It's not so much that corporations and the wealthy are breaking the tax rules, it's that the rules were written with their interests in mind.
April 18, 2011
"WHEN GOVERNMENTS set tax rates, they are making decisions about who will prosper and by how much," argued David Cay Johnston in his groundbreaking book Perfectly Legal: The Secret Campaign to Rig Our Tax System to Benefit the Super Rich--and Cheat Everybody Else. Johnston, a former New York Times tax reporter, described the class character of the U.S. tax code as follows:
Congress lets business owners, investors and landlords play by one set of rules, which are filled with opportunities to hide income, fabricate deductions and reduce taxes. Congress requires wage earners to operate under another, much harsher set of rules in which every dollar of income from a job, a savings account or a stock dividend is reported to the government, and taxes are withheld from each paycheck to make sure wage earners pay in full.
As the April 7 Bloomberg BusinessWeek cover story noted bluntly, "The more you make, the less you pay" in U.S. taxes. The story offers "A Billionaire's Guide to Paying No Taxes," providing a list of "11 shelters, dodges and rolls--all perfectly legal--used by America's wealthiest people."
These tax breaks are not available to those who file their taxes on Turbotax.com, much less to those who fill out their 1040 short forms themselves, but only to members of the corporate class, who employ an army of tax lawyers and lobbyists to exploit each and every loophole in the 67,000 pages that make up the U.S. tax code.
Tax deductions such as "accelerated depreciation" (write off the cost of your machinery and equipment years before it actually wears out!) and "deferred tax" (why pay taxes now when you can postpone them for a decade or two?) might be as incomprehensible as they are unavailable to the average taxpayer, but they are gold mines for the extremely wealthy.
The offshore tax haven is the biggest tax loophole of all. According to U.S. PIRG, the IRS itself estimates that individuals and corporations currently have $5 trillion stowed away in offshore low-tax havens.
And tax havens can offer other opportunities for corporations to yet further lower corporate tax rates. As SmartMoney.com described in 2008, "There are so many ways to play the game...merely make sure that U.S. operations incur tax-deductible interest payments by borrowing money from cash-rich subsidiaries overseas. This is what's known in industry parlance as 'income-shifting.' It passes the time while one waits for the next U.S. tax holiday on repatriated overseas profits."
If you own a yacht, you can claim it as a second home, allowing you to deduct the interest paid on your loan from your taxes, as long as you say you spent a total of 14 nights on it. As the Seattle Post-Intelligencer remarked about the yacht deduction in 2004, "The Internal Revenue Service rarely bats an eye at questionable cases, nor does it keep track of the lost revenues," which it estimated could approach $1 billion annually.
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NOT SO at the other end of the income spectrum. The lower you are on the income ladder, the higher your chance of an IRS audit--especially if you are a member of the working poor who claims an Earned Income Tax Credit, which automatically flags you for suspicion. In 2001, those who applied for this credit were eight times more likely to be audited than those with incomes of $100,000 or more.
Thus, while working-class taxpayers sweat out each tax season, tax day is a cause for great rejoicing among the tax delinquents at the top of the financial heap. And 2011 promises to be the best in many decades. As the aforementioned article notes:
For the well-off, this could be the best tax day since the early 1930s...For the 400 U.S. taxpayers with the highest adjusted gross income, the effective federal income tax rate--what they actually pay--fell from almost 30 percent in 1995 to just under 17 percent in 2007, according to the IRS...It may seem too fantastic to be true, but the top 400 end up paying a lower rate than the next 1,399,600 or so.
Indeed, as mega-billionaire Warren Buffett remarked while speaking at a $4,600-a-seat fundraiser in New York for Sen. Hillary Clinton in 2007, "The 400 of us [here] pay a lower part of our income in taxes than our receptionists do, or our cleaning ladies, for that matter."
On March 24, the New York Times exposed the fact that, although corporate giant General Electric posted $14.2 billion in profits last year, it not only paid zero taxes but actually claimed $3.2 billion in tax credits--as if GE's tax dodging is a shocking exception to corporate practice. But GE is merely the leader of the pack. Between 1998 and 2005, 57 percent of U.S. companies paid no federal income taxes for at least one year.
And from 2008 to 2010, according to PayUpNow.org, many of the most profitable U.S. corporations paid 5 percent or less in taxes--including Chevron (under 5 percent), Merck (5 percent), Hewlett-Packard (3 percent), Exxon (2 percent), IBM (2 percent) and Carnival (1 percent).
