Now jump forward twenty-seven years to 2007, the peak year for the financial bubble. That year 18,394 individuals and couples filed tax returns listing adjusted gross income of more than $10 million. Even adjusting for inflation, that represented a generous increase from 1980. Actually, it added up to about four times more money in real dollars. In any event, the average tax paid came to $6.0 million.
But the really telling numbers are these: The 1980 taxes paid averaged 47.9 percent of income. The 2007 taxes paid came to a meager 19.8 percent of income. If the nation’s richest tax return filers had paid at the same rate as those twenty-seven years earlier, the U.S. Treasury would have taken in a whopping $157 billion a year in added revenue—or as the people who like to play with numbers in Washington would put it, $1.5 trillion over ten years. More to the point, $1.5 trillion never would have been added to the debt, and no interest payments on that amount would have been made.
Corporate Greed: One explanation for the tax burden on middle America is that for years U.S multinational corporations have refused to bring home billions of dollars they’ve earned on overseas sales because they don’t want to pay taxes on those profits.
Sitting in banks in the Cayman Islands, the Bahamas, Switzerland, Luxembourg, Singapore, and other tax-friendly jurisdictions is a staggering amount of money—an estimated $2 trillion, a sum equal to all the money spent by all the states combined every year, or more than half the size of the annual federal budget.
The corporations say they will bring these overseas profits back to the United States to invest in the country and create jobs, but only if Congress wipes out nearly all the taxes they owe by reducing their rate from 35 percent to 5.25 percent. To appreciate the pure greed and arrogance of this stance, the next time you are required to send a check to the IRS to pay your personal income tax, imagine what would happen if you advised the agency that you will pay only a fraction of what you owe.
When corporations were given a similar tax break in 2004, they repatriated $312 billion and avoided taxes of $3.3 billion over ten years. But the program was a sham. Rather than create jobs, according to the U.S. Senate Subcommittee on Permanent Investigations, the proceeds from the tax holiday were used by multinational corporations to pay more to their executives and stockholders while they cut more jobs in the United States.
The fifteen corporations that brought back the most money reduced their U.S. workforces by 20,900. One of the most aggressive was Pfizer, the world’s largest pharmaceutical company. Pfizer eliminated 11,700 jobs in the United States after celebrating the tax holiday. The company’s CEO, Henry McKinnell, made out just fine during this period. While Pfizer was cutting jobs, McKinnell’s compensation soared 72 percent in 2004, to $16.6 million. When he retired two years later, McKinnell walked off with a $200 million severance package, which included $305,644 for unused vacation days.
Entitlements for the One Percent: The federal budget deficit is a big issue with the wealthy and their think tanks. Typical of the position they espouse is that of Peter G. Peterson, the billionaire cofounder of the Blackstone Group, the big Wall Street private equity firm. Peterson says the deficit is a “real threat to America’s future” and has the nation on an “unthinkable and unsustainable path.” But how did this deficit get so out of control?
Peterson points to Social Security and Medicare as among the chief culprits in creating “trillions of dollars of entitlement obligations.” But let’s look at it another way.
Since 2001, tax cuts to the rich, including Peterson, have totaled $700 billion, according to IRS data. How did the federal government make up for the lost tax revenue? The Treasury issued more IOUs, adding $700 billion to the federal debt. Paying the interest on that debt in years to come will fall heaviest on the middle class.
Vanishing Jobs: Ever since jobs began to be exported from the United States, the elite have sought to assure Americans that the number was small and would not have a significant effect on overall employment. In 2007 Jacob Kirkegaard of the Peterson Institute for International Economics contended that concerns over offshoring had been “vastly overblown” and that only about 4 percent of those who had been laid off had lost their jobs because work was shipped offshore.
Financial writers picked up on the study to echo that theme. In a May 16, 2007, column, Robert J. Samuelson thundered: “Remember the great ‘offshoring’ debate? . . . Merciless multinational companies would find the cheapest labor and to heck with all the lives ruined in the process. What happened? Well, not much.” Samuelson cited Kirkegaard in contending that offshoring was no big deal.
But offshoring is a huge deal. Samuelson, like other media cheerleaders, failed to take into account the trends already under way when he dismissed warnings about it. Although the U.S. Department of Labor does not have definitive statistics on the number of jobs sent offshore each year, a little-noticed report by the agency’s economists in 2008 concluded that 160 service occupations employing 30 million Americans—more than 25 percent of the entire service industry workforce—were “susceptible to off shoring.”
If the past is a guide, any job that can be offshored will be. An analysis by Princeton University economist Alan S. Blinder, using 2004 data to measure potential job losses in both the manufacturing and service industries, concluded that 291 occupations accounting for 38 million jobs—29 percent of the workforce—could be offshored.
RIGGING THE SYSTEM
For what has happened to jobs, retirement savings, and other vital signs of America’s economic health, you can thank Congress and a succession of presidents who make the rules for the American economy. These rules determine the kind of job you may have, how much you will pay in taxes, and whether you have health benefits or a pension.
