Executive Benefit Strageties Inc.

Unintended Consequences

Prussian Minister Otto von Bismarck once said that laws are like sausages: it's better not to see them being made. Frankly, that comparison is unfair to sausage makers. When was the last time a kitchen full of lawmakers cooked up something as tasty as a delicate Bavarian weisswürst, or as satisfying as a classic Wisconsin brat, or as fun as a cheddarwurst? But now the new administration has rolled out a grab-bag of tax changes as part of its American Jobs Plan (i.e., infrastructure week) and American Families Plan, and sausagemakers are rolling up their sleeves.

Changing the tax code used to be the sort of Serious Business you'd see in Mr. Smith Goes to Washington. The landmark Tax Reform Act of 1986 was a heroic rewrite of the entire code following five days of sober hearings. A bipartisan coalition of legislative heavyweights like New York's Jack Kemp and New Jersey's Bill Bradley led the charge, battling a sea of lobbyists swamping "Gucci Gulch." The final text passed with majorities in both parties. (Ok, a few years later Dan Rostenkowski, the Ways & Means Chair who finally closed the deal, wound up in jail. But nobody's perfect.)

Today that sort of cooperation has vanished. (You thought it still works like Schoolhouse Rock? Awww, bless your heart.) Tinkering with the tax code is a grubby, partisan exercise in raw political power. Senate Republicans passed the 2017 tax act with hand-written edits in the margins, language we can only assume started out scrawled on the back of cocktail napkins. ("Hearings? We don't need no stinkin' hearings!") Few of the Senators voting on the $1.4 trillion bill had even seen the 479-page text before voting.

Now the circus is back in town. The White House has proposed raising the corporate rate back up to 28%, halfway between where it stood in 2017 and where it stands now. But rank-and-file Democrats, who seem happier closing loopholes than raising rates, look more inclined to settle on 25%. The administration has proposed hiking the capital gains rate on incomes over $1 million to 39.6%. That proposal drew fire faster than the first guy off the boat at Omaha Beach, and we'll probably wind up around 25% there, too.

Writing tax law is a wonderfully sadomasochistic interplay between pain and pleasure, between the bite of increases in one place and the sweet relief of cuts in another. Should estate taxes go back up? Will "coastal elites" get their unlimited state tax deductions back again? Come to think of it, the whole process might not be that different from deciding how much actual "meat" to stuff into those sausage casings, along with the "filler" and other icky stuff.

Whatever recipe they pick, lawmakers should consider how their plans might go wrong. In 1993, President Clinton thought it was unfair that corporate CEOs were making 60 times more than rank-and-file workers. So he added Code Section 162(m), which limits deductions for executive pay to "just" $1 million — except performance-based rewards like stock options and grants. Compensation committees laughed and restructured pay packages to meet the new rules. The result? For 2020, the average CEO took home over 300 times as much as the average employee.

We may not know until December what the tax system is going to look like in January. But our job won't change no matter where it goes: map a course for your finances to avoid any new red lights where you have to stop and pay, and take advantage of green lights where you can go without paying. Either way, you'll be way ahead of the people who settle for just recording their history under the new rules!

Beam Me Up, Scotty!

Fifty-five years ago, NBC debuted a new series that producer Gene Rodenberry called "a Western in outer space — a so-called Wagon Train to the stars." Star Trek starred a journeyman Canadian actor named William Shatner as Captain James T. Kirk, helming a crew of comically diverse stereotypes (the Russian! The Scot! The Vulcan!) aboard the Starship Enterprise. Shatner went on to play the defining role of his career throughout the series' three-season run, as well as an animated spinoff and seven feature films.

Today, Shatner is still going strong at age 90, famous mostly for being William Shatner. And last week, he got to boldly go where few men have gone before, strapping on a space suit and joining three other passengers to the edge of space. He didn't use a transporter, or reach warp speed nine, or reach the Romulan neutral zone. He did it on a Blue Origin rocket owned by lifelong Trekkie Jeff Bezos; he topped out at just 2,235 miles per hour; and he climbed just 66.5 miles above the west Texas plain. But that was enough for him to describe it as "the most profound experience I can imagine."

Celebrity has its privileges. In Shatner's case, he paid for his flight with publicity. But two of his fellow passengers, both tech entrepreneurs, paid for theirs with cash. Blue Origin claims to have booked $100 million in ticket sales. Richard Branson's competing company, Virgin Galactic, has sold 600 tickets to space at roughly $200,000 each. And Elon Musk's SpaceX, which launched a Tesla into orbit, charges an estimated $50 million to ferry passengers all the way to the International Space Station.

