During World War II, most Americans—both corporations and individuals—contributed a fair share through an income tax that was progressive: those who could afford to pay more did so. The very richest saw their tax rate go up to 94 percent on taxable income over $200,000 (equivalent to $2.5 million in 2011). The theory was that people should be able to get by on $200,000. Tax rates came down somewhat in the 1960s and 1970s, but it wasn’t until the 1980s that the tax bills of the wealthy really began to tumble after Congress converted the tax code into a boutique bank offering all sorts of products tailored just for them.
When Ronald Reagan took office in 1981, the top tax rate on salaries and wages was 50 percent; today it is 35 percent. The tax rate on unearned income—dividends and interest for example—was 70 percent. In 2012 it was 15 percent. The maximum tax rate on income from capital gains was 28 percent in 1980; in 2012 it was 15 percent.
Another dramatic change was the tax cut in 2003 for dividends paid to individuals by corporations. For much of recent history, dividends were taxed at a similar rate as salaries and wages. But before 1980, they were taxed at a higher rate than so-called earned income—money received in wages. The long-held theory was that people who worked for a living should not pay taxes at a higher rate than someone who lived on investment income. George W. Bush’s Jobs and Growth Tax Relief Reconciliation Act of 2003 repealed that notion by slashing the maximum tax rate on dividends to 15 percent. This was a crowning moment in the annals of the great tax heist for the benefit of the wealthy. This one tax cut alone put billions of dollars into the pockets of the richest Americans. According to the Joint Committee on Taxation, which is required to prepare estimates of the implications of tax legislation passed by Congress, the dividend reduction cost the U.S. Treasury more than $100 billion over seven years. Politicians, economists, and media figures are fond of saying that more and more Americans own stock. President Bush later defended his 2003 tax cut on dividends by saying that “American families all across this country have benefited from the tax cuts on dividends.... Half of American households—that’s more than 50 million households—now have some investment in the stock market.”
Bush’s claim is entirely misleading. While 50 percent of Americans own some stock, often just a few shares, ownership of shares and equities is concentrated in the hands of the wealthiest Americans. They are the ones who receive substantial dividends from stocks, and they are the ones who benefited overwhelmingly from the dividend rate cut. That tax cut, along with other Bush-era tax favors for the rich, is why the top 1 percent of Americans prospered to such an extreme during the last decade.
Studies by economists Thomas Piketty and Emmanuel Saez have concluded that “two-thirds of the nation’s total income gains from 2002 to 2007 flowed to the top U.S. households.” This is why the top 1 percent, they said, “held a larger share of income in 2007 than at any time since 1928.”
If Congress had not enacted these tax cuts, if Congress had not opened new loopholes for its friends, and if Congress had closed a few existing loopholes, we would not be having discussions about the dangers of the federal deficit. Tax cuts didn’t just fatten the bank accounts of rich people—they plunged the nation deeper into the red. As for the folks in Washington who made it all possible—mostly Republicans—they now want working people to cover the costs through reduced Social Security and health care benefits at the same time that they want to guarantee that the rich, the beneficiaries of all the largesse, will be insulated from any tax increases.
Any attempt to increase taxes would provoke stiff opposition from the elite, but when they whine about the taxes they pay, there are two things they never mention: in their grandparents’ day, the rich paid taxes at twice the rate they do in the twenty-first century. Some don’t come anywhere near paying even the maximum rate. By the IRS’s own count, of the 400 tax return filers with the highest adjusted gross incomes in 2008, not one paid taxes at the top rate of 35 percent. It was the same for 2007 and the same for years before that. Those numbers underscore a longtime tax truism: if the top rate is 2 percent, some rich people will claim it is too high. Even the very rich who paid taxes did not come close to the top rate. For 30 of those 400 filers, their effective tax rate was under 10 percent. And for 101 of the top earners, the effective tax rate was between 10 and 15 percent.
