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Taxcast on Big Four Accounting and the Duke of Westminster

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From Tax Justice Network’s August 19 Taxcast.

The Big Four accountancy firms: Are they in fact more like the ‘Big One’? And should they be broken up? Also: the Duke of Westminster’s 9 billion tax free inheritance and how his family history forms the legal basis for the justification of tax avoidance around the world; why are the world’s biggest banks now officially endorsing transparency measures? And…so much for Panama cleaning up its act post-Panama Papers scandal: we discuss the demise of Panama’s not-so-transparent Transparency Commission.

“The Big Four…just seem to be getting away with being the guardians of commerce when they are basically a bunch of tax cheating facilitators…they have infiltrated governments at every level all around the world” —Michael West

“What they’re doing is really taking over the operation of companies by stealth…4 organisations dominating 98% of global commerce as auditors is well past its used by date, I don’t think any industry has come even close to this…” —George Rozvany

Featuring: John Christensen of the Tax Justice Network, tax ethicist George Rozvany (with 32 years of experience at senior levels of Big 4 Accounting Firms and major corporations) and award winning economics and finance journalist Michael West

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.

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15 comments

  1. Stephen Verchinski

    What are the functionally equivalent firms internationalky or are these big four operating everywhere?

    1. John Zelnicker

      I believe these four pretty much cover the waterfront for multi-nationals. They have divisions in most countries of significance.

  2. Anonymous

    I was very interested that the taxcast people did not describe the rates of income taxation on trusts. I don’t know what they are in Britain, but in the US ‘taxable income over $12,400 results in a tax of $3,206 plus 39.6% of the excess over $12,400.’ And that’s only at the Federal level.

    http://www.trustedattorneys.com/News/tabid/64/entryid/37/income-tax-rates-for-trusts-and-estates-2016.aspx

    In other words, if you set up a trust, in the US, you’re paying the highest tax rate at a low, low level of income. The federal government is, in effect, charging you extra in taxes to allow you to take care of your incompetent child or other relative after your death. There’s only an estate tax benefit if your estate is over $5.45 million, or $10.9 million if you’re married. I presume only a small minority of trust makers enjoy this benefit.

    1. John Zelnicker

      However, any trust income distributed to or for the benefit of the beneficiaries is taxed at the beneficiary’s personal tax rate, just like any other income. Only retained income is taxed at the trust’s tax rate and the vast majority of trusts distribute most or all of their income.

      I’m not sure what you mean by an estate tax benefit for large estates. Those numbers indicate the size of the estate exempt from estate tax. Only estates larger than that are taxed at all.

      1. Anonymous

        You are correct, of course. I overlooked the fact that beneficiaries pay tax at their individual rate. My mistake.

        Re: estate tax benefit, I meant that I expect that only a minority of trust creators have estates expected to be larger than $5.45 or $10.9 million. They would, as you say, have estates exempt from the federal estate tax.

        1. John Zelnicker

          The figure for taxable estates is about 0.2% of the people who die in a given year. In 2011 there were 4,400 taxable estates out of 2.5 million deaths and in 2015 the numbers were 4,700 out of 2.6 million.

    2. TheCatSaid

      I know a UK author who had a trust set up that covered all his travels and living expenses related to his writing (in other words, everything for his living expenses could be deemed as being related to the books he was writing), and into which all his income was deposited. The author had to be under the control of one (or more) people who were not him or his family. IIRC there was no tax due. There were probably regulations to have this status, but they didn’t sound too onerous.

      This author moved in well-connected circles: the secret sauce for all these schemes.

      1. John Zelnicker

        The US Internal Revenue Code (IRC) does not allow for the assignment of income to any person or entity other than the one who did the work or earned the income. So, in the US, an arrangement like the one you mention would result in the author being taxed on the income distributed to him or for his benefit. He would, of course, be able to deduct all of the “ordinary and necessary” expenses (travel, supplies, etc.) related to the production of that income, but that would not include regular living expenses, such as rent, utilities and other costs of maintaining his home.

