Showing posts with label rich. Show all posts
Showing posts with label rich. Show all posts

Tuesday, April 16, 2013

Poverty Expert Peter Edelman Explains How Low Wages and Racial Politics Line the Pockets of the Rich




To help America"s neediest, we"ve got to raise tax rates on corporations and wealthy Americans back to the levels they paid in 2001.








Peter Edelman, one of the nation"s foremost academic authorities on the subject of poverty in the U.S. has lived a life on the front lines of history and politics, holding positions ranging from senatorial aide to state bureaucrat to official in a presidential cabinet. But in his storied employment history, he is perhaps more famous for quitting one job than for holding it: in 1996, Edelman resigned his post as an assistant secretary in the Department of Health and Human services to protest President Bill Clinton"s signing the Republicans" welfare-reform bill into law. Since then, Edelman has held fast not only to his critique of that law — which, he says, has left some 6 million people with no income other than food stamps — but to his assessment of why poverty in the world"s richest nation has become so intractable.


Edelman finds his answers in the tangle of racialized politics, mass incarceration, displacement caused by globalization, the explosion of low-wage jobs and the dilution of democracy by moneyed interests. In his 2012 book, So Rich, So Poor: Why It"s So Hard to End Poverty in America, Edelman writes, “The American economy did not stagnate over the past 40 years: it grew, but the fruits of that growth went to those at the top.”


Edelman"s interest in American poverty began when, as an aide to Sen. Robert F. Kennedy, D-NY, he accompanied his boss on fact-finding trips to the poorest parts of the nation, including the Mississippi Delta, rural Kentucky, California"s San Joaquin Valley and Brooklyn"s Bedford-Stuyvesant neighborhood. More than four decades later, the quest to end poverty is still his mission, now conducted from his office at Georgetown Law School, where he is a professor. “Had I been part of the exodus from ancient Egypt,” he says, “I would have made it to the promised land by now.”


But Edelman is not without hope; in fact, he seems to find hopelessness something of a cop-out. Instead, he points to recent push-back by voters against an anti-union law in Ohio and an anti-abortion referendum in Mississippi as indicators of what might be possible if the electorate were truly engaged in the fight. He spells out in his book a plan for for fuller employment in decent jobs through a combination of accessible education, subsidized childcare and a safety net adequate for keeping families working together. But to make that happen, he says, the government needs the kind of revenue it can only get by bringing tax rates on corporations and wealthy Americans back to the levels they paid in 2001.


I met with Edelman in his office at Georgetown Law, a spacious and airy book-lined room near the U.S. Capitol, the day after the across-the-board spending cuts known as the sequester officially took effect. Also known as sequestration, the spending cuts were signed into law by President Barack Obama as part of a deal to allow the U.S. government to pay its debts by lifting the cap on government borrowing, which the Republicans had blocked.


Obama agreed to the deal with the expectation that Congress would prevent the cuts from going into effect because of the impact on the defense budget. Instead, Republicans refused to cut a deal to forestall the sequester, and government agencies are set to furlough workers and mothball programs.


Adele M. Stan: Two things have happened since you published the book: the sequester, and the president"s proposal for raising the minimum wage. Of course, the president"s minimum wage proposal is a dollar short of the $ 10-an-hour rate you were suggesting. But we"re told because it is linked to the cost of living — indexed to rise with the cost of living — that in some ways it might be better. However, few believe that even this modest proposal has a chance of getting through Congress.


Peter Edelman: The president made three important proposals in his State of the Union message. One was about minimum wage. The second was the proposal for early childhood development and the third was the “race to the top” for so-called STEM — science and technical education — and especially having that reach all the way down to lower-income young people. Each of those is not going to be something that is likely to be achieved during the course of at least the first two years of this second term, because they all, regardless of sequestration, they all run into the Tea Party, and the fact that the Tea Party effectively controls the Republican Party now.


Those three proposals are out there because they"re the right thing to do, and because they will have an effect in changing the discourse around the country. Some states will raise their own minimum wage. Some states will respond by doing more with early childhood development. Some states will do more about getting people the education they need for the jobs of the 21st century. This is not only about getting Congress to act.


AMS: You"re saying just by injecting this into the conversation, it spurs action in the states.


PE: Yes. It"s helpful. Now, in some states that are completely red, it"s not going to make any difference. But state revenue is beginning to go up — although sequestration cuts against that. You can look at what"s happening in California now. There"s the economic recovery going on and they"re beginning to look at the various sorts of measures that were completely off the table [before the recovery began].


The minimum wage is what it is. It"s not a living wage or a near-living wage. [The benefit of the proposal is] in terms of the effect that it has. It goes in the right direction, but it only gets part of the way to where we need to go. But we shouldn"t disparage it, it"s very important. At the margins, $ 9 an hour is a substantial increase over [the current rate of] $ 7.25. It will total a few million people out of poverty. He"s the first president that proposed indexing it to inflation. That"s all to the good. In terms of getting to a living wage, it might be, I don"t know, 10 percent of the way or something like that.


Still, I"m glad he made those proposals. I think each one of them is absolutely at the heart of something very important.


Sequestration, of course, changes the subject, which is exactly what the Republicans want. And there"s only one thing that they agree about. They"re flaking off on immigration. They"re flaking off on gay marriage and they flaked off recently on the Violence Against Women Act. They"re fraying a little around the edges, but they…


AMS: … You mean by allowing VAWA to pass.


PE: …Yes, by the fact that there are [Republicans in Congress] who don"t toe a monolithic party line on those three examples I just gave you, and others. The one thing where they will all agree to not confirm judges who are appointed to the District of Columbia Circuit Court of Appeals, and so a genuinely centrist and moderate woman like Caitlin Halligan gets totally pilloried that they absolutely make up stories about her that are zero true. Zero true; not 1 percent, not 2 percent, zero truth, and that"s a Republican game, right?


The place where the Republicans are absolutely staking the heart of their position is cut, cut, cut, and of course, cut, cut, cut doesn"t mean cutting Medicare and Medicaid and Social Security to the same degree as other things — or even the defense budget, even though ostensibly that"s being cut by the same amount just at the moment.


The brunt of the budget-cutting comes on the domestic discretionary programs. What are those? Those are things about educating children. Those are things about helping people with housing. Those are things about training people for jobs. Head Start. It"s all things that hit the most vulnerable people, the WIC program. The fact is that the day after sequestration started, everything didn"t come crushing down. That"s just a matter of the process.


AMS: It"s almost a dangerous feature of the sequestration.


PE: Well, that"s exactly right. Exactly. Oh, well, the world didn"t come to an end last night. But it"s a very big thing. It turns out that this is exactly what the Republicans want. They want to force the people who oppose them, namely the Democrats, to focus on resisting sequestration and then they can"t do anything else. It"s brilliant in a very negative way.