Beyond the top 400, a whopping 18,783 individuals and families with incomes of more than $200,000 paid not one cent in federal income tax for 2008. That was up 1,782 percent from 1995, when only 998 individuals and families reported that they owed no income tax, according to IRS data. And that exponential growth occurred during a time when the people at the top of the economic pile seized more of the nation’s overall wealth than at any time since the years leading up to the Great Depression.
Some high-income folks will threaten to pack up and leave the United States when they think taxes are too high. That obviously is everyone’s right. But once that right is exercised, they should cease to enjoy any of the privileges that come with U.S. citizenship.
Corporations also will threaten to vote with their feet and move business operations to another country. That, too, is their choice. But they also should face a similar loss of U.S. benefits—like all the standard legal protections they enjoy courtesy of the taxes they should pay, but don’t even pay now. Think patents, copyrights, and the American legal system, among others. Would Apple have achieved its lofty stock price absent such protections?
To fully appreciate the inequity of the U.S. tax system, visit your local bank and ask a teller to show you some Capital Gains dollar bills.
When you get a puzzled stare, ask for some Dividend dollar bills.
If there still isn’t a hint of recognition, drop the big one: you would like to see a Carried Interest dollar bill.
If the teller still has a quizzical expression, just say that you will settle for some old-fashioned Work bills—the kind you get from your job as a store clerk or as a schoolteacher or as a carpenter.
You might think that a dollar is a dollar. After all, it can be used to buy an ice cream cone or pay your child’s tuition or cover medical expenses. But to the IRS not all dollars are equal. Long ago, members of Congress, responding to the wishes of their well-heeled constituents, ordered the IRS to treat some dollars differently. This arrangement ensures preferential tax treatment for the privileged, including members of Congress, many of whom are millionaires. If all dollars were treated the same, as they should be, the deficit would disappear, with only a few adjustments in tax rates. But that would mean that the super-rich and the privileged would have to pay more taxes. It’s not about to happen.
Among those who have benefited from having their own congressionally approved dollar bills are the men who run the hedge funds. Part of their earnings take the form of what the architects of tax language have labeled “carried interest.” Because these earnings are performance-related, they are taxed at a much lower rate as capital gains, not as income. The government taxes a carried interest dollar at a maximum of 15 percent. Most people in America in regular salaried jobs pay taxes at a higher rate. But they don’t speak the language of the privileged—people like the Republican presidential candidate Mitt Romney, who acknowledged that he pays taxes approaching 15 percent, thanks in part to carried interest, on income up to $42.6 million over two years. Most of us don’t understand the incredible importance of carried interest, or even what it is. It’s the kind of complex, murky term that has made the tax code such a field day for the rich and their lawyers. But the lesson of carried interest is clear: there is one dollar for the rich, and one much smaller dollar for the rest of us.
If hedge fund managers and others were required to pay taxes at the normal rate, it would generate tens of billions in additional tax revenue. It would also remove some egregious unfairness. Philip Falcone, the billionaire creator of Harbinger Capital Partners, a New York City–based hedge fund, made a fortune betting against subprime mortgages before the collapse of
the housing market. John Paulson, another hedge fund manager, made an even bigger fortune betting that subprime mortgages would be a loser. In short, two billionaire hedge fund managers made staggering sums betting that you would default on your mortgage and lose your house and that the financial institution holding your mortgage would collapse. In doing so, they were taxed at a much lower rate on that income than the rate applied to the salary you received, which went to pay the mortgage on the house you no longer have. How can that be right?
Falcone and Paulson are but two of this mushrooming breed of global financial buccaneers in private equity and hedge funds who have made huge amounts of money courtesy of Congress’s largesse on the carried interest deduction. The riches that have come their way are financing lifestyles that average Americans cannot even fathom. If the fraternity were to bestow an award for flaunting that wealth, the hands-down winner would be Stephen Schwarzman, the CEO of Blackstone, the huge private equity fund.
