Pandora Papers: Stop the enablers that help billionaires dodge taxes

The recent publication of the Pandora Papers adds to the recent bounty of investigative journalism chronicling how the super-wealthy play shell games with their tax obligations. 

The Pandora Papers disclosures reveal the elaborate mechanisms that the wealthy deploy to shift funds between global jurisdictions, masking their true wealth and minimizing their tax obligations. It unmasks the U.S. as a tax haven — including the state of South Dakota with its proliferation of dynasty trusts. 

Recently, ProPublica chronicled the proliferation of granter retained annuity trusts (GRATS) in enabling billionaires avoid estate tax and pass on democracy-distorting levels of wealth to their heirs. This and other tax dodges are the reason that the 400 wealthiest households paid an effective tax rate of 8.2 percent when the average taxpayer pays 14 percent, according to a White House analysis.

While we should hold the billionaire tax dodgers to account, not enough scrutiny is focused on the enablers, what social scientists describe as “the wealth defense industry.”  These are the tax attorneys, accountants, wealth managers and family-office staffers that are paid millions to help billionaires sequester trillions.

These paid experts create dynasty trusts, anonymous shell companies, and construct complex alphabet soup of tax-dodging mechanisms such as GRATs. They take advantage of weak IRS oversight, offshore tax havens and competing state jurisdictions to help their super-rich clients move their treasure to the shadows. 

The wealth defenders will crow “everything we do is legal” but segments of the wealth defense industry are implicated in writing the rules governing trusts in many U.S. states and designing the exotic transactions that dance along the intent of the law. While the left hand is using various wealth-hiding techniques and loopholes, the right hand is fending off oversight, lobbying for special treatment, and creating new loophole innovations.

For example, South Dakota has pioneered the “dynasty trust,” according to revelations from the Pandora Papers, a favorite among global billionaires. The state legislature, at the behest of the state’s tiny trust industry, update their laws on a regular basis to maintain their competitive advantage against other states, such as Nevada and Delaware, in a race to the bottom of weak trust regulation.  

In another example of writing the rules, wealth advisors in New Hampshire lobbied for the creation of a new ownership structure — the civil law foundation (not to be confused with charitable foundations). Their goal was to attract billionaire wealth from around the world that might be anxious about the unfamiliar “trust” ownership form. These enablers actively rig the rules to benefit their clients.  

The good news is with political leadership, we can shut down this corrupt hidden wealth system. At the end of 2020, with bipartisan leadership, Congress passed the Corporate Transparency Act to require limited liability companies to disclose their real owners to the law enforcement arm of the Treasury department. 

It would be great if the wealth defense industry policed their own ranks, but we can’t wait for voluntary action. The next steps include outlawing particular trusts and loopholes, promoting further ownership transparency, passing global trade treaties that prohibit offshore practices (and consign rebel states to economic pariah status), as well as investing in robust enforcement. 

A group of lawmakers has proposed the “Enablers Act,” an amendment to the Bank Secrecy Act, to establish due diligence laws for the attorneys, art dealers and other “middlemen” responsible for these systems.

To ensure the super-wealthy pay their fair share, we urgently need robust IRS oversight. The IRS has lost roughly 18,000 full-time positions since 2010, primarily the result of Republican budget cuts. As a result, the IRS lost the expertise required to “follow the money” and unravel the complex tax dodges that have proliferated in recent years. As a result, the gap between the amount owed and the amount collected has widened. IRS Commissioner Charles Rettig told Congress in April that the gap may be as large as $1 trillion a year.

To pay for his Build Back Better program, President Biden has proposed restoring higher corporate and individual tax rates and taxing millionaire income on capital gains at the same rate as wages. But lawmakers also need to back Biden’s plan to spend $80 billion over the next ten years to help enforce existing tax laws, a move that could raise an estimated $700 billion over the next decade. 

Blocking the path of this necessary change won’t just be the super-wealthy, but this self-interested class of wealth advisers who thrive on complexity and trusts that live forever (and provide them with perpetual fees). Lawmakers should strive for tax transparency and simplicity and consider a radical solution: Outlaw all trusts except a few special-needs custodial arrangements for a publicly disclosed single beneficiary — and require an annual tax return for the trust. 

Without these enablers, what sociologist Brooke Harrington calls the “agents of inequality,” the super-rich would still avoid taxes — but the scale of the heist would be considerably smaller.

Chuck Collins is the author of “The Wealth Hoarders: How Billionaires Pay Millions to Hide Trillions” (Polity Books).  He directs the Program on Inequality at the Institute for Policy Studies where he co-edits the website, Inequality.org. Follow him on Twitter: @Chuck99to1