Revealed: How the System Favors the Wealthy

Revealed: How the System Favors the Wealthy
Thursday, December 3, 2009

“The U.S. tax code is the most political law in the world.”
– Jonathan Blattmacher, tax lawyer to the super-wealthy

“Taxes are what we pay for civilized society.”
– Oliver Wendell Holmes

Executive pay has been in the news a lot lately. We all know that Kenneth Feinberg of the Treasury Department has imposed sharp limits on the compensation of execs within the seven firms that received the biggest portion of the federal bailout.

In alphabetical order, those were AIG, Bank of America, Chrysler, Chrysler Financial, Citigroup, General Motors and GMAC. These seven companies received almost $240 billion in TARP funds.

Now the Federal Reserve has said it will evaluate executive compensation levels as part of its sound-management assessment of the 6,000 banks it regulates. Excessive risk-taking in the upper echelons of financial institutions, it seems, is on the way out.

What I’d like to focus on, in a new series of articles here in The Tycoon Report, is the greed that brought us to the brink of financial ruin and threatens the fabric of checks and balances that keeps any one group from wielding too much influence in the governing of this beloved country.

A Necessary Evil or a Citizen’s Duty?

Oliver Wendell Holmes (along with the founding fathers) knew that without an equitable, representative system of taxation, there would be no — could be no — widespread wealth in the United States.

Compare us to Afghanistan or Honduras, which have no real tax systems in place. There, wealth is quite concentrated and no “middle” class exists.

Taxes are necessary to provide for what the Constitution calls “the commons” — interstate highways, public forests, police and fire departments, public education, and the lot.

As reported recently in BusinessWeek, the federal income tax rate for businesses is 35 percent, but few companies pay that much: “After factoring in deductions, loopholes and special incentives, large businesses on average paid less than 27 percent. Goldman Sachs, which recently reported a record $3 billion profit, paid an effective tax rate of 0.6 percent last year.”

(For more about Goldman Sachs and their manipulation of market bubbles, see my previous articles).

Whenever someone escapes paying their rightful share of the tax burden, every other American has to make up for the uncollected taxes.

In other words, like the last one left at the Olive Garden for the family reunion, we’re picking up the tab.

Not since 1929 has the wealth of the USA been concentrated in the top 1%. They own approximately 50% of the financial assets in the country. And the richest 15% own nearly all of them.

Now the IRS tracks wages religiously. They are less-disciplined when it comes to income derived from anything other than wages.

It may surprise you (as it did me) to discover that the IRS no longer audits people whose reported income appears insufficient to support their lifestyle. This, you may remember, was how they caught Al Capone.

This provision was excised in a 1997 law purported to be a middle-class family’s dream of a tax cut. This was also the law that generously reduced the tax rate on long-term capital gains, the source of 2/3 of the incomes of America’s wealthiest 400. (Long-term capital gains were again slashed to their current rate of 15% in 2003.)

The National Bureau of Economic Research is a nonprofit that officially decides whether or not we are in a recession or an expansion. (It was, as you may remember, in the news quite a lot about a year ago.)

Its president, Martin Feldstein, was chief economic adviser under Ronald Reagan, and is a proponent of supply-side economics.

A 2002 paper commissioned by the bureau offers some interesting facts, since its authors took a fine-toothed comb to detailed income and wealth data from 1917 to the year 2000. They focused on the very richest of the rich.

The chart and graphic below, which illustrate part of their findings, speak for themselves.

(Click the images to view them full-size)

While the bottom 90% of us lost ground, those in the 95%-100% brackets did pretty well, with each successive group close to doubling the previous group’s share percentage.

The most-telling figures of all are in the next-to-the-last column, where 0.09% of households increased their holdings by 227%, and the last column, where 13,360 households (0.01%) had a whopping 412% increase in their slice of the economic pie.

Let’s look closer at the breakdown.

That $2,710 increase in income for the bottom 99% represents an increase of 0.08% over 30 years, while the top 1/100 of 1% saw their income increase over 658% for the same period.

And remember — the graphic doesn’t do the comparison justice, considering the comment at the top of the right column.

How Taxes Work (or, How They’re Supposed To)

How the government sets its tax rates determines both the degree of prosperity and who will prosper.

Under President Dwight D. Eisenhower, the top tax rate was 90%. That administration effectively decided to limit the accumulation of wealth from earnings.

On the other hand, we now tax the first dollar of wages earned (including Social Security and Medicare), effectively restricting or removing the ability of people at the lowest extreme of income to save money and to get ahead.

Wage earners also operate under harsher tax rules than, for example, business owners, investors and landlords. The wage earner must report every dollar of income. Look at this:

YEAR TOP TAX BRACKET MAXIMUM SOCIAL SECURITY TAX
1970 70% $327
Current 35% $4,724

Remember, Social Security taxes are collected only on the first $76,200 of wages (as of 2000), so the burden is carried mostly by the middle- and upper-middle classes.

YEAR CAPITAL GAINS TAX
1987 28%
1998 20%
2003 15%

As corporate execs’ salaries rose, the demand for corporate tax shelters rose as well. The tax burden shifted off capital and onto labor. Under Eisenhower, the portion of federal revenue derived from corporate taxes was 33 1/3%. By 2002, it was 10%.

Playing Politics with the Market

The elimination of one simple rule by our representatives in Washington was the precipitating event that opened the door for the scandals at Adelphia, Global Crossing and Enron, among many others.

The significance of this rule was hotly debated and discussed in academic journals and corporate publications. But you probably never read a word about it, since the news media largely ignored it.

The legal principle wiped out by our esteemed lawmakers was the policy that each partner in an accounting or law firm is liable for the acts of any partner in the firm.

By removing such accountability, Congress wiped out the most-powerful incentive for accountants and lawyers to behave with integrity.

In closing, let me say that an active pursuit of self-interest is itself a necessary element of a healthy democracy. The government is designed to work through compromise and informed debate, to settle the ever-present tension between self-interest and the common good.

But an uninformed electorate cannot act in its own best self-interest. And when people stop acting in their own best self-interest, the power and influence of the political donor class grows.

It’s natural to want to escape paying as much tax as legally possible. Problems arise when, in an effort to curtail the spirit of the law, tax specialists propose a strict adherence to what is delineated in the tax law, thereby requiring every new law added to be spelled out in detail — resulting in a massive, complicated and burdensome compendium of regulations that few understand.

But the few who do charge a hefty fee for their knowledge, and those who can afford to pay it, are awarded with benefits that are unattainable by the rest of us, thereby bestowing on the wealthy an unfair and undemocratic advantage.

Stay tuned for part two of this article series where, next week, we’ll talk about a “top executive’s hidden hoard.”

Bob De Dea
Guest Contributor
The Tycoon Report

Source: History.com http://tycoonreport.tycoonresearch.com/