AMS: Right. Well, you observe that the Republican party is, in fact, controlled by the Tea Party at this point in time — and it"s very clever the way they control it, too, because it"s not as if they even control it through a majority of the majority.


PE: They"re exactly in place where they control the sand and the gears.


AMS: Your observation about how the racialization of the image of poverty, or the image of people who access government social safety programs — be it Head Start or Temporary Cash Assistance to Needy Families (the program most often described as “welfare” in everyday language) — how that cuts into political support for those programs is chilling. And your description in your book abouthow almost inaccessible TANF is to most people who need itwas a real eye-opener to me. 


PE: White or black, or Latino.


AMS: Right. What I"m wondering is you"ve got this party, the GOP, that is very invested in, as you say, cut, cut, cut, and particularly these sorts of programs. You"ve got this party supported electorally, such as it"s supported, by a lot of people who are basically middle-class white people, right? The old saw about people voting against their own self-interest may very well hold true here.


I"m wondering how the racialization of the image of poverty and of the people we think of using these sorts of programs and the rise of the Tea Party — which some of us believe foments a certain amount of racial resentment or is fueled by it — how do those two things work together?


PE: There has been a racial element to conservative politics, going back to the end of the time when the George Wallaces of this world simply stood up and used the “N” word. Then that became incorrect to say, and we have to remember that it was President Nixon of whom sometimes people say, “He wasn"t so bad.”


AMS: Right. By comparison, he looks almost liberal.


PE: Well, that"s a somewhat careless rewriting of the history because he"s the one who invented the Southern strategy. What was the Southern strategy? It was about saying to conservative white Democrats in the South that they really would find a much more congenial home in the “modern Republican Party.” Lyndon Johnson had said when he signed the Voting Rights Act that the price would be sort of the end of the Democratic Party as we know it and the loss of the South for a generation.


AMS: It turned out to be several generations.


PE: Well, he was quite right, and it"s interesting if you unpack it with a little bit more detail because there were all those very interesting governors in the South in the "80s. Not just Bill Clinton, but Dick Riley in South Carolina, Bill Winter in Mississippi, Lawton Chiles in Florida, Jim Hunt in North Carolina. It was a considerable list. There was a kind of a New South for a while and Democrats did win, but now it much more reflects a fulfillment of Nixon"s strategy.


There were two things that the Republicans did to make sure that there was a racial element to their politics. The most important was what they did, around the country, to the criminal justice system, because the number of people who are in prison in 1970 was a fraction — a small fraction — of the number of the 2.3 million who we now incarcerate, and of course, the drug war is connected to that, but not [it"s not the] only [reason], because [you have to consider] the whole system of mandatory minimum sentences and the “three strikes and you"re out” laws. It"s [both of those things] together, so that if you look at the prison population in this country, you actually find that two-thirds of the people who are in our jails and prisons are older than 25 years old. Crime is an activity of the young disproportionately. What"s happened is people that are in [prison for much longer]. The prisons now have their geriatric units now. The prisons have all these people who have been there for long, long periods of time and they"re aging, literally aging, as inmates.


That all was a major piece of racial politics, and then, secondly, that was about the man, [and removing him from the family]. And of course, that has an enormous effect in racializing poverty as a matter of fact, as well as in the politics of it, because if you have these guys who, when they do get out of prison, have absolutely no prospects and the law makes it extremely difficult to put their lives back together again. For that whole period of time that they"re imprisoned, the men aren"t in the community and it has an enormous terrible effect on family structure, and has a horrible effect on kids, the self-worth of children and their sense of possibility in their lives.


The companion piece of the racial politics was what [Republicans] did to welfare, starting with the war on welfare that goes all the way back to the very late "60s and into the "70s. And it"s just this steady attack on welfare recipients as being lazy and wanting to collect their checks. The image that is conveyed is a racial image. Ronald Reagan talks about the woman who drives up to the supermarket in her white Cadillac and goes in with her food stamps and buys the choice cut of meat. Everybody knew who he was talking about; he never said it: an African-American woman who lives in New York City who"s on welfare.


We"ve had this inculcation of racial politics in those two major ways, and so it has these two interlocking facts, because on one hand, partly it"s a consequence of the criminal justice policy. You have a racial disproportionality in the poverty itself and then you have, as a consequence of the changes in family structure in the neighborhoods of concentrated poverty in the biggest cities, you would have some bad things that happen in terms of behavior. Then it becomes easier to make the racialized stories stick in the politics. You end up with 27 percent African American, Latino, Native American poverty — which is actually down over the decades from where it was. It was 55 percent in 1959 — African-American poverty — when they started measuring poverty, so we actually made progress on that, even though white poverty is 10 percent.


It"s really a vicious circle because the image of African-American poverty feeds the negative politics.


AMS: Right, and then white people don"t see themselves as people who could fall into this, too.


PE: The fact is that the largest group of people in the country [on welfare] are white.


AMS: Right, of course, which is not the image that people have. My personal opinion is it encourages white people not to identify with the people who avail themselves of public assistance.


Getting to all of this, the difficult conversation is, as we euphemistically call discussions about family structure, is this is a mine field. I"m a feminist, and there is always a delicacy within the feminist communities about talking about this issue as one that is too easily used to blame women for the plights of their families.


PE: Yeah. Well, I don"t think I would blame anybody; the first thing we have to understand is the question of women having children in an instance where if they"re not married to the father, that"s a worldwide phenomenon. I mean, it"s all over. It"s in Europe, as well.


AMS: That fascinated me because I have observed this within my own family and community. I"ve seen it among young white women who are, broadly speaking, middle-class, but who might be considered on the cusp of the working-class.


PE: Right. While it"s true that there is a racial disparity in the numbers, in fact, if you look at the trends and the numbers of origin, increases [in babies born to single women] in the African-American community took place in the 1970s. It"s been pretty steady since then, and in fact, in terms of [the birth rate among] adolescents, that"s going down. It"s still too high, but it"s still on the decline. The increases in births to unmarried women — all of the increases since 1980 have been [among] whites and Latinos. Who knows that?


Talking about what"s happening across the board, the trends, well, they"re higher in some groups than in others…And you even have Charles Murray, who draws lots of conclusions that are wrong, [talking] about the kind of change of behaviors in the white community.


But this is about how the economy functions. This is about what"s happened to the job market. This is about the flood of low-wage jobs. The conversation about poverty much too easily turns to welfare — and there is a big problem in terms of the huge holes that we"ve got in the safety net at the bottom.


But in terms of the heart of the problem, without the intrusion of race into it, the heart of the problem is about low-wage jobs. Half the jobs in the country pay less than $ 34,000. And a quarter [of those jobs] don"t pay even up to the poverty line for a family of four, [which is] $ 23,000. No wonder families are falling apart.