Schwarzman’s now-infamous multimillion-dollar sixtieth birthday party in New York City has long since passed into the annals of “the rich are different than us,” but it is worth revisiting for what it says about their boldness and ability to turn aside any public policy that threatens their wealth.
Held at the famed Seventh Regiment Armory on Park Avenue on February 14, 2007, Schwarzman’s birthday party attracted hundreds of the glitterati from New York and beyond. Arriving guests were ushered inside by a brass band and a contingent of children dressed in military uniforms. The cavernous armory, home to the most prestigious antiques show in America every year, was festooned with colorful banners and had been decorated to resemble the Schwarzmans’ Park Avenue apartment. Copies of paintings from Schwarzman’s art collection were mounted on the walls, and a huge portrait of Schwarzman himself, painted by the head of Britain’s Royal Society of Portrait Painters, had been sent over from Schwarzman’s apartment to greet arriving guests. “Dinner was served in a faux night club setting, with orchids and palm trees,” according to the Wall Street Journal. Patti LaBelle sang “Happy Birthday,” composer Marvin Hamlisch performed a number from A Chorus Line, and Rod Stewart sang for half an hour for a fee reported to be $1 million.
After stories of the party appeared in the media, legislation was introduced in the Senate to repeal the carried interest tax break that gave Schwarzman and his fellow private equity managers multimillion-dollar tax breaks on their personal income.
Hearings were held, and the giveaway was roundly condemned. But the proposal went nowhere. Behind the scenes, the leaders of private equity firms pumped millions of dollars into a lobbying campaign that scuttled the move to make them play by the same rules as everyone else.
When President Obama later proposed a similar reform, Schwarzman leveled an outrageous charge: “It’s a war,” Schwarzman told a nonprofit board. “It’s like when Hitler invaded Poland in 1939.”
Schwarzman later apologized for comparing the president to Hitler, but the repeal of the private equity loophole didn’t go anywhere that time either. Game, set, match for private equity. And no surprise: the ruling class is now so powerful that it can brazenly flaunt its wealth—wealth it owes in part to middle-class taxpayers—at a shindig like Schwarzman’s party without fear of losing its privileges.
As should be clear by now, Congress, at the direction of those at the top, has created two different tax systems: one for the wealthy and one for everyone else. America’s founders, who were very well aware of how the aristocracy rigged the system to guarantee its own perpetuation, up to and including the king, would shudder. We all know the importance of luck in having wealthy parents. But under the twisted U.S. tax system, it’s especially important for tax purposes. If you are among the privileged and your company rakes in billions of dollars over the years, essentially tax-free, the basis for those tax freebies may be passed along to the next generation.
Such is the case with Carnival Cruise Lines, a Miami-based company whose glitzy megaships have names like Carnival Fantasy, Ecstasy, Elation, and Paradise. Over the six years from 2005 to 2010, Carnival, the world’s largest cruise carrier, racked up $13 billion in profits. The company’s tax bill for the six years? Chump change of $191 million. And that included U.S. income tax, foreign income tax, and local income tax. The overall tax rate came in at 1.4 percent. Carnival’s ships may sail out of Miami and be inspected by the U.S. Coast Guard, but its finances hardly touch our shores. Middle America has not fared nearly so well, thanks to a Congress that likes to sock it to ordinary people, the same people who are and will be hammered even more as lawmakers and the elite target them to be a scapegoat for the ballooning deficits. While corporate profits have continued to climb, the wages of working people remain frozen in time. In 2008, according to IRS data, 10 million working individuals and families filed tax returns reporting incomes between $30,000 and $40,000. Their effective tax rate: 6.8 percent—nearly five times the Carnival rate.
This helps explain how members of the Arison family, who started Carnival, have held membership in that exclusive club of global billionaires for two decades.
Ted Arison was born in Tel Aviv in 1924 and moved to the United States in 1952. In 1972 he formed a joint venture to establish a shipping business. His partner was Meshulam Riklis, who was born in Turkey but also grew up in Tel Aviv. Riklis, too, moved to the United States, where he eventually became an early-day corporate takeover artist, working alongside the legendary junk bond king Michael Milken.
