The Bermuda Triangle: Where money mysteriously disappears

Allianz’s Global Wealth Report 2015 rated the US as the wealthiest - and most unequal - country in the world. The growing divide between rich and poor is driven by this sophisticated method for shielding their fortunes. If the top 400 earners were taxed like an average American in 2012, their tax obligations would have doubled. “We do have two different tax systems, one for normal wage-earners and another for those who can afford sophisticated tax advice,” said Victor Fleischer, a law professor at the University of San Diego.

A New York Times report says the so-called “income defense industry”, operating in the shadows of Washington and Wall Street, mostly in tax courts and private Internal Revenue Service (IRS) negotiations, and who consist of top-shelf lawyers, estate planners, lobbyists, and anti-tax activists exploiting (and creating) loopholes unavailable to middle or working class taxpayers. The techniques applied are designed to be too complicated for regulators, the media, and the general public to understand, but NYT explains their principle is quite simple - convert one type of income into another type that’s taxed at a lower rate.

Hedge fund magnate Daniel S Loeb uses this  technique through a Bermuda-based reinsurance company he set up in 2013, where he transforms "his profits from short-term bets in the market", taxed at roughly 40 percent, into capital gains, a nearly 50% drop in tax rate.

‘Charitable trusts’ purchasing a "private placement life insurance policy" is another way top earners reduce their tax

When Bill Clinton was elected US President in 1993, the 400 highest-earning taxpayers in America paid nearly 27 percent of their income in federal taxes, according to IRS data. By the time Obama was re-elected in 2012, this had fallen to below 17 percent. At its peak, the top US tax rate was 94% in 1944 and 1945, but it's been on a steady decline since then.

In the October 2015 budget deal gives the IRS more power to collect "underpaid taxes", but since the rules don't take effect until 2018, it gives "the wealthy plenty of time to weaken them further". The IRS also faced budget cuts, losing 5,000 enforcement officers out of about 23,000 after funding was reduced by 15 percent between 2010 and 2014. In 2014, the Club for Growth Action fund raised more than $9 million and spent much of it helping candidates critical of the IRS.