by Gary Alexander
April 9, 2024
The annual IRS tax deadline is on us, matching the historic date of the sinking of the Titanic in 1912 and the death of Lincoln, so let’s forget Shakespeare and Julius Caesar and fear the Ides of April, not March.
Back in the 1990s, when I moderated six investment conferences a year, I used the Atlanta Investment Conference (timed to coincide with the Masters Golf Tournament) to thank the audience, something like this: “Since most of you are at, or near, the top income tax bracket, I want to thank you for paying more than your fair share in income taxes. Your nation should thank you. They don’t, so I will. Thank you.”
I must admit that the audience usually gave me a blank stare – a deer in the headlights look – like nobody ever said that to them before. A few smiled, but most looked down like it was an embarrassing secret.
Sure enough, President Biden is proposing tax increases on the rich in his 2025 budget, vowing they will pay their “fair share,” even though the top 1% in 2021 paid 46% of all income taxes, up from 33% in 2001, and 39% in 2018. The Top 10% of earners in 2021 paid 75.8% of all income taxes. How much more than that do they need to reach the “fair” plateau? The bottom 50% paid only 2.3% of all income taxes.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
I could go on quoting such statistics for another 1,000 words or a dozen paragraphs, while listing the booms in the stock market and federal tax revenues following the tax rate cuts in the 1920s, 1960s, 1980s 2000s and 2017, but skeptics ignore that like white noise in the room, or disco music. It’s “cognitive dissonance” to their belief system. So let me try another angle. I was there and saw it happen, first-hand, with the Tax Reform Act of 1986, the act that killed the magazine I was editing, “Wealth Magazine.”
The 1986 Tax Bill That Killed Nearly All Tax Shelters – and My “Wealth Magazine”
In the mid-1980s, I had all the editorial energy in the world, editing two monthly newsletters, “Gold Newsletter” and a compendium of over 100 newsletters which I called “Investor’s Notebook,” plus a daily news summary for our staff called “Alexander’s Morning Economic Newsletter” (AMEN), a few other bulletins, and a quarterly glossy magazine, called “Wealth” (like Money but for the top 1%). It wasn’t something I did by choice, but it was an outgrowth of other endeavors for my publisher, as we tried to reach a wider mainstream audience with our message of alternative investment portfolio choices.
However, there was a dark side of “wealth investing” that I didn’t enjoy, and that was the advertising-driven array of articles necessary to cover tax shelters for the super-wealthy. The first edition in the Fall of 1983 (pictured below) was titled “Protecting Your Nest Egg” against confiscation or high taxes, with articles on “Year-end Tax Strategies.” I’ve been looking at all 14 issues and each has such tax strategies.
As Reagan’s second term began, tax reform was in the air. Our Spring 1985 issue begin with rumors of a big tax cut coming. Our first article was headlined: “Tax Shelters: The Flat Tax and Your Investments:” The article began, “There has been considerable talk about a flat tax or ‘modified flat tax.’ …. Some investors, paralyzed by uncertainty, have reacted by avoiding all tax shelters. This is exactly the wrong strategy.” The article went on to promote limited partnerships. The next two articles in that issue were also about tax shelters: “Low-Profile Offshore Investing” and “Tried and True Real Estate Techniques,” which involved leverage, adjusted cost basis, tax deferral rollovers and other tricks not involving actually living in the darned house! Later in that issue was a major article on “tax-sheltered life insurance.”
I must admit that these articles were no fun editing. I didn’t solicit them. They usually came as part of a package of advertising or speaker deals. Although I insisted they be clear, legal, informative and not geared toward a sales pitch, they either confused me with their convoluted legalese and math or they bored me. I would rather publish articles about clear profit opportunities than how to spend $10,000 to lose $5,000 in order to save $20,000 to $30,000 in taxes because you are in the 50% or higher tax bracket.
To the very rich, it made sense to spend (waste) up to half of their time and money weighing these very obscure tax shelters if they were in the 50% personal federal income tax bracket (plus more in state, local and other add-on taxes) or in the 46% corporate tax bracket, which prevailed from 1983 to 1986.