The Arison-Riklis arrangement lasted only two years until Arison bought out Riklis in 1974. From that point on, he maintained tight control of what would become the company’s flagship brand, Carnival Cruise Lines. He systematically added ships, amenities like gambling, and passengers. Each of his ships was a floating casino featuring slot machines, roulette, “Big Six” wheels, and tables for craps and blackjack. In 1987 Arison took the company public, and a hefty chunk of the proceeds from the sale of stock went to Arison personally. His take, according to U.S. Securities and Exchange Commission (SEC) records, was a special dividend of $81 million.
Carnival has long been a master at avoiding U.S. income taxes. The fine print in a document filed by Carnival with the SEC allowed that:
The company is not subject to United States corporate tax on its income from the operation of ships, and the company does not expect such income to be subject to such tax in the future. This exemption from United States corporate income tax will remain in effect under current United States law for as long as the company retains its status as a controlled foreign corporation.
Even better for Arison and his family was yet another provision in the SEC public offering document that said: “The company intends to distribute dividends to all shareholders in at least such amounts as are necessary to enable the principal shareholders to pay the income taxes imposed on them with respect to those earnings.”
Translation: whatever taxes Arison or his family incurred would be covered by a payment to them from the Carnival Corporation.
Imagine such a deal: when you receive your W-2 from your employer next January, ask if the company would write you a check to cover the taxes withheld from your paycheck! This perk, of course, doesn’t exist for 99 percent of us.
Ted Arison renounced his U.S. citizenship in 1990 to further insulate himself personally from the U.S. income tax, and he returned to Israel. Years earlier, his son Micky, a fixture in Miami, had assumed day-to-day control of the business empire, which also includes the Miami Heat, the National Basketball Association team. The elder Arison died in 1999. Son Micky and daughter Shari inherited their father’s tax freebies, meaning a second generation of the Arison family continues to enjoy the benefits of a company that pays only token taxes, thanks to a beneficent Congress.
Along the way, Micky and Shari also secured their very own slots on Forbes magazine’s global list of billionaires. For 2012, the total is drawn from fifty-eight countries. He is number 223. She is number 288.
POOF!
THE DISAPPEARING TAX ACT
Corporations, like the very wealthy, have also seen their taxes go down over the years. In 1952 corporate taxes accounted for 32 percent of the federal government’s overall tax collections. The corporate share in 2011 was 7.9 percent. When World War II started for the United States in 1941, corporate taxes amounted to 1.9 percent of the nation’s gross domestic product (GDP). By war’s end in 1945, that figured had gone up to 7.2 percent. It would never reach that level again. In fact, during the first decade of the twenty-first century, when the United States was waging not one but two wars, in Iraq and Afghanistan, the ruling class and their allies in Congress not only held corporate tax rates down but forced them lower even as they continued a policy of non-enforcement of the tax laws.
As a result, corporate tax collections added up to a meager 1 percent of GDP in 2009—the lowest level since the Great Depression. This at a time when corporate profits topped $1 trillion for the fifth consecutive year—double what they were as recently as the 1990s. Those who make the rules had achieved the perfect formula: the more money a corporation rakes in, the lower its U.S. tax bill. Underlying this formula is a condition that most people recognize: in a global economy, higher profits do not mean more jobs. More often than not, they mean just the opposite.
Further increasing the tax burden on the middle class, the number of corporations that pay little or no corporate income tax has exploded. They are large and small, closely controlled and owned publicly. Their one common trait is that they operate in multiple countries. Companies whose businesses are solely in the United States are treated most unfairly compared to the multinationals. They often pay taxes at the maximum rate or close to it, since they have few opportunities to move their cash around the globe’s assorted tax havens, unless they are willing to engage in flagrant tax avoidance, bordering on evasion, which is a crime.
The Betrayal of the American Dream Page 12