Congress makes the rules when it enacts new laws and amends or rescinds others—and then votes on whether or not to provide the resources that determine whether the laws will be enforced.
The president makes the rules through the departments and agencies that implement new regulations and amend or rescind others—and then either enforce or ignore these regulations.
Both the Congress and the president make the rules when they succumb to pressure from special interests and fail to enact laws or implement regulations that would level the economic playing field for everyone.
Taken together, the myriad laws and federal regulations form a set of rules that govern the way business operates—from trade to taxes, from regulatory oversight to bankruptcy, from health care to pensions, from corporate write-offs to investment practices.
In every era, these rules establish a system of rewards and penalties that influence business behavior, which in turn has a wide-ranging impact on your daily life:
• From the price you pay for a gallon of gasoline or a quart of milk to the elimination of your job
• From the cost of your favorite cereal to the size of your unemployment check if you’ve been laid off
• From whether the company you work for expands in the United States or shifts your job to Mexico
• From the size of your pension to the question of whether you will even have a pension
Ultimately, the rule-makers in Washington determine who, among the principal players in the U.S. economy, is most favored, who is simply ignored, and who is penalized. In the last few decades, the rules have been nearly universally weighted against working Americans.
That a huge wealth gap exists in this country is now so widely recognized and accepted as fact that most people have lost track of how it happened. One of the purposes of this book is to show how the gap became so huge and to explain why it was no accident.
Over the last four decades, the elite have systematically rewritten the rules to take care of themselves at everyone else’s expense. As postwar U.S. history shows, it doesn’t have to be this way. For decades after World War II, personal income in the United States grew at roughly the same rate for the rich and everyone else, all except for the poorest Americans. During this
period, the gap between the rich and the middle class remained about the same.
The rich would have you believe that high taxes are a damper on the economy, but the postwar economic boom was marked by the highest personal income tax rates on the wealthy in peacetime U.S. history. At one point in the early 1950s, the top rate was 92 percent. No one actually paid 92 percent of their total income in taxes, but the wealthy paid a much higher percentage in taxes than they have paid for many years since. The federal government collected that tax money and routinely reinvested it in the American people. Veterans were able to go to college, families bought homes for the first time, and government invested in infrastructure projects such as the interstate highway system— the benefits of which all Americans continue to enjoy to this day. All boats rose.
But in the 1970s things began to change. Middle-class incomes, after growing steadily for decades, began to flatten, while incomes in the top bracket rose by quantum leaps. By the early years of the twenty-first century, the rich had captured the lion’s share of the nation’s growing wealth. And they paid taxes at little more than a token rate.
From 2002 to 2007, the income gains of the top one percent rose 62 percent, compared to just 4 percent for the bottom 90 percent of households, according to economists Emmanuel Saez and Thomas Piketty. Consequently, by 2007 the top one percent of Americans claimed a larger share of the nation’s income than at any time since 1928. Among the richest of the rich—individuals and families with incomes in the top one-tenth of one percent—the gains were even more astronomical: their income rose 94 percent, or $3.5 million a household, from 2002 to 2007, according to Saez and Piketty.
This, too, was no accident. The rich were getting richer thanks to public policy. Their greatest victory—one that would aggravate the nation’s deficit and substantially widen the gulf that separated them from everyone else—was lobbying Congress to rewrite the tax code in their favor. Since the 1980s, with a few exceptions, the tax rate of the very rich has gone straight down and now bears no resemblance to the rate during the years when America as a whole prospered. The top rate on personal income— 92 percent—has shrunk to 35 percent. But that tells only part of the story.
In addition to lowering the overall rate for the rich, Congress in 2003 reduced the tax on income from corporate dividends, one of the key income streams for the very wealthy that significantly benefits only about 2 percent of taxpayers. In the 1950s, ’60s, and’70s, millionaires might pay as much as 70 percent of their dividend income in taxes. In 2003 that rate dropped to 15 percent.
And they want more.
They plan to cut their taxes even further by having Congress eliminate the capital gains tax on sales of stock and other assets. During his 2012 presidential campaign, Republican candidate Newt Gingrich spoke for many of the elite when he proposed doing away with the capital gains tax, ostensibly to spur investment in America. Eliminating that tax would deepen the income and wealth gap and do nothing to create jobs in America. But that’s okay with the folks who make the rules. In their view, inequity is a reasonable price to pay for the greater profit on the sale of, well, equities.
When word got out in the press in 2009 that Goldman Sachs was paying more than $16.7 billion in compensation, bonuses, and benefits to executives that year—in the midst of the recession—an outcry arose, but Brian Griffiths, an executive with Goldman Sachs International, brushed aside the criticism:
“We have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all.” For all? Griffiths was silent on when that “greater prosperity” might trickle down to the rest of us.
The economic elite are forever telling working Americans that the lag in their earnings is just the way it is going to be in a globalized economy. But other countries also compete head-on in the global economy—with different results. Germany and Japan have healthy trade surpluses, in contrast to the ballooning U.S. trade deficit, which cumulatively is nearing $10 trillion, far larger than that of any other country. That Germany and Japan provide education and training for workers is important, to be sure, but that’s not why both countries are succeeding so well in the global marketplace. Germany and Japan are succeeding because each has national policies that protect basic industries and encourage jobs.