That’s where the 1986 Tax Act came in, killing all of these shelters, and our magazine. Most tax shelters disappeared at the end of 1986 due to the Tax Act that reduced top rates to 28% and eliminated virtually all abusive tax shelters. It passed the Senate Financial Committee 20-0 on May 7, 1986, a warning shot, and then it passed the full Senate by a commanding majority of 97-3, including the vote of one Joe Biden.
On September 25, it passed the House and it was signed into law by President Reagan on October 22, 1986. Very soon, we went to press with our final (winter 1986-87 edition of Wealth Magazine. We just couldn’t sell enough advertising among tax shelter folks and others benefiting from wealth workarounds.
That law really goosed the stock market, too. In the 10 months from October 21, 1986 (the day before tax reform passed) to August 25, 1987, the Dow Jones Industrial average rose 50%, from 1805 to 2702, so in a sense you could say that the Crash of 1987 was caused by over-reaction to the Tax Reform of 1986.
Wall Street Journal reporters Jeffrey H. Birnbaum and Allen S. Murray wrote up this whole process in a very entertaining style in their book, “Showdown at Gucci Gulch,” so named because well-paid lobbyists for special interests in the tax code often charged $200 to $400 an hour ($500 to $1,000 today) and invariably wore Gucci shoes, but they didn’t expect 97 of 100 Senators to turn against them so suddenly.
Wealth magazine (1983-86) often focused on asset protection and tax shelters – until the 1986 Tax Reform killed that demand; “Gucci Gulch” referred to tax lawyer lobbyists; the 1986 tax reform held Consequences for them, too.
To give you a taste of the drama in the air back then, Washington bureau chief for the Journal at the time, Albert R. Hunt, began the introduction to Gucci Gulch: “The Tax Reform Act was the best political story of its time, full of suspense, and with a vivid cast of characters. It marked the most significant achievement of the second Reagan administration. Indeed, in the history of the Republic, very few pieces of legislation have more profoundly affected so many Americans. The saga was all the more dramatic because it was so unlikely. When the 99th Congress convened, tax reform barely was on the agenda.” The authors go on to show how all the characters who made it happen were previously in the pocket to special interests but transcended that trap and made the miracle happen – two low simple tax rates and virtually no shelters.
The Tax Reform Act suddenly lowered the top federal income tax rate from 50 percent to 28 percent, and rich people, as if with one sighing voice, surrendered, saying, “OK, we can live with that. Back to work.”
Likewise, when taxes are raised, rich folks go back to work on tax shelters. As Art Laffer says at the start of his book, “Taxes Have Consequences,” high-income earners can switch courses four ways, rapidly:
“The extent of their wherewithal gives them options. High earners can readily change the location of where they earn their income, the timing as to when they receive their income, and the form in which they receive their income – not to mention how much income they choose to earn.” (page 23).
Laffer presents compelling evidence (with his Laffer Curve) that the rich pay about 20% of their total income in taxes, whether the top rate is 30%, 50% or 70%. They so arrange their affairs that the income they report is about what they’re willing to pay, even though they must create strained legal structures to reduce, move, delay or shelter the income they don’t want to share with Uncle Sam quite yet.
So, we either admit reality and human nature, or we deny history and science. Which will we choose?
My “Wealth” Magazine (1983-86): May it rest in peace, along with high tax rates. This typical (Fall 1984) issue featured “Year-End Oil & Gas Shelters” (upper left) and “Tax Shelter Magic: How you can lose money and still make money,” the dirty little secret of tax shelters. (I much preferred moderating the “Inflation vs. Deflation debate” between two real experts and great gentlemen, Alexander Paris/inflation and Richard Russell/deflation).
Photo by grand-daughter Marleigh Alexander, since all evidence of Wealth Magazine is ghosted on the Internet.
All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.
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About The Author
Gary Alexander
SENIOR EDITOR
Gary Alexander has been Senior Writer at Navellier since 2009. He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks. For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.
Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s. He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division. Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander
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