For the purposes of tax avoidance, shell corporations, along with other tools favored by what’s called the “wealth-defense” (known less euphemistically as tax avoidance) industry, are useful mainly to those making substantial amounts of money from owning assets, as opposed to working. Because the U.S. has a rigorous system for tracking people’s income—employers have to report it to the IRS—taxpayers are not able to hide their money before a tax authority is made aware of it. But, shell corporations don’t make sense for you if you’re earning only a little bit of money from assets; you have to be making a lot. “Just because I could buy a backhoe for cheap,” Winters says, “doesn't mean that a backhoe is useful for me, for my little garden in the backyard.”
So how big would your garden have to be for it to make sense to buy a backhoe? Winters says that individuals start being able to afford Mossack Fonseca-level wealth defense once their annual earnings (from both work and assets combined) cross a threshold of about $3 million to $5 million. The deductions that people of average wealth take are hard to fudge, but for the super-rich, it’s different: “As you move into these very complex structures, it becomes really up for grabs whether the tax payment is even legitimate or not,” Winters says. This means that with the proper legal handiwork, a lot of their income can avoid taxation.
Consider one lucrative tactic, the tax-opinion letter. At the upper tail of wealth, tax-opinion letters are thoroughly vetted documents that tax-law firms produce on behalf of their clients, and essentially what they say is that, in the expert opinion of the firm, the client owes little to no taxes. At the price of $1 million to $4 million—which also buys clients the peace of mind that the firm will defend its letter in court if pressed by the IRS—these documents are wildly out of reach for an American making median income, according to Winters. But for much wealthier people they’re worth it, because they can lead to tax savings in the tens or even hundreds of millions of dollars.
Shell companies, similarly, require the expensive expertise of tax lawyers to be of any use. “A shell corporation is only one part, it’s just an instrument, in a broader wealth-defense strategy,” Winters says. He says that a well-designed network of shell companies can make $30 million in gains look to the IRS like a $10 million loss.
So is wealth defense not worth it unless you are ludicrously rich?
It turns out that there is a market for selling cheaper but still effective wealth-defense services to people who are less wealthy but still rich—a group the industry calls “the mass affluent.” But those services aren’t available. Why? The idea of millions of people engaging in tax avoidance, instead of a much smaller group doing so more discreetly, didn’t go over so well when the accounting firm KPMG tried it in the early 2000s. KPMG, as Winters explains in his book, Oligarchy, decided to start marketing a watered-down version of their high-end wealth-defense services. For only about $300,000, a client could tap into the power of shell companies and tax-opinion letters—just ones that weren’t as customized as the ones sold to richer people. “They decided to try to produce hamburgers instead of filet mignon,” Winters says.