Right now, those tickets are just defraying the cost of shooting people into space. But someone, someday, will finally turn a profit on space travel. (Will it happen before or after someone, someday, finally turns a profit on ride-sharing?) At that point, the sci-fi fans at the IRS will perk up and start paying attention.

Taxing individual astronauts is easy. Here in the U.S., you pay on all your income wherever you earn it. Now, you can exclude up to $107,600 of foreign income from your tax return, and you can claim a credit for foreign taxes you pay. But those rules assume you're paying tax somewhere else. In 2008, the Tax Court ruled that a married couple couldn't exclude wages they earned in Antarctica. Why? Because it isn't a "country," so there's no government, so there's no tax. While that may sound like the ultimate libertarian paradise (minus, y'know, the weather), the same precedent applies to astronauts earning income in space.

Taxing space businesses like Blue Origin presents tougher challenges. Corporations are infamous for shifting income to places like Bermuda or Ireland with lower rates than our own 21%. What happens when corporations argue the nexus of their income is space, where the marginal tax rate is lower than the force of gravity?

The real losers here are likely to be the states, which have no reach beyond their own borders. Elon Musk has already announced he's moving himself and Tesla to Texas to avoid California's maximum 13.3% tax. Who doubts he would move to Mars if he thought it could mean paying even less?

Someday, one of you reading this article is going to visit space. We don't know when and we don't know where, and you'll probably have to wait a while for it. But all of you can make smarter choices with your business and taxes. That's where we come in. So beam yourself up to our office and let's talk. It may not be as profound as traveling to space — but we're pretty sure you'll appreciate the results!

Making the Grade

People have always aspired to "make the grade" and take their place on the lists of the world's most famous and accomplished people. A generation ago, business executives and politicians aimed for Who's Who in America, while athletes aimed for the Hall of Fame and entertainers pined for stars on the Walk of Fame. Today, the internet has brought those lists online, made them searchable, and added new ones: Wikipedia.com for general noteworthiness, IMDB.com for Hollywood players, and the Forbes 400 for billionaires.

But there's one searchable online directory nobody wants to make, and that's the Bureau of Prisons Inmate Locator. And while most of the lucky nominees wind up on that list for drug offenses, weapons charges, or s*x offenses, the list has a fair number of tax cheats, too.

Two years ago, prosecutors indicted dozens of rich and famous parents for hiring a crooked college counselor named Rick Singer to buy their children's way into more prestigious colleges than they could earn their way into on their own. Sometimes that involved cheating on standardized tests. Other times, it involved using a fake charity to launder bribes to college coaches to admit the kids as athletic recruits.

Ironically, many of those parents got their kids admitted just in time for COVID-19 to empty those campuses. The kids wound up sitting in Zoom classes just like their classmates at state schools (oh, the horror!), and missing out on the real college experience that those of us who studied in a more innocent era enjoyed: keg stands, cow-tipping, and the occasional Walk of Shame. Today's vocabulary word is schadenfreude, kids.

When indictments dropped, the smart parents folded right away. Actress Felicity Huffman pled guilty just two months after the scandal broke and spent just 11 days in jail. Others dithered before bowing to the inevitable. Actress Lori Laughlin took two years to accept a plea deal that included spending two months in a very full house.

But a few hardy souls chose to go down swinging. Some people just can't take no for an answer — maybe that's why they wound up indicted in the first place. They included John Wilson, a private equity investor headquartered on Cape Cod. (Translation: he's a rich guy who does deals.) In 2014, he "donated" $220,000 to Singer's charity to buy his son's way into USC. He even deducted it on his taxes! He must not have had any problem sleeping at night because in 2018 he dropped another $1.5 million to get his twin daughters into Harvard and Stanford.

On Friday, Wilson's verdict came down. Not surprisingly, the jury found him and his co-defendant, a former casino executive, "guilty as hell." No, that's not an official verdict, but it really should be. Now Wilson stands convicted of various conspiracy and fraud charges, including one count of filing a false tax return. Sentencing is in February, and he can expect about four years in jail. Ironically, that's about as long as his kids spent in the considerably more prestigious institutions he cheated to get them into.

John Wilson was, by any measure, one of the most privileged people to walk the face of the earth, a card-carrying 1%er in the richest country in the history of the world. But that wasn't enough, not if his kids had to settle for Boston College instead of Harvard or UCLA instead of Stanford. Defrauding the government just means more jail time. Sometimes enough really is enough.