AMS: You also referenced your knowledge of the Great Depression early in your book and I think I recall reading that during the Great Depression, the abandonment of families by men was an issue.


PE: Abandonment? They could not find any work in their own community and then went off and hopped on the road to see if they could find something somewhere, so they could send money back home! This is what happens.


We"re not facing up to what"s happened. Well, there"s a structural change in the economy. Globalization has taken away the jobs that built the middle class in this country, which, by the way, you didn"t have to have a high school education to have. It was at the height of — which was never so high in the United States — but at the height of union influence. In those manufacturing plants, there was organizing. We were by ourselves in the world. The infrastructure of Europe and Japan had been destroyed. We were at the top of the roof in the world and so we built the middle class. The modern middle-class was built between 1945 and 1973, and it included a significant increase in the income of black men during that period. The statistics that we have about the situation of black men begin to turn downward in 1973, after having gone steadily upward from 1945 to 1973.


You have globalization as a factor for the entire lower half, and of course, the economy isn"t stuck. There is more income [than before]. It"s just all going to the top.


AMS: That was quite stunning — even though I suppose I should have known that. But to see the data as plainly as it is shown in your book, because we"re so used to this mantra of the economy, of course, since 2007-2008, being a mess, right? That when you look at the aggregate overall picture, we"re really pegging all of these problems to something that happened in 2008, when it all began long ago?


PE: Right, right. It started happening a long time ago. That"s absolutely right, although it continues, 2009 to 2011. The income of the top 1 percent went up by 11 percent, and over that three-year period in the height of the recession, depth of the recession, the [income of the] other 99 percent went down by 0.4 percent…We really are not focusing on the fact that so many people in this country just can"t make enough money….


I think that in terms of the economic, any woman or man who is, by themselves, raising children ought to be able to earn enough by herself or himself to support those children. Of course, if it"s a woman, right there for openers, she"s likely to have 77 percent of the income of the man, and then she"s much more likely to have one of these low-wage jobs. We know that by herself, just for openers, she"s likely to end up in poverty or near poverty.


It"s very much a terrible interaction between the wave of low-wage jobs and how many single moms are out there. The largest group of poor people in the country is the children of single mothers, almost 50 percent across racial lines.


[...]


There"s a responsibility of women and men. You need to separate out the structural issues that affect everybody and that have to be dealt with as such, but you"d also need to be talking about responsibility. It"s important to somebody who fathers a child to take responsibility for that child. It"s important, too, that the father, A) have that kind of wherewithal to pay child support, but B) pay the child support…we all have a parental responsibility and people need to live up to that.


It"s not enough to say that there"s a cradle to the present pipeline. There is. It needs to be fixed, but insofar as people who are not even trying because of some attitude that they have, there has to be work to change that. Insofar as people are having children and haven"t got the least idea of what it means to be a parent, there have to be ways that are respectful to reach out to those parents to help them understand what their responsibility is…Anybody who says the whole problem is structural is just wrong, misguided, whatever it is — anybody who says it"s all a matter of personal responsibility is, of course, making a horrible mistake.


AMS: But can you ever really separate it out? How do you make a distinction between the evolution of economic structure and the evolution of culture. I mean those two things go together, right?


PE: That"s such an important point because when we talk about the personal responsibility, this isn"t saying that somebody was born and they were irresponsible. They were born as a baby and then they grew up, right? There"s no irresponsibility gene…I mean we just really have to pursue all of this, and if we could just get more kind of wide in the middle, if you will…You ask: how do we do those things? And in terms of what I"m suggesting, the hows about the different politics and the different politics is about people who organize and advocate in order to–the people will participate and act in a way that that really addresses problems that they have.


AMS: The numbers that you have on child poverty are really mind-blowing. You report that the U.S. has the highest rate of child poverty in the industrialized world.


If you have so many kids growing up with that experience in poverty, how does that shape them for finding their way through life?


PE: It"s terrible, and it"s a terrible interaction between the poverty, the child poverty and what happens at school. Forty percent of black children are born into households in poverty. Forty percent.


Twenty percent of African-American children grow up in poverty for more than half of their childhood. Twenty percent.


AMS: This gets back us to what you were talking about concentrated poverty and why you think that"s such a critical issue even though we have widespread poverty — the increase in the suburban poverty and the rural poverty.


PE: The increase in suburban poverty is very important. With rural poverty, there are diminishing numbers of rural people, but rural poverty is in some places quite hopeless, [as in] Appalachia, the Indian reservations, Mississippi Delta, Colonias in South Texas, and so on. If you"re in a neighborhood where you have — [according to] the census tracks are all 40 percent poor or more — we know what happens, right? The schools are going to be terrible. Too many of the men are in prison. Too many children are born to people who aren"t married or to a mother who is not married, and there"s violence all over the place.


The most persistent poverty is intergenerational poverty. It"s the people who are the least included in the larger society. It"s the place that we"ve done the very worst and it is true that part of our efforts have to be to promote personal responsibility, but not by preaching. Let"s actually do something that creates some hope and possibility.


AMS: Right. Some of what you advocate is creating community centers around schools, such as the Harlem Children"s Zone program.


PE: Well, let"s start with schools that teach before we go to community centers. Let"s do everything we can to get effective teachers.


AMS: That"s another controversial thing in the progressive movement, because we have seen school reform used as a means to cut into unions…


PE: …I think that"s a very complicated subject. I think there is polarization in both directions. There surely are people who want to destroy the public school system and voucherize everything and have charters that are really for-profit businesses, and to have a market model. There surely are such people.


To say from a progressive point of view that charters are, blanket, a bad thing or that any criticism of the union is being a union-buster, that"s not right either. But there are some things that a broad scope of people do agree on. The left — and certainly many conservatives — we want a public school system that works for every child. Anybody who thinks that you"re going to charter your way out of these problems, it"s conceptually wrong. There are school systems — look at Union City in New Jersey, which David Kirp has [written] a book about and [who] had a terrific piece in the Sunday Review section of the New York Times.


It"s a gritty town — and there are lots of places in the United States that are similar that have terrible schools — and they have just done a wonderful job. I will say that one of the things that happened there is, in New Jersey, they have a piece of litigation that"s still going on, Abbott vs. Burke, which is to force the state under its own constitution to provide adequate funding for the poorest districts in the state.


There are places where there are things going on that actually bring effective teaching to low-income children. Well, let"s figure out what"s going on and do more of that. If you take the union question — [there are] some places where the local unions are cooperative and they"re working very hard on the reforms, and to paint with a broad brush is totally wrong. You"ll find other places where, I"m sorry to say, they"re part of the problem…


AMS: Okay, fair enough. You make a very strong point about the proliferation of these low-wage jobs, problems with our education system, concentration of poverty, all that stuff. But you don"t see that changing in a big way anytime soon, right? You don"t have a fix for the low-wage job thing. Nobody does, right?