China is routinely the focus of our trade deficit. It rose from $84 billion in 2000 to an all-time high of $295 billion in 2011. U.S. government officials, lawmakers, and economists complain loudly about this, citing China’s policy of manipulating its currency to keep the cost of its exports artificially low. But the problem isn’t in China—the problem lies in us, and in our own policies.
Not so long ago, Japan was the target of similar complaints. Because of Japanese import barriers, American products weren’t allowed into Japan. Over the years, the U.S. government repeatedly negotiated deals with Japan that were supposed to enable American companies to sell more products in Japan. But those deals were rarely enforced, and so the trade barriers remain.
In 1990, at the zenith of concern about Japan’s unfair trade practices, the U.S. trade deficit with Japan was $41 billion. During the past decade, the annual deficit has often been double that. The Japanese are no doubt delighted to see America’s anger over trade issues shift to China. It allows them do business as usual with the United States—to their advantage.
If the middle class has been hammered by U.S. trade policies that favor our trading partners more than our own citizens, it has also been hit by the actions of a group of opportunists at home who likewise benefit from favorable policies set down by Congress. These are the moguls of private equity. The activities of private equity companies burst into the national debate early in 2012 when Mitt Romney’s Republican opponents (of all people) accused him of being a job-killer for his past work at the Boston private equity firm Bain Capital. Bain certainly did its share of cutting jobs at the companies it acquired, but there was nothing unusual about that. Eliminating jobs is what private equity funds do—all of them. This is how, for instance, Stephen A. Schwarzman, CEO and one of the founders of the Blackstone Group, the nation’s largest private equity fund, has become one of America’s richest men with an estimated net worth of $4.7 billion.
It’s no coincidence that the private equity industry has exploded in the last two decades at exactly the same time that the decline of the middle class has been most pronounced. The money managed by these firms has skyrocketed, rising from $5 billion in 1980 to an estimated $1 trillion by 2012. In addition to 2,300 private equity firms, nearly 10,000 hedge funds, some of which are similar to private equity firms, have another $1 trillion under management. This means that Wall Street has $2 trillion in funds to buy and sell companies, often with disastrous results for almost all the people who work for them.
While the practices of many publicly held corporations have been detrimental to the welfare of their employees, the private equity firms have generally been much worse. Secretive, insular, and essentially unregulated, private equity funds have been free to pursue their rapacious job-killing strategies with abandon.
Typically, private equity firms borrow money to take over a company. Then they institute cutbacks and other “efficiencies” to groom the company for sale to new investors. When the company is taken public, the private equity firm earns substantial fees and passes on the debt it took on when it bought the company. Often the new company has difficulty managing the heavy debt load and reduces expenses by cutting even more jobs.
The list of companies whose employees were cast aside after their company was acquired by Blackstone is long and depressing. In what was the largest technology company buyout of its time, Blackstone in 2006 acquired Freescale, the huge maker of semiconductors based in Austin, Texas. Financed largely by debt, the $17.6 billion acquisition was a prelude to a string of job cuts of skilled workers. In 2009, again using borrowed money, Blackstone took over one of America’s most venerable names in processed food, Birds Eye Foods. Blackstone instituted job cuts, ax
ing the corporate staff of Birds Eye in Rochester, New York, and closing a processing plant in Fulton, New York, that had been a fixture of the town for a century.
To conservatives and free-market zealots, job cuts by private equity companies such as Blackstone and Bain, while causing pain, are absolutely essential and have a positive effect on the economy. Writing in the New York Times in 2012, columnist Ross Douthat argued that the “private equity revolution was necessary” and that “our economy became more efficient” as a result of often brutal restructurings. To Douthat and like-minded thinkers, the “competitiveness revolution,” as he called it, has reinvigorated the economy.
But has it? It depends on what you mean by the economy.
There is no hard evidence that all this buying and selling has helped the economic welfare in communities across the country so that money flows from one enterprise to another, supporting other businesses and local services. What is absolutely certain is that the deal-making has been a boon to the bank accounts of Schwarzman and his fellow private equity moguls.
The managers of the largest equity and hedge funds have become immensely wealthy—many are billionaires—even though some of the companies they bought and sold later foundered. In addition to the rich fees they harvest, private equity fund managers rake in millions more courtesy of U.S. taxpayers. Thanks to Congress, a portion of their annual income is taxed at 15 percent (rather than 35 percent) under an obscure provision called “carried interest.” This puts that income in the same tax bracket occupied by the janitors who clean their buildings. Using the proceeds from their deals and the money they save on taxes, private equity and hedge fund managers have lavish lifestyles featuring multiple residences, private planes, and ostentatious parties.
THOSE HIGH-PRICED AMERICAN WORKERS
The ruling class thinks that the average American earns too much money. This is an unspoken belief, and one that most of them would no doubt vehemently deny. But the evidence is compelling. The elite show their hand in many ways:
The Betrayal of the American Dream Page 3