In 2016, a consortium of journalists exposed how a global elite including associates of Russian President Vladimir Putin, the King of Saudi Arabia, drug dealers, and others hid their wealth (legally and illegally) using a network of shell companies and offshore tax havens. Known as the “Panama Papers” investigation, their project revealed how the wealthy and powerful use shell companies to hide billions in wealth and income from taxation, among other crimes. But when the papers were released, some questioned why there were so few Americans named. The answer, per one expert, was that Americans “really don’t need to go to Panama. Basically, we have an onshore haven industry in the U.S. that is as secretive as anywhere.” Like their global counterparts, elite Americans increasingly use untaxed pass-through businesses to avoid taxes and pass money overseas, driving inequality ever higher.
The secrecy, flexibility, and tax advantages of pass-through businesses have made them the preferred income source for the wealthy. Unlike traditional C-corporations (think Alphabet, General Motors), which pay corporate taxes and dividend taxes on their profits, pass-through businesses (think private equity firms and real estate firms) pay no federal taxes on their regular profits. Instead, profits flow onto owners’ personal returns. In theory, those profits are then taxed at personal income rates. In practice, taxes on pass-through income are low, especially after the 2017 Tax Cuts and Jobs Act cut the top tax rate on most partnership income to 29.6 percent versus 37 percent for regular income.
The above excerpt was originally published in Democracy Journal.
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