PE: I have some partial fixes. When it comes to low-wage work, beyond the minimum wage, the major things that we can do which would be quite substantial if we did them, are to do, in a full and complete way, the things that a decent society does for all of its people. There should be childcare for every family that needs help with it. The federal funding for childcare reaches 1 out of 7 children who qualify for it now. We have a housing affordability crisis in this country — and not just from mortgage foreclosures. We had the problem before and we have it now.


AMS: Rents are crazy.


PE: Rents are crazy and…housing vouchers only reach 1 out of 4 people who qualify for those things. The other things that are a lot better in healthcare, where we"ve made a major move with Medicaid and the financing of post-secondary education — well, if we actually provided help on childcare and housing, so that everybody who needs help would get, it would be a very substantial increase in the effective income of people. The heart of this is you have to do everything you can do to raise wages and pay attention to that, and more leadership that calls in people and essentially says to Walmart: “How come you"re different from Costco?” Get that out in a much more public way…


AMS: Do you think that"s a failure of rhetoric and framing, or is it a failure of activism?


PE: It"s partly a failure of activism, and to some extent, a failure of message, yes.


Fundamentally, there is a structural flaw in the economy — no question about that. And that"s difficult to change, but the amelioration could be substantial. We should celebrate the fact that we have 40 million people that we"re keeping out of poverty because of what we"ve done in public policy…we would have 86 million if we didn"t have Social Security and food stamps, which is a great success, and the Earned Income Tax Credit and the Child Tax Credit.


We need to be having a discussion in this country about the real meaning of the Earned Income Tax Credit and the Child Tax Credit, which are income supplements, because if jobs are not for, as long as we can see, going to pay enough to live on, we need to be talking about the role of public policy in having a wage supplement in this country. That"s not even on the table now.


AMS: Right. Now, of course, there are some progressives who say: “Well, that"s subsidizing corporations so that they don"t have to pay a living wage.”


PE: I understand that. It is, and it would not be my preference — I prefer to raise the minimum wage more than I do to have wage subsidies…


AMS: But we"re not going to have a $ 15-an-hour minimum wage.


PE: Well, you would have to have a tension between a minimum wage and Earned Income Tax Credit. The businesses would love it if you never raise the minimum wage and you gave them the wage subsidies. That"s wrong. There has to be a tension in that, and of course, you want to avoid unnecessarily giving a gift to the business side of it. That"s wrong.


AMS: You make the point that activism — that there"s a danger in the activism being focused on the wealthy side of the inequality and not as much in the language and rhetoric dealing with the other side of it.


PE: I think Occupy did some very good things, but I wish that there had been more sustainability to it.


AMS: To the actual people in the streets?


PE: Well, just in general that it should have–in a variety of ways have reached large numbers of people and activated them for political change in this regard. The people with more capacity like the Service Employees International Union certainly tried, and there were others. Yeah, there was more attention in inequality for that period of time and for quite a while on inequality than we had had in many, many years. It was effective.


AMS: They certainly did shift the discussion away — temporarily — from the debt and deficit to this question of inequality. Now, we seem to be back.


PE: Yes. Well, the nature of the politics as such that it"s difficult to have that conversation when you have essentially a block of people in the Congress who are capable of just putting sand in the gears in order to grind everything to a halt. The president was successful, as we know, in giving at least some of the cause of the huge inequality that comes from the tax structure, a modest amount of change, and just getting us partway back to where we had been before 2001.


I often said — and I say it in my book — that not only do we have to talk about the 1 percent. Let"s talk about the 99 percent, but be sure that when we talk about the 99 percent we mean everybody down to zero, because clearly, the person in the 99th percentile is quite different from the person in the 1st percentile.


AMS: Even different than those in the 50th, right?


PE: In the 50th [percentile] is somewhere in between — but not just in the law of averages. It"s qualitatively different from both ends. That"s quite right. That"s the challenge. We have to deal with the question at the top for multiple reasons. One, very simply is that in order to run our country in a way that"s consistent with the values that we espouse, we have to have more revenue. In a way that income is divided, the people who can afford to make a greater contribution in the revenues than we receive are the people at the very top.


That"s for a lot of reasons. That"s not simply because the people at the bottom have so much less income. That"s about the quality of life, and it also relates to power because those people at the top, the more economic wherewithal they have, the greater their political wherewithal. They are in what looks at the moment like an inexorable march [of the 1 percent] toward greater power and greater hegemony and it becomes more and more difficult to resist that. Citizens United is the headline, but the additions to political power through the translation of the money into governance is deeply troubling.


AMS: Thank you for having me in.



 

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Poverty Expert Peter Edelman Explains How Low Wages and Racial Politics Line the Pockets of the Rich

Friday, April 12, 2013

10 Tax Dodges That Help the Rich Get Richer








Have you read about the billionaire who pays a lower income tax rate than his secretary and gives advice for how much income tax other people ought to pay? You might want to ask: “How does he do it? ”


We don’t know the complete answer to that question. No doubt, only his army of tax advisers does. What we’d instead like to share are 10 ways the current tax code allows the rich to accumulate vast fortunes, subject to little or no tax. And, unlike the offshore account tax fraud that gets so much press and regulatory attention, many of the most egregious tax avoidance scams are perfectly legal.    


1. No income means no tax. Imagine two men living in the same town. Joe owns an oil exploration corporation. Pete, a geologist, works for Joe. Pete finds oil, billions of dollars worth, and when he does, Joe gives him a $ 1 million bonus.


Pete pays income taxes on $ 1 million and keeps looking for oil. Joe, the boss is now a billionaire. Although he has not sold any oil yet, the bank lends him money against the find and he builds a mansion, buys a nice car and lives it up. Even though Joe has become richer by billions of dollars, he pays no income tax. Why? He has no income.


This simple example illustrates an important point: The biggest income tax loophole is the definition of income. For most people, what counts as income is simple to see—it’s their salary, and maybe, if they’re lucky, a bonus. Yet for the very wealthy, salary is trivial—if they earn one at all. That’s not where their riches come from. Instead, their money comes from “carried interest” (which we’ll explain more fully below) and from the appreciation of their ownership interests in stock, real estate and other assets. Every year, Forbes and other magazines show how the wealth of hundreds of individuals increases by hundreds of millions from one year to the next. As long as this increase is not defined as income, no income tax is due.


And, surprise, surprise: all these things are effectively taxed, if at all, at a much lower rate than the income tax rates that apply to simple salaries and bonuses. It gets even better: increases in the value of shares of stock, and of real estate, aren’t taxed until sold and if never sold, may never be taxed. What about estate tax, you say? After all, it used to be said, “The only things that are certain are death, and taxes.” But now, with good ”advice,” that’s no longer true. Stick with us and we’ll explain how.