        The IRS would never allow someone to claim that all of their living expenses were directly related to the production of their income (it’s been tried).

        1. TheCatSaid

          While I don’t know the details, I know the author travelled abroad extensively and wrote works of fiction about those places. So the travel (and related living expenses) were probably legitimate research related to his creative work.

          I think his home was owned by the trust.

  3. Sound of the Suburbs

    Looking at the UK’s aristocracy (like the Duke of Westminster) helps us understand capitalism.

    Let’s put the Upper Class back in the picture.

    We’ve been sold a pack of lies.

    The lazy people are at the top and always have been.

    Capitalism, itself, is the welfare state of the upper, leisure class

    Capitalism is an old system designed to maintain a leisure class.

    Every social system since the dawn of civilization has been set up to support a Leisure Class at the top who are maintained in luxury and leisure through the economically productive, hard work of the middle and lower classes.

    The lower class does the manual work; the middle class does the administrative and managerial work and the upper class lives a life of luxury and leisure.

    In the UK we call our leisure class the Aristocracy.

    Adam Smith observed this:

    “The Labour and time of the poor is in civilised countries sacrificed to the maintaining of the rich in ease and luxury. The Landlord is maintained in idleness and luxury by the labour of his tenants. The moneyed man is supported by his extractions from the industrious merchant and the needy who are obliged to support him in ease by a return for the use of his money. But every savage has the full fruits of his own labours; there are no landlords, no usurers and no tax gatherers.”

    He could see:

    1) It is a system designed to support a leisure class
    2) The system flows upwards
    3) The two sides of capitalism, the productive side where “earned” income is generated and the unproductive, parasitic side where “unearned” income is generated that supports the leisure class.

    He and other Classical Economists thought taxes should go on “unearned” income to provide public services and subsidise the productive side of capitalism.

    The leisure class were appalled at the prospect of centuries of idleness coming to an end and backed neoclassical economics that hides the way the economy actually works.

    This “junk” economics lies underneath the Neo-Liberal veneer.

    With this “junk” economics and Neo-Liberal thinking most of the UK now dreams of giving up work and living off the “unearned” income from a BTL portfolio, extracting the “earned” income of generation rent.

    The UK dream is to be like the idle rich, rentier, living off “unearned” income and doing nothing productive.

    Once the UK moves on from its rentier ways and the unproductive, parasitic side of capitalism, the sky’s the limit with the productive side of capitalism.

    Read Michael Hudson’s “Killing the Host” for more details and an insight into real, Classical Economics.

    1. Sound of the Suburbs

      Feudalism used land to maintain the leisure class.
      Capitalism uses wealth (capital) to maintain the leisure class.

      The UK Aristocracy and their ancestors barely noticed the transition.

        1. Sound of the Suburbs

          The wealthy do fight over their share of the spoils.

          In Feudal times they used to go to war to kill each other and steal each other’s stuff.

          William the Conqueror came over from France in 1066 to kill anyone necessary to steal everything in England

          They still do almost nothing.

          As David Cameron was persecuting those at the bottom for being lazy and feckless he didn’t notice his Aristocratic father-in-law does almost nothing and lives on an estate the family have had since the 16th Century.

  4. Dikaios Logos

    I listened to the podcast TWICE this morning. It was that good!

    I’ll listen to the segment about auditors and insurance another time, but if anyone with knowledge of the auditors and their Caribbean insurance scheme(s) could directed me to further materials on the subject, I would consider donating to your favorite charity!

  5. templar555510

    I think it was Piketty’s book that put the spotlight of the whole rich versus poor issue, but as a sequel as we are now seeing is that this has been the deliberate policy of government and that has dawned on enough of the populace to look for someone to support at the ballot box – Trump, Brexit etc . These votes may not turn out to have the desired effect, but they represent deeply felt moral imperatives and should not be underestimated by the elites because they can be addressed at present by changes of policy ; and I don’t mean just changing tax rates , important though that is . There needs to be an acknowledgement that our democratic societies are deeply flawed and that is a big ask , not to mention the whole issue of tax avoidance / evasion discussed in this podcast.

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