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January 03, 2012

How the oligarchy avoids taxes

Many big corporations avoid paying US taxes by creating offshore subsidiaries and putting their profits into those companies. That money is often stored in banks in the US but are technically considered outside of the country. Of course, these companies and their executives would like to be able to use the money (which is currently running at more than $1.375 trillion) in the US to pay for their bonuses and the like but if they 'bring it back' (i.e., put it in their US books) they would have to pay the 35% tax that they avoided by using their foreign subsidiaries. So now an army of 160 lobbyists is pushing to allow a 'temporary' tax holiday under which the money can be repatriated to the US at a rate of only 5.25%, which would be a massive windfall to these companies and impoverish the government. This was also done back in 2004, creating a windfall then.

The lobbying effort is headed by Jeffrey Forbes, the former chief of staff of Democratic Senator Max Baucus, head of the Finance Committee, and many of the other lobbyists are former congressional members or their staffers, another example of how the revolving door works to benefit the oligarchy. NPR had a good interview with Jesse Drucker, author of the above-linked Bloomberg Businessweek article on this topic, in which he says that at least 60 former Congressional staffers are involved in the lobbying effort though the rules for identifying lobbyists are so vague that the true number is definitely much larger. Matt Taibbi wrote about the possibility tax repatriation holiday scam in July, wondering where the outrage was.

Taibbi also writes in depth about another big swindle that the banks perpetrated to avoid paying taxes to local communities when they transferred properties. They are now being sued but the oligarchy (including the Congressional and White House leadership) is pushing for a deal that seeks to bail out the big banks at taxpayers' expense.

Another way that taxes are avoided depends on how income is classified. The highest marginal tax rate is 35% but that only kicks in on 'ordinary' income (i.e., the kind that almost all of us earn as salaries and wages) earned in excess of $380,000. NPR's All Things Considered had a good piece on how much of the income of very wealthy people is in a form that is not subject to income taxes. Multimillionaire Nick Hanauer says that he pays just 11% of his income on taxes. As he says, "Most Americans think that the tax rate on the wealthy is 35 percent. But this is absolutely not true. If you're a small business person earning $350,000 a year, your tax rate is 35 percent… But if you're a hedge fund guy or an incredibly rich person like me, all of your income is from capital gains or dividends or tax-free municipal bonds or what have you. And these things are taxed at much lower rates."

How can that be? Because of various tricks. The official salary for very rich people is often just the nominal one of a dollar a year. They get almost all their remuneration from stocks and investments that are taxed at the long-term capital gains rate of just 15%. For ordinary taxpayers, the 15% rate kicks in at incomes above $8,375. For incomes over $34,000, the marginal rate is 25% so people who are below the median income levels are already paying at a higher rate than the wealthiest people. Furthermore, the compensation of private equity or venture or hedge fund managers is often in the form of a share of the profits called 'carried interest' which is subject to a maximum tax rate of 15%. Mitt Romney has been coy about releasing his tax returns and there are suspicions that this is because as a former venture capitalist, almost all his income is of this kind and thus, although a multimillionaire, he pays taxes at a much lower rate than a schoolteacher or fireman or secretary.

And this is even before the wealthy people bring in their high-priced tax accountants who are skilled in finding other ways to further shield their incomes, such as the device known as the 'variable prepaid forward contract', in which people can avoid paying even the low 15% rate by making it seem as if they had not actually sold their stock even though they got money for it, often in the hundreds of millions of dollars. This income does not even show up on their tax returns. It is essentially invisible.

The oligarchy has set up a tax structure that is so complicated that it conceals the fact that they are intent on making as much money as possible and impoverishing everyone else in the process. Nick Hanauer says that that is an incredibly short-sighted policy, and the reason is simple.

If Jeff Bezos and I had started Amazon.com in a poverty-stricken corner of Africa, there would have been no job creation because there would be no people to buy the stuff from Amazon.com. The difference here is the American middle class, which is by every measure the most extraordinary economic achievement in the history of the world. And there is only one of those, and it is the font of both innovation and of demand, not just for the American economy, but for the world's economy. And in that sense, it's incredibly precious.

This insight is not new. It was the existence of a large middle class with considerable disposable income that partly made the US economy so powerful. What is new is that the current oligarchy, in its drive to impoverish the very base that gives it its riches, is ignoring history and, in the process, killing the goose that gives them their golden eggs.

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Comments

Very good post. The surest thing is that - no matter what has happened, whether it's supposedly "good" or "bad" for the world economy – the rich get richer and the poor get poorer.

I am sure we never get proper news.

For example, all the economies and banks of the world are supposed to have suffered huge losses at the start of the credit crunch. So, assuming this money hasn't shot into space, where has it gone? Somebody must have got it, surely.

I have posted this question on various UK and US government economic-based websites and it has been deleted every time.

Posted by A Booker on January 3, 2012 10:36 AM

The tax holiday should not be allowed. The US can not afford to loose out on this tax revenue and the tax regulations and rates are in place for a reason, to fund the public services that we all expect. When the Government is facing huge debts the last thing it needs is to loose out on potential tax revenue. Then again on the flip side maybe 5% tax revenue is better than none?

Posted by Mike Rowe on January 4, 2012 05:43 AM

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Posted by Senuke X review on January 4, 2012 09:30 AM

The supply-siders' argument in favor of lower taxes on investment income is, of course, to stimulate investment. That might be convincing to freshmen students of economics, but in the real world what we got was an orgy of speculation, clever executive compensation schemes, and a massive transfer of wealth and income to the top. Far from producing an economic miracle due to investment in productive capital, we almost destroyed the global economy by turning it into a casino. Brilliant.

All of this will be up for renewal at the end of 2012, and I would expect most of the Bush tax cuts to be extended (effectively made permanent) no matter what happens in the general election. Both parties have largely bought into the notion that lower taxes are good for the economy, a most convenient idea for their paymasters.

Posted by Richard Frost on January 4, 2012 07:47 PM