2. Why investment managers pay lower tax rates than their secretaries. Some of the wealthiest people in America manage hedge funds, private equity funds, or real estate partnerships, and typically, these investment managers receive a very small salary, relative to their total compensation. But don’t feel too sorry for them—they’re not working for free. Instead, most of their compensation comes in the form of a share of the fund or project they manage. This ownership share is called a “carried interest.” And currently, it’s usually taxed as a capital gain instead of ordinary income.    


Okay, why does this matter, and what does it mean in plain English? It means that when the manager’s tax bill comes due, he owes the federal government 20 percent in taxes– the current tax rate on long-term capital gains– rather than the 39.6 percent rate that applies to ordinary income. This dodge halves his effective tax rate on these earnings. It’s just this loophole that Mitt Romney used to pay less than 15 percent— based on the legal capital gains tax rate at the time—on the millions he cleared while head of Bain Capital. This compares to the nearly 40 percent in federal income tax that a top surgeon, or anyone else whose earnings are defined as ordinary income, pays on his money.


Congress has been trying to eliminate this loophole since 2007, but every time they get close to a fix, lobbyists beat them back. After all, no one likes to pay more taxes. But some of us pay more than the favored few.


3. How tax delayed can become tax never paid.Taxes on the appreciation of assets—the value of a company, a stock portfolio, or the increase in real estate held for investment purposes—qualify as capital gains, rather than ordinary income. We’ve already seen the big advantage of calling something a capital gain: it’s taxed at a lower rate.


There’s another benefit to how the tax code treats these assets: no tax is due on the increase in the value of these assets until their owner sells them to realize the proceeds. That means, no matter how much one’s wealth increases on paper, one doesn’t need to pay the government a dime in income tax until the property—whether real estate or paper assets — is sold.  


Let’s go back to our simple example of the oil entrepreneur. What if he never sells his oil property? No tax is due. He just keeps spending money he’s borrowed against his holdings. Or suppose he trades one piece of real estate for another? Under like kind exchange rules there would also be no tax due, no matter how much the pieces of property are worth. Compare this to how the tax code treats the ordinary married couple who’ve done well with a home purchase, and has to pay capital gains tax on any gain of more than $ 500,000. Although this might sound like a lot of money, many retirees who live in places where real estate’s expensive have to pay such taxes. They cannot get exclusions for millions and billions. They must pay the tax that’s due.


Suppose the billionaire bequeaths his billions to his spouse. Spouses can receive unlimited bequests without estate taxes, and better still, the value for tax purposes is “stepped up” at death so that if everything is sold to realize the gains, no income tax is due as there is no capital gain. The “cost” of the billions was redefined to be value at death.


The current US income tax system doesn’t impose taxes on wealth. Nor is much appreciation in assets such as stocks and real estate ever taxed by the estate tax system. The result: tax delayed can become tax never paid.


4. The charity scam. Another way the wealthy avoid paying taxes on their billions is to make charitable donations. If you donate property, you never have to pay income tax on that donation, whatever it costs you and how much it’s worth right now. Well you might say, at least someone benefits from the charity. Whether or not the charitable donation is a scam in whole or in part depends on the answer to that old question: qui bono? Aka, who benefits? That’s where the real scam takes place.


And there’s no legal requirement that a charity must spend its wealth. In fact, IRS rules require only that charities spend about 5 percent of their investment assets annually, and all or part of this amount can be spent on salaries and “expenses,” rather than devoted to the charitable purpose the charity purports to be serving. So, what happens with a charitable trust, set up by a billionaire, and controlled by one of the billionaire’s children? The child gets a job and a salary for life. Maybe a mansion to live in and entertain in as a fringe benefit. This is a great gig for the heir.


What about the taxes due? No income tax is due on the money the parent donated to set up the charity—even though the parent may have made the charitable donation so as not to pay any tax on an appreciated asset.  


Similarly, no estate tax is due on this donation, ever. And all the money donated to the charity is protected from divorce, or any creditors because even though the donor’s heir controls the charity, the law says that heir does not “own” the trust.


The non-profit sector is a very big tent. It houses genuine do-gooding institutions that contribute to society by deploying resources to improve public health, reduce poverty, and improve the environment. But charitable trusts that just go through the motions so that the lion’s share of benefits is realized by a donor and heirs are also allowed inside. And other types of distortion are rampant, such as charities that promote a certain worldview or political philosophy, often cloaked in some form of intellectual or educational rhetoric.


Bill Gates and Warren Buffett got lots of great press in 2010, when they launched the Giving Pledge, committing America’s wealthiest to giving away half their wealth to charity. Since then lots of big names— Michael Bloomberg, Larry Ellison, Carl Icahn, George Lucas, Michael Milken, Peter Peterson, Ted Turner, Mark Zuckerberg– have all signed on. Sounds great—so philanthropic. Would it be churlish under the circumstances to ask for more details?


5. What is an expense? Those damn Yankees. Our main focus is on personal income taxes. But we can’t resist taking a few swipes at corporate income tax rules, especially since these largely benefit rich people.


One way to lower taxes is by claiming offsetting expenses. When you go to a baseball game, who rents all those expensive skyboxes? Almost always it’s a corporation. The most expensive restaurants are called expense account restaurants because businesses foot the bill for these meals, and individuals who dine out on the corporate dime aren’t taxed on these benefits. After all, they’re working while they devour vintage wines, eat foie gras, and if they’re lucky, catch foul balls.


Of course, there is a limit on how much even pigs can eat. The real tax-free compensation comes from corporate limos, corporate jets, corporate chefs, corporate apartments, and even corporate barbers. Not everyone gets a chance to enjoy these freebies, which are in fact largely limited to the 1 percent at the top of the corporate food chain.


So, you cannot deduct the interest payments for the used car you need to get to work, since the tax code says your car isn’t a business expense.  Nor can you deduct the price of your daily subway or bus ride to go to and from the office. But you can bet that the Goldman Sachs banker who works late, pays nothing for his free ride home in a corporate limo. That’s considered a business expense for Goldman, and is allowed as a deduction on its corporate tax return. And if you’re a fat cat who rides in a Gulfstream, even better. A corporate jet trip for the offsite meeting in the Caribbean followed by a few rounds of golf is also a perfectly legal tax deduction. Some companies even insist that their CEOs use corporate jets for all their trips, even vacations. Why? “Security,” they say. It wouldn’t do for these folks to have to stand in line with the rest of us, and remove shoes, surrender Swiss Army knives, and discard oversize shampoo bottles before they’re allowed to board an airplane.


Good record keeping is all it takes to avoid taxes on what some would say should be treated as untaxed compensation.


