There has been a lot of press coverage recently about American citizens using Swiss accounts for tax evasion purposes. I have spent thousands of hours researching the affluent and advising the majority of the top fifty financial institutions in America. Yet, I have only spent about two (2) hours consulting with a group of executives employed by a bank based in Switzerland. This bank, which targeted the affluent, was interested in establishing a presence in the United States. What do I remember most from the continental breakfast meeting? One, the number of serving trays that displayed Swiss cheese exceeded the number that held breakfast rolls by 2 to 1; two, the conference room was as sterile as an operating room: glass, steel, grey paint, no plants; and three, the look of disbelief on the faces of the executives when I profiled the typical American millionaire.
They asked me how I found the millionaires that I interviewed. I discussed several ways including scanning key trade and professional journals that profiled the “winners” within their respective industries. As I did so, I passed out copies of some of my favorite sources: Rock and Dirt, Pizza Today, The Alaska Commercial Fisherman, Sludge News, and Turkey World. The leader of the group responded, “This is so different, so very, very different from the wealthy in Europe who are our customers. They would never allow themselves to be featured.” I told them that in the United States the large majority of millionaires are proud of their achievements. Further, I pointed out that a disproportionately large number of American millionaires are business owners. Compared to other occupational groups such as executives and professionals, they are better able to minimize their taxable income and maximize their unrealized income (legally).
But the Swiss bank executives wanted to target wealthy people who demand anonymity in so-called tax advantaged services and products. I countered that I thought they were really looking for people whom I consider Income Statement Affluent: those with big incomes but relatively low levels of wealth. That is not my specialty. Nor is developing prospect lists. Again, I am not in the list business. All my respondents are guaranteed anonymity.
I have always believed that most of those who are guilty of tax evasion are hyper consumers, using their money to buy prestige makes of motor vehicles, multiple vacation homes, etc. In my view, few if any are Robin Hoods. They are not interested in building an orphanage or giving to the mothers of the poor with all the money they saved by not paying taxes. Most need every dollar of income they generate to sustain their gluttonous lifestyles. How can they be expected to pay taxes? It is just so common!
I’ll predict that if and when the names of these tax evaders are released by the IRS, there will be very few millionaire next door types or even one member of the Forbes 400 among them. Let me explain. The typical millionaire next door type has a total annual realized income of 6.7% percent of his wealth, meaning that only 6.7% of his wealth is subject to some form of income tax. I predict that this year Americans in total will produce a realized income of approximately $9 trillion. When taken as a percent of the total household net worth of $50 trillion, the average American is realizing 18% of his wealth every year or nearly 3 times that of the millionaire next door. The median figure for the typical American is significantly greater as will be discussed in Part II of this blog. Most millionaires know that the more they spend, the more income they must realize. The more they realize, the more they must allocate for income taxes. As I wrote in The Millionaire Next Door:
To build wealth, minimize your realized (taxable) income and maximize your unrealized income (wealth/capital appreciation without a cash flow).