Citigroup and Bank of America paid no taxes for at least two of the three years. And Boeing, DuPont, Dow Chemical and Verizon all posted tax credits during this three-year period.
PayUpNow.org's research showed that the top 100 corporations paid less than 10 percent of their pre-tax profits in taxes in 2010, using data that is readily available to the public. Yet the mainstream media continues to recycle the same group of tax "experts" who promote the illusion that the vast majority of corporations actually pay the official 35 percent tax rate--while corporate leaders pose as a persecuted minority, forced to keep their trillions overseas due to the U.S. government's punitive tax treatment.
A broad range of corporations and organizations--including the U.S. Chamber of Commerce, Microsoft, Apple and Cisco--recently came together to form the "WIN America (Investing Here at Home) Campaign," to plead their case. As its website states:
Currently, there is over $1 trillion earned by American businesses trapped overseas. We strongly support corporate tax reform--it is essential to keeping us competitive. But as Washington works on broader reform--likely to be a long process--an essential first step would be to allow these worldwide American businesses the freedom to bring up to $1 trillion in global earnings home to invest it now into our still fragile economy.
Unfortunately, our broken tax system actually penalizes U.S. businesses that want to bring their global earnings to America.
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WHEN IT comes to taxes, money that goes up doesn't come back down. As author Paul Buchheit explained recently on CommonDreams.org, the largest 100 U.S. companies:
with $5.67 trillion in 2010 revenue and almost $600 billion in pre-tax earnings, paid $57 billion, or 9.7 percent, in federal incomes taxes. If these 100 companies had paid the 35 percent tax designated by U.S. tax law, an additional $150 billion would have been collected in federal taxes in just one year. This is approximately equal to the total budget deficits for all 50 states.
Workers--including unemployed workers whose benefits count as "taxable income"--do not merely pay income tax at higher rates than some of the wealthiest corporations. Sales taxes and payroll taxes are also rigged to benefit the rich at the expense of the poor. Politicians of both parties are well aware of this enormous disparity, since together they passed all the laws that make up the grossly unequal U.S. tax code.
Often, these laws masquerade as benevolent gestures, with names such as "The American Jobs Creation Act," passed in 2004. That bill created few jobs, but was laden with corporate tax breaks, including a tax holiday that allowed corporations holding billions of profits in overseas tax havens to bring the money into the U.S., at a tax rate of just 5.25 percent instead of 35 percent. The U.S. Chamber of Commerce is now clamoring for another, similar tax holiday from Congress.
To be sure, Democrats somberly talk of the need for "shared sacrifice" while Republicans howl for blood, but both parties have for three decades been part of a common project to shift the tax burden sharply downward.
The highest income tax rate stood at 70 percent in 1980; today, it is half that, at 35 percent--in a downward trajectory throughout that period, whichever party has been dominating Congress or occupying the White House.
Shifting the tax burden from the rich to the poor has been the ugly underbelly of the one-sided class war waged by the corporate class that has successfully slashed working-class living standards and gutted union organization over the last 30 years.
And since the George W. Bush administration, corporations have been feasting on tax breaks. Citizens for Tax Justice compiled a report in 2004, documenting the top 25 tax break recipients of 2001-2003, which not only contains the familiar corporate culprits such as GE and Exxon-Mobil, but also reads like a who's who of the key players in the 2008 financial meltdown: Citigroup, J.P. Morgan Chase, Wachovia, Bank of America, Wells Fargo and Merrill Lynch.
Goldman Sachs did not make it into the top 25 that year, but after receiving $10 billion in taxpayer dollars from the 2008 Wall Street bailout, it paid a tax rate of just 1 percent. In 2010, Bank of America, another key perpetrator of the 2008 financial crisis, claimed a tax credit of almost $1 billion.
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"SOCIAL SECURITY is going broke," is one of the most persistent claims of policymakers over the last two decades, as if the coming influx of retiring baby boomers will suck the Social Security trust fund dry, thereby imposing an unfair tax burden on today's workforce.
On the contrary, baby boomers pre-paid for their Social Security benefits, but have since been robbed of them. Soon after Ronald Reagan took office in 1981, the government raised Social Security payroll tax rates, so workers would pay in advance for their own retirement benefits.
In 1970, the maximum Social Security tax was $327. By 2000, it was $4,724, more than 14 times higher. Democrats spearheaded the hike in Social Security taxes and assured their constituents that their money was safely parked in a trust fund where it would continue to earn interest.