6. Catch me if you can. All rules are subject to interpretation. Is this starting to sound familiar? Many tax shelters are created to reduce income or delay the recognition of income by redefining it as something else or offsetting it with cash or non-cash expenses such as depreciation. The way U.S. tax law works is that if the IRS or a court hasn’t said a tax shelter is illegal, you’re free to try it. If you’re caught, the worst that will happen is that you’ll have to pay taxes due, plus interest and perhaps some penalties. And that only happens if you’re caught. The IRS and state tax authorities have no idea of what interpretation is being used—no matter how ridiculous–  unless it is discovered in an audit. Now, how likely is that? Currently, about 1 percent of tax returns are audited in any one year. Even when they occur, audits are seldom all encompassing. Many creative interpretations go unnoticed for years.


Other countries follow more sensible rules. They require prior approval of creative tax code interpretations. So, in other words, it’s not legal to follow a certain tax strategy unless the tax authorities declare, upfront, that it is. Such a policy discourages the most aggressive tax avoiders from pushing their luck, and places all tax players on a level playing field. Our system instead encourages companies and individuals to pioneer the most creative tax minimization strategies. Do we really want to be a world leader in such activity?


7. He who pays the piper calls the tune: corporate welfare. Currently, 17,500 registered tax lobbyists work overtime to pack the U.S. tax code with special interest benefits. Big agri, ethanol producers, mine owners, clean energy companies—all line up to demand special tax concessions. Some of them might seem to make sense: allowing drug companies to deduct the costs of research and development into the next big drug blockbuster. But even when they do seem to make sense, there’s a big overall cost to the economy of all these tax breaks. They distort economic activity, moving it away from profit-seeking endeavors to where the biggest tax concessions may flow.


A second serious concern is how these tax concessions worsen inequality: how many of those lobbyists do you suppose work on behalf of the ordinary U.S. taxpayer, the two-income family working hard to make ends meet? And when it comes time to draft a new tax law to squeeze out a bit more revenue, where do you think it comes from: the rich whose interests are well-represented in Washington, or the rest of us?


8. You get what you pay for. If you think this discussion is impossibly convoluted and complex and wonder why, you have no further to look than the experts. Our tax preparation and avoidance industry is massive. It bills by the hour. The more complex the tax code, the more complex the avoidance vehicles, the more billable hours. Therefore it’s no accident that the U.S. income tax code, when last we checked, is now nearly 74,000 pages long. More than 1.2 million people are employed as tax preparers—more than the number of police and firefighters combined, according to Face the Facts, a nonpartisan project of George Washington University– and about 3 million people are involved in ensuring “compliance” with the tax code, including 90,000 IRS employees. Those who can afford it can hire the most astute experts, whose stock in trade is interpreting and defining the tax code to their best advantage. Remember Leona Helmsley? “Only the little people pay taxes.” Leona, you may recall, did do time for tax fraud, but for those who aren’t quite in the Queen of Mean’s class, and get competent advice, there’s usually no penalty.


9. Sorry, your fishing boat doesn’t count: it has to be a yacht. Our income tax system purports to be progressive. Yet one of the biggest tax breaks, the mortgage interest deduction, is anything but. This deduction allows homeowners to deduct mortgage interest payments on both a principal residence and one vacation property to reduce their income taxes due. But if you’re a renter, no such luck: someone making minimum wage cannot deduct his rent payment.


If you’re rich enough to afford a yacht, it’s another story. So long as it contains a built-in galley, an installed toilet, and a sleeping berth—no fishing boats, please– you’re entitled to a tax deduction on the interest you pay to finance this “vacation property.”


Most other countries, by the way, don’t subsidize home ownership in the same way via the tax code. And it’s worth mentioning that some of these countries—such as Australia, Canada, France, and Germany— have not seen the same vicious boom-bust real estate cycle that we have.


10. Individual Retirement Accounts (IRAs): $ 21 million makes a nice nest egg.Congress has set up various programs that allow people to fund retirement accounts that accumulate, tax-free, until these savings are tapped to fund someone’s retirement. Regular IRAs allow a person to contribute money, on a “pre-tax basis.” No tax is due on the money when it’s earned, so long as it’s placed in an IRA account. Nor is any tax due on interest or dividends earned, or the increase in the value of the investment. Income tax is only due when sums are withdrawn, after a person hits retirement age, and if a person dies before he withdraws his money, this money isn’t subject to estate tax.


The maximum IRA contribution limit is $ 5500 annually (rising to $ 6500 for those over 50). Similarly, many Americans participate in 401(k) plans offered by their employers. With these plans, the maximum annual contribution is $ 17,500 (increasing to $ 23,000, for those over 50). Finally, certain types of pension plans—used by law firm partnerships, consulting firms, joint medical practices, and sole proprietors—allow individuals to contribute as much as $ 50,000 to a retirement plan, under similar tax-advantaged conditions.


So, we wonder, with such clear contribution limits in place, how did Mitt Romney end up with between $ 21 million and $ 102 million in a tax-free retirement account, as he himself reported in his tax returns?


If Mitt contributed the current annual maximum donation — $ 50,000 — for 20 years, he’d only end up with a contribution of $ 1 million. Where did the rest of the money come from? It must be from the returns he earned on his investment. As the rest of us know when we look at our 401(k) statements, it’s, ahem, extremely unusual — some would say next to impossible– for an investment to increase by 20 times, or 100 times, even if we hold it for 20 years. These wonderful returns could be the result of good fortune, but more likely are the result of the best tax advice, with Mitt’s IRA able to invest on favored terms not available to anyone else. 


The only reason we know about Mitt’s spectacular run of luck with his IRA is that he was forced to disclose his income tax returns when he decided to run for president. How many other 1 percenters, we wonder, have also been similarly lucky with their retirement plans?


The solution to America’s retirement crisis might be to give Mitt a job as retirement czar, showing the rest of us how we can earn similar stunning rates of return on our retirement savings. This could be a bipartisan initiative, with newly unemployed Hilary Clinton chipping in expertise on how to trade cattle futures.


Thu, 04/11/2013 – 05:44


 
AlterNet.org Main RSS Feed



10 Tax Dodges That Help the Rich Get Richer

10 Tax Dodges That Help the Rich Get Richer








Have you read about the billionaire who pays a lower income tax rate than his secretary and gives advice for how much income tax other people ought to pay? You might want to ask: “How does he do it? ”


We don’t know the complete answer to that question. No doubt, only his army of tax advisers does. What we’d instead like to share are 10 ways the current tax code allows the rich to accumulate vast fortunes, subject to little or no tax. And, unlike the offshore account tax fraud that gets so much press and regulatory attention, many of the most egregious tax avoidance scams are perfectly legal.    


1. No income means no tax. Imagine two men living in the same town. Joe owns an oil exploration corporation. Pete, a geologist, works for Joe. Pete finds oil, billions of dollars worth, and when he does, Joe gives him a $ 1 million bonus.


