grow, the value of the property is increasing.

You build equity while experiencing several years of negative income. When the trees are ready to produce you sell the orchard to a farmer who wants to actually produce and sell crops, buy another piece of undeveloped land with part of the proceeds, and start another orchard. On the difference in land prices, presumably a profit, you pay only long term capital gains taxes, at half or less the rate for actual earned income.

So you made a profit as a doctor, a loss as a farmer, and paid taxes on the net, which was perhaps a middle class salary. You were, however, accumulating a valuable asset that, when sold, produced long term capital gains. This could be, and was, done repeatedly.