There's a curve - up to perhaps $0.5-1m / year, it's not really feasible for most people to structure hyper-cleverly to avoid taxes. But after that, you can start to afford the extra lawyers and accountants (and corporate structures) to cut the rate back down by shifting everything to LTCG and having the corporate side of things cover little things like your private plane. :)
It's not really about being able to "afford lawyers and accountants." It's about our system preferentially taxing investment income on purpose. Some of those lawyers and accounts themselves make millions a year and pay 40%+ in income taxes, and there is little they can do to reduce that number because it's labor income.
You might be surprised - for example, a very-well-compensated trial lawyer can avoid substantial amounts of tax (and convert it into LTCG) by creating an offshore-registered captive insurance company: http://www.jdsupra.com/legalnews/tax-reduction-and-deferral-...
It's expensive to set up & maintain one of those, so it's not worthwhile in the sub-$1m/year regime.
"As part of an asset protection plan, captive insurance helps shield your business while working to reduce your insurance costs. It can even help you save up to $1.2 million a year free of income tax. "
(I love the "oh, and by the way, there might be this other little benefit, though we know you're just doing it to reduce insurance costs" tone of that one. :)
> Some of those lawyers and accounts themselves make millions a year and pay 40%+ in income taxes, and there is little they can do to reduce that number because it's labor income.
Lawyers and accountants making that much are generally not doing it all (or even mostly) as what is, for tax purposes, labor income; they are doing it by owning (or co-owning) a firm through which the work is done, taking a much smaller salary as labor income, with the rest being the firms income which, if extracted, is extracted as tax-favored capital income (depending on the particular form of firm and method by which the value is extracted, this could be taxable dividends or LTCG, which are both tax-favored but have different exact tax treatment.)
There's a curve - up to perhaps $0.5-1m / year, it's not really feasible for most people to structure hyper-cleverly to avoid taxes. But after that, you can start to afford the extra lawyers and accountants (and corporate structures) to cut the rate back down by shifting everything to LTCG and having the corporate side of things cover little things like your private plane. :)