Pete pays income taxes on $ 1 million and keeps looking for oil. Joe, the boss is now a billionaire. Although he has not sold any oil yet, the bank lends him money against the find and he builds a mansion, buys a nice car and lives it up. Even though Joe has become richer by billions of dollars, he pays no income tax. Why? He has no income.


This simple example illustrates an important point: The biggest income tax loophole is the definition of income. For most people, what counts as income is simple to see—it’s their salary, and maybe, if they’re lucky, a bonus. Yet for the very wealthy, salary is trivial—if they earn one at all. That’s not where their riches come from. Instead, their money comes from “carried interest” (which we’ll explain more fully below) and from the appreciation of their ownership interests in stock, real estate and other assets. Every year, Forbes and other magazines show how the wealth of hundreds of individuals increases by hundreds of millions from one year to the next. As long as this increase is not defined as income, no income tax is due.


And, surprise, surprise: all these things are effectively taxed, if at all, at a much lower rate than the income tax rates that apply to simple salaries and bonuses. It gets even better: increases in the value of shares of stock, and of real estate, aren’t taxed until sold and if never sold, may never be taxed. What about estate tax, you say? After all, it used to be said, “The only things that are certain are death, and taxes.” But now, with good ”advice,” that’s no longer true. Stick with us and we’ll explain how.


2. Why investment managers pay lower tax rates than their secretaries. Some of the wealthiest people in America manage hedge funds, private equity funds, or real estate partnerships, and typically, these investment managers receive a very small salary, relative to their total compensation. But don’t feel too sorry for them—they’re not working for free. Instead, most of their compensation comes in the form of a share of the fund or project they manage. This ownership share is called a “carried interest.” And currently, it’s usually taxed as a capital gain instead of ordinary income.    


Okay, why does this matter, and what does it mean in plain English? It means that when the manager’s tax bill comes due, he owes the federal government 20 percent in taxes– the current tax rate on long-term capital gains– rather than the 39.6 percent rate that applies to ordinary income. This dodge halves his effective tax rate on these earnings. It’s just this loophole that Mitt Romney used to pay less than 15 percent— based on the legal capital gains tax rate at the time—on the millions he cleared while head of Bain Capital. This compares to the nearly 40 percent in federal income tax that a top surgeon, or anyone else whose earnings are defined as ordinary income, pays on his money.


Congress has been trying to eliminate this loophole since 2007, but every time they get close to a fix, lobbyists beat them back. After all, no one likes to pay more taxes. But some of us pay more than the favored few.


3. How tax delayed can become tax never paid.Taxes on the appreciation of assets—the value of a company, a stock portfolio, or the increase in real estate held for investment purposes—qualify as capital gains, rather than ordinary income. We’ve already seen the big advantage of calling something a capital gain: it’s taxed at a lower rate.


There’s another benefit to how the tax code treats these assets: no tax is due on the increase in the value of these assets until their owner sells them to realize the proceeds. That means, no matter how much one’s wealth increases on paper, one doesn’t need to pay the government a dime in income tax until the property—whether real estate or paper assets — is sold.  


Let’s go back to our simple example of the oil entrepreneur. What if he never sells his oil property? No tax is due. He just keeps spending money he’s borrowed against his holdings. Or suppose he trades one piece of real estate for another? Under like kind exchange rules there would also be no tax due, no matter how much the pieces of property are worth. Compare this to how the tax code treats the ordinary married couple who’ve done well with a home purchase, and has to pay capital gains tax on any gain of more than $ 500,000. Although this might sound like a lot of money, many retirees who live in places where real estate’s expensive have to pay such taxes. They cannot get exclusions for millions and billions. They must pay the tax that’s due.


Suppose the billionaire bequeaths his billions to his spouse. Spouses can receive unlimited bequests without estate taxes, and better still, the value for tax purposes is “stepped up” at death so that if everything is sold to realize the gains, no income tax is due as there is no capital gain. The “cost” of the billions was redefined to be value at death.


The current US income tax system doesn’t impose taxes on wealth. Nor is much appreciation in assets such as stocks and real estate ever taxed by the estate tax system. The result: tax delayed can become tax never paid.


4. The charity scam. Another way the wealthy avoid paying taxes on their billions is to make charitable donations. If you donate property, you never have to pay income tax on that donation, whatever it costs you and how much it’s worth right now. Well you might say, at least someone benefits from the charity. Whether or not the charitable donation is a scam in whole or in part depends on the answer to that old question: qui bono? Aka, who benefits? That’s where the real scam takes place.


And there’s no legal requirement that a charity must spend its wealth. In fact, IRS rules require only that charities spend about 5 percent of their investment assets annually, and all or part of this amount can be spent on salaries and “expenses,” rather than devoted to the charitable purpose the charity purports to be serving. So, what happens with a charitable trust, set up by a billionaire, and controlled by one of the billionaire’s children? The child gets a job and a salary for life. Maybe a mansion to live in and entertain in as a fringe benefit. This is a great gig for the heir.


What about the taxes due? No income tax is due on the money the parent donated to set up the charity—even though the parent may have made the charitable donation so as not to pay any tax on an appreciated asset.  


Similarly, no estate tax is due on this donation, ever. And all the money donated to the charity is protected from divorce, or any creditors because even though the donor’s heir controls the charity, the law says that heir does not “own” the trust.


The non-profit sector is a very big tent. It houses genuine do-gooding institutions that contribute to society by deploying resources to improve public health, reduce poverty, and improve the environment. But charitable trusts that just go through the motions so that the lion’s share of benefits is realized by a donor and heirs are also allowed inside. And other types of distortion are rampant, such as charities that promote a certain worldview or political philosophy, often cloaked in some form of intellectual or educational rhetoric.


Bill Gates and Warren Buffett got lots of great press in 2010, when they launched the Giving Pledge, committing America’s wealthiest to giving away half their wealth to charity. Since then lots of big names— Michael Bloomberg, Larry Ellison, Carl Icahn, George Lucas, Michael Milken, Peter Peterson, Ted Turner, Mark Zuckerberg– have all signed on. Sounds great—so philanthropic. Would it be churlish under the circumstances to ask for more details?


5. What is an expense? Those damn Yankees. Our main focus is on personal income taxes. But we can’t resist taking a few swipes at corporate income tax rules, especially since these largely benefit rich people.


One way to lower taxes is by claiming offsetting expenses. When you go to a baseball game, who rents all those expensive skyboxes? Almost always it’s a corporation. The most expensive restaurants are called expense account restaurants because businesses foot the bill for these meals, and individuals who dine out on the corporate dime aren’t taxed on these benefits. After all, they’re working while they devour vintage wines, eat foie gras, and if they’re lucky, catch foul balls.


