Dearth of Taxes
The IRS Files
ProPublica shook things up last week when it released secret IRS records of some of the country’s richest men. It compared the taxes paid to the growth of wealth to establish a “true” tax rate the richest Americans paid:
According to Forbes, those 25 people saw their worth rise a collective $401 billion from 2014 to 2018. They paid a total of $13.6 billion in federal income taxes in those five years, the IRS data shows. That’s a staggering sum, but it amounts to a true tax rate of only 3.4%.
How is this possible? It is thanks, in large part, to the fact that the richest keep most of their wealth in investments, and don’t pay taxes until they cash them in - something the rich can avoid doing almost indefinitely. Jeff Bezos presents a good example:
In 2011, a year in which his wealth held roughly steady at $18 billion, Bezos filed a tax return reporting he lost money — his income that year was more than offset by investment losses. What’s more, because, according to the tax law, he made so little, he even claimed and received a $4,000 tax credit for his children.
For the rich, gambling on investments has a lot of upside - if you win, you can hold on to those gains tax free, if you lose, you can write it off on your taxes. You’ll recall that our former president is still battling a $73 million dollar tax refund he got by (probably) lying on his taxes.
Some have called for a wealth tax, which would claw back some of the vast fortunes the rich have built. The problem with a single-digit wealth tax is, while it would make the rich a little less rich, their fortunes grow at such a rate it’d hardly make a dent.
Another way the wealthy avoid taxes is by taking out massive lines of credit against their fortunes, and writing off interest payments on their taxes. Elon Musk funds his lavish lifestyle this way - despite claiming he is selling off all his belongings:
About half his Tesla stock is pledged as collateral for personal loans, an April 28 financial filing shows. Maintaining his equity stake—about 20%, or around $28 billion at Friday’s valuation—is important for him to keep control over the Silicon Valley auto maker.
Think about that - one of the world’s richest men had - as of last year, he’s only become richer since then! - pledged half his wealth as collateral for loans to fund his personal spending.
The piece, and the future reporting on the returns by ProPublica, is a fascinating window into all the ways the rich avoid taxes, but I won’t hold my breath for Congress to respond to the public outcry by changing the laws - they are primary beneficiaries of said loopholes.
The White House has responded by opening a criminal investigation into how the tax records were leaked:
A Treasury Department spokesperson told reporters “the unauthorized disclosure of confidential government information is illegal” and said the matter had been referred to the FBI, federal prosecutors in Washington, the Treasury’s inspector general and the IRS inspector general.
The US, like most countries - except Norway! - keeps tax records secret. While there’s probably an argument to be made for privacy, the government’s extreme secrecy around the finances of its richest citizens gave us at least one wildly corrupt president in recent memory, so it’s worth revisiting why the IRS - which has long been unable to properly police tax avoidance - is more worried about tax returns being leaked than the billions a year the rich don’t pay.
Private Equity
ProPublica focused on the 25 richest individuals in the country, but what about your average private equity executive?
There were two weeks left in the Trump administration when the Treasury Department handed down a set of rules governing an obscure corner of the tax code.
Overseen by a senior Treasury official whose previous job involved helping the wealthy avoid taxes, the new regulations represented a major victory for private equity firms. They ensured that executives in the $4.5 trillion industry, whose leaders often measure their yearly pay in eight or nine figures, could avoid paying hundreds of millions in taxes.
Nice. Even before the Trump administration handed private equity their own tax loophole, avoidance within the industry was out of control:
The industry has perfected sleight-of-hand tax-avoidance strategies so aggressive that at least three private equity officials have alerted the Internal Revenue Service to potentially illegal tactics, according to people with direct knowledge of the claims and documents reviewed by The New York Times. The previously unreported whistle-blower claims involved tax dodges at dozens of private equity firms.
[…]
While intensive examinations of large multinational companies are common, the I.R.S. rarely conducts detailed audits of private equity firms, according to current and former agency officials.
Very cool! One reason private equity has evaded scrutiny is their profit structures are intentionally complex and opaque:
One reason they rarely face audits is that private equity firms have deployed vast webs of partnerships to collect their profits. Partnerships do not owe income taxes. Instead, they pass those obligations on to their partners, who can number in the thousands at a large private equity firm. That makes the structures notoriously complicated for auditors to untangle.
A web of partnerships and LLCs to move money around and avoid taxes? Doesn’t sound familiar at all!
Many media outlets frame tax avoidance as money the US government doesn’t “get”, which somewhat misses the point. America doesn’t need an extra few billion dollars here and there - it can print infinite money, and the pandemic has shown that no amount of damage to the lives of the populace can prevent the stock market from breaking records. The real concern is what private equity firms and partners do with that money - which often hurts regular people.
Some private equity companies - like Blackstone - buy up huge swaths of residential and commercial real estate, and troubled assets from cities whose budgets were crushed by the pandemic. Their CEO made $610 million dollars last year, and who knows how much tax he paid on it.
The industry itself spends tens of millions of dollars a year influencing politicians:
The private equity industry, which has a fleet of almost 200 lobbyists and has doled out nearly $600 million in campaign contributions over the last decade, has repeatedly derailed past efforts to increase its tax burden.
And then there’s how most private equity firms make money - buying companies, saddling them with debt, and walking away with profits whether the company succeeds or fails:
Private equity firms typically borrow money to buy companies that they see as ripe for turnarounds. Then they cut costs and resell what’s left, often laden with debt.
These are the firms our government has been subsidizing for decades - letting them roll their tax savings into more leveraged buyouts and political influence. More important than Uncle Sam collecting another billion dollars in tax revenue is keeping an eye on where that money is going.