Instead, the government looted the fund to pay its day-to-day expenses. As Johnston remarked, "Instead of buying municipal bonds or shares of IBM, the extra Social Security taxes were spent on cruise missiles and salaries of FBI agents and running the Environmental Protection Agency...making up for the taxes that were no longer being paid by the rich because of the 1981 tax cuts."
Social Security payroll taxes are already regressive because all employees, however large or small their wages, pay the same 6.2 percent rate. And Social Security deductions are capped--at $106,800 for 2011--so all those earning more have no more payroll deductions for the year, no matter how high their income reaches, effectively lowering their Social Security tax rate.
Policymakers have increasingly sought to make up lost revenue through a new tax scheme with a public relations twist: "sin taxes." Sales taxes are already a regressive form of taxation, since everyone pays the same rate, whatever their income and whatever their purchase, be it shoes for the kids or $3,000 Armani suits.
But sin taxes allow politicians to seize the moral high ground while punishing those who engage in allegedly unethical behavior--from smoking and drinking alcohol to, more recently, weighing too much--all of which target working-class people disproportionately.
In 2001, the Congressional Budget Office reported that those who quit smoking due to tobacco taxes tend to be from middle- and upper-income brackets. And as the Tax Policy Center pointed out:
In 2008, 34 percent of individuals with incomes between $6,000 and $12,000 said they smoked, compared to only 21 percent of all Americans, according to a Gallup Poll. Also, the 2007 Consumer Expenditures Survey reported that individuals in the lowest income quintile spent 1.7 percent of their after-tax income on alcohol, compared to only 0.6 percent for those in the highest quintile.
The latest sin tax fad is teeming with contempt, and the infamous Arizona Gov. Jan Brewer (who exudes contempt) is spearheading the attack. Brewer has proposed a $50 annual tax on Medicaid recipients who smoke, are overweight and/or have chronic medical conditions such as diabetes, claiming that their "unhealthy behavior" costs taxpayers money in additional health care costs.
Arizona Medicaid spokeswoman Monica Coury explained to the Wall Street Journal, "If you want to smoke, go for it. But understand you're going to have to contribute something for the cost of the care of your smoking."
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INDEED, CLASS contempt seems to characterize much tax policy in 2011, as governor after governor has combined "corporate tax reform" with draconian cuts in social spending and attacks on public-sector workers.
Once again, Jan Brewer is not to be outdone. While imposing the tax on Medicaid recipients noted above, she has also proposed lowering corporate taxes from 7 to 5 percent. The Georgia legislature is considering legislation to lower its corporate and personal tax rate to 6 percent--making up the shortfall with a tax on groceries.
Michigan Gov. Rick Snyder successfully ended the state's Earned Income Tax Credit, eliminated a $600 per child tax credit, and gutted education funding by 8 to 10 percent, while slashing the corporate tax rate by 86 percent. And Wisconsin Gov. Scott Walker advertises his state's tax policy with a sign reading, "Wisconsin: Open for Business."
Policymakers continue to repeat the same Reagan-era mantra that providing generous corporate tax cuts lead to significant job creation--after three decades of evidence to the contrary. Obama and his Treasury Secretary Timothy Geithner still repeat such supply-side economic fallacies.
They opened budget negotiations with Republicans this year having already agreed to further lower the corporate tax rate by at least 5 percent. As Geithner told Congress in February, "We are very serious...in trying to build consensus now on a set of fundamental changes to the corporate tax system that would improve incentives for investment."
In a recent speech, Obama assured his voting base that he will finally end the Bush tax cuts on the wealthiest Americans (successfully maintaining a straight face despite the fact that he renewed them in December). He also vowed that, while lowering corporate tax rates, he will also "close the loopholes" that corporations currently exploit.
But history has shown that corporate tax loopholes are a constant feature of the U.S. tax code--like a whack-a-mole game, as soon as one door gets pounded shut, another immediately pops open. Corporations have nothing to fear.
And in an obvious nod to the corporate donors he is already courting for his re-election bid, Obama appointed none other than General Electric CEO Jeffrey Immelt as chairman of the President's Council on Jobs and Competitiveness, even though in 2009 the corporate behemoth--awash in tax breaks--laid off 19,000 of its workers, roughly 6 percent of its workforce.
In so doing, Obama demonstrated his actual class allegiance and his intent to enable the continuation of Corporate America's one-sided class war against workers--when workers have little or nothing left to give.