Dan Kamensky
Here is an…unusual story about a hedge fund manager, as told by the Wall Street Journal. I say unusual because it spends a lot of time talking about the subject’s mental state and self care practices before it gets to the financial crime stuff:
Running his own firm became stressful for Mr. Kamensky. He was anxious, had difficulty sleeping, lost weight and had trouble concentrating at the office or at home, he says. His fund, while it grew quickly, was still a relatively small player in the distressed market, which is dominated by giant private-equity companies, hedge funds and major law firms.
In 2017, Mr. Kamensky began working with a psychologist and a sleep specialist. He also consulted an executive coach, while in the middle of the day he would head to a meditation studio. He began to feel healthier and more relaxed, he says. He enjoyed family time again, playing games like Scrabble and doing crossword puzzles.
Good for him! More powerful men should go to therapy. So why am I reading this before the bit in the headline about him heading to prison? I am still not sure. The pandemic was tough for Kamensky, because he lost access to some of his traditional support structures and ended up WFH like the rest of us:
Staying at his Long Island home because of the pandemic, he worked in a cramped bedroom that he had converted into an office. A puppy once relieved himself on Mr. Kamensky’s foot during a business call. Sometimes, after working late into the night, Mr. Kamensky slept in the same room.
It became difficult to work with his coach and consult with colleagues. “Everything became more ad hoc,” he says.
Bad dog! I appreciate the WSJ attempting to humanize a guy in charge of a billion dollar distressed securities fund - they get such a bad rap. So what got Kamensky in so much trouble? His fund was part of a deal to buy Neiman Marcus, the struggling retailer. Kamensky’s fund was also struggling, and he wanted to buy shares of a property Neiman owned to boost his investment returns. Then, stuff happened:
But on July 31, he was blindsided by word that another bidder was also trying to buy the preferred shares. The bidder, he learned, was investment bank Jefferies LLC, one of his longtime brokers.
He feared Jefferies could scuttle a deal he had been pursuing for more than two years, just days before completion.
“There was a fuse exploding,” Mr. Kamensky says. “I lost it.”
At 3:20 that summer Friday afternoon, he texted Joe Femenia, his contact at Jefferies, “DO NOT SEND IN A BID.” In a phone call 20 minutes later with Mr. Femenia and Eric Geller, a Jefferies colleague, he yelled and cursed at the men, according to a Justice Department probe.
Why is the Justice Department investigating this, you might wonder? Well:
Mr. Geller not long after told a lawyer for the Neiman creditors committee that Jefferies wouldn’t bid because Mr. Kamensky told the firm to back off.
Mr. Kamensky realized he had violated the law. As a member of the creditors committee, he shouldn’t try to stop a higher bid that could benefit other investors.
Four hours after he made his threat, Mr. Kamensky called Mr. Femenia again. On the call, he pleaded with Mr. Femenia to tell a different story to authorities—that Mr. Kamensky wanted Jefferies to bid only if it was serious about going through with the deal. “I pray you tell them that this was a huge misunderstanding,” Mr. Kamensky said on the call, which was recorded by Mr. Femenia. He said he could go to jail without Mr. Femenia’s help.
I know it’s been a journey, but we’ve reached the final stop on the Do Not Explain Your Crimes Over the Telephone express. Kamensky was charged with one count of extortion (!) and bribery (!!) because of his angry text and phone call. He’s going to serve a six month sentence, and may be banned for life from the investment industry. The judge seemed sympathetic to his plight:
Mr. Kamensky is a “good man, but one who lost his moorings,” Judge Cote said at his sentencing. She said it wasn’t clear to her whether his actions had caused economic harm to creditors.
Unfortunately for Kamensky, behavior that would probably be acceptable under normal circumstances - finance guys love to yell at each other - wasn’t okay, because bankruptcy laws are very strict. I hope he can catch up on his sleep in federal prison.
EA Games
Motherboard reports that hackers gained access to source code for multiple Electronic Arts (EA) games and software tools. How did they do it? By tricking employees in a company-run Slack channel:
A representative for the hackers told Motherboard in an online chat that the process started by purchasing stolen cookies being sold online for $10 and using those to gain access to a Slack channel used by EA. Cookies can save the login details of particular users, and potentially let hackers log into services as that person. In this case, the hackers were able to get into EA's Slack using the stolen cookie.
Once inside the company Slack, hackers impersonated an employee and got a MFA (multi-factor authentication) token from internal IT support, which they used to log in and gain access to source code and other resources.
EA confirmed these details because the hackers themselves provided proof of the hack and detailed screenshots to journalists, which has to be rough for the company’s PR department. Also for the poor support staff who provided them the information! I hope they don’t try to throw them under the bus, but when the code for your multi-billion dollar sports franchise (FIFA) gets stolen, it’s going to be someone’s fault, surely.
Movies, and sometimes the press, tend to portray hackers as if they’re code geniuses sitting in a dark room somewhere reverse engineering wildly complicated software, when in reality it’s typically the humans involved who let them in.
In a related story, this episode of Planet Money delves into the Solarwinds hack and how it happened. Hackers found security vulnerabilities at one software vendor - lapses in human judgement - and used it to penetrate some of the US government’s most sensitive networks. It’s (almost) always people!
Short Cons
Motherboard - “The program has already sparked ire among some drivers, who say they've been offered no meaningful training on furniture assembly, and that the time Amazon has allotted for these deliveries vastly underestimates the labor involved…”
Zero Day - “…so you get these crazy demands — $3 million, $10 million, $50 million. They just make these crazy numbers up, so then when they cut it in half they can sound generous.”
Toms Guide - “A new piece of malware called CopperStealer is lurking in “cracked” software downloads available on pirated-content sites, and the malware can compromise your login info for Amazon, Apple, Facebook and Google, among other services.”
Tips, thoughts, or FIFA cheat codes to scammerdarkly@gmail.com