Of course, there is a limit on how much even pigs can eat. The real tax-free compensation comes from corporate limos, corporate jets, corporate chefs, corporate apartments, and even corporate barbers. Not everyone gets a chance to enjoy these freebies, which are in fact largely limited to the 1 percent at the top of the corporate food chain.


So, you cannot deduct the interest payments for the used car you need to get to work, since the tax code says your car isn’t a business expense.  Nor can you deduct the price of your daily subway or bus ride to go to and from the office. But you can bet that the Goldman Sachs banker who works late, pays nothing for his free ride home in a corporate limo. That’s considered a business expense for Goldman, and is allowed as a deduction on its corporate tax return. And if you’re a fat cat who rides in a Gulfstream, even better. A corporate jet trip for the offsite meeting in the Caribbean followed by a few rounds of golf is also a perfectly legal tax deduction. Some companies even insist that their CEOs use corporate jets for all their trips, even vacations. Why? “Security,” they say. It wouldn’t do for these folks to have to stand in line with the rest of us, and remove shoes, surrender Swiss Army knives, and discard oversize shampoo bottles before they’re allowed to board an airplane.


Good record keeping is all it takes to avoid taxes on what some would say should be treated as untaxed compensation.


6. Catch me if you can. All rules are subject to interpretation. Is this starting to sound familiar? Many tax shelters are created to reduce income or delay the recognition of income by redefining it as something else or offsetting it with cash or non-cash expenses such as depreciation. The way U.S. tax law works is that if the IRS or a court hasn’t said a tax shelter is illegal, you’re free to try it. If you’re caught, the worst that will happen is that you’ll have to pay taxes due, plus interest and perhaps some penalties. And that only happens if you’re caught. The IRS and state tax authorities have no idea of what interpretation is being used—no matter how ridiculous–  unless it is discovered in an audit. Now, how likely is that? Currently, about 1 percent of tax returns are audited in any one year. Even when they occur, audits are seldom all encompassing. Many creative interpretations go unnoticed for years.


Other countries follow more sensible rules. They require prior approval of creative tax code interpretations. So, in other words, it’s not legal to follow a certain tax strategy unless the tax authorities declare, upfront, that it is. Such a policy discourages the most aggressive tax avoiders from pushing their luck, and places all tax players on a level playing field. Our system instead encourages companies and individuals to pioneer the most creative tax minimization strategies. Do we really want to be a world leader in such activity?


7. He who pays the piper calls the tune: corporate welfare. Currently, 17,500 registered tax lobbyists work overtime to pack the U.S. tax code with special interest benefits. Big agri, ethanol producers, mine owners, clean energy companies—all line up to demand special tax concessions. Some of them might seem to make sense: allowing drug companies to deduct the costs of research and development into the next big drug blockbuster. But even when they do seem to make sense, there’s a big overall cost to the economy of all these tax breaks. They distort economic activity, moving it away from profit-seeking endeavors to where the biggest tax concessions may flow.


A second serious concern is how these tax concessions worsen inequality: how many of those lobbyists do you suppose work on behalf of the ordinary U.S. taxpayer, the two-income family working hard to make ends meet? And when it comes time to draft a new tax law to squeeze out a bit more revenue, where do you think it comes from: the rich whose interests are well-represented in Washington, or the rest of us?


8. You get what you pay for. If you think this discussion is impossibly convoluted and complex and wonder why, you have no further to look than the experts. Our tax preparation and avoidance industry is massive. It bills by the hour. The more complex the tax code, the more complex the avoidance vehicles, the more billable hours. Therefore it’s no accident that the U.S. income tax code, when last we checked, is now nearly 74,000 pages long. More than 1.2 million people are employed as tax preparers—more than the number of police and firefighters combined, according to Face the Facts, a nonpartisan project of George Washington University– and about 3 million people are involved in ensuring “compliance” with the tax code, including 90,000 IRS employees. Those who can afford it can hire the most astute experts, whose stock in trade is interpreting and defining the tax code to their best advantage. Remember Leona Helmsley? “Only the little people pay taxes.” Leona, you may recall, did do time for tax fraud, but for those who aren’t quite in the Queen of Mean’s class, and get competent advice, there’s usually no penalty.


9. Sorry, your fishing boat doesn’t count: it has to be a yacht. Our income tax system purports to be progressive. Yet one of the biggest tax breaks, the mortgage interest deduction, is anything but. This deduction allows homeowners to deduct mortgage interest payments on both a principal residence and one vacation property to reduce their income taxes due. But if you’re a renter, no such luck: someone making minimum wage cannot deduct his rent payment.


If you’re rich enough to afford a yacht, it’s another story. So long as it contains a built-in galley, an installed toilet, and a sleeping berth—no fishing boats, please– you’re entitled to a tax deduction on the interest you pay to finance this “vacation property.”


Most other countries, by the way, don’t subsidize home ownership in the same way via the tax code. And it’s worth mentioning that some of these countries—such as Australia, Canada, France, and Germany— have not seen the same vicious boom-bust real estate cycle that we have.


10. Individual Retirement Accounts (IRAs): $ 21 million makes a nice nest egg.Congress has set up various programs that allow people to fund retirement accounts that accumulate, tax-free, until these savings are tapped to fund someone’s retirement. Regular IRAs allow a person to contribute money, on a “pre-tax basis.” No tax is due on the money when it’s earned, so long as it’s placed in an IRA account. Nor is any tax due on interest or dividends earned, or the increase in the value of the investment. Income tax is only due when sums are withdrawn, after a person hits retirement age, and if a person dies before he withdraws his money, this money isn’t subject to estate tax.


The maximum IRA contribution limit is $ 5500 annually (rising to $ 6500 for those over 50). Similarly, many Americans participate in 401(k) plans offered by their employers. With these plans, the maximum annual contribution is $ 17,500 (increasing to $ 23,000, for those over 50). Finally, certain types of pension plans—used by law firm partnerships, consulting firms, joint medical practices, and sole proprietors—allow individuals to contribute as much as $ 50,000 to a retirement plan, under similar tax-advantaged conditions.


So, we wonder, with such clear contribution limits in place, how did Mitt Romney end up with between $ 21 million and $ 102 million in a tax-free retirement account, as he himself reported in his tax returns?


If Mitt contributed the current annual maximum donation — $ 50,000 — for 20 years, he’d only end up with a contribution of $ 1 million. Where did the rest of the money come from? It must be from the returns he earned on his investment. As the rest of us know when we look at our 401(k) statements, it’s, ahem, extremely unusual — some would say next to impossible– for an investment to increase by 20 times, or 100 times, even if we hold it for 20 years. These wonderful returns could be the result of good fortune, but more likely are the result of the best tax advice, with Mitt’s IRA able to invest on favored terms not available to anyone else. 


The only reason we know about Mitt’s spectacular run of luck with his IRA is that he was forced to disclose his income tax returns when he decided to run for president. How many other 1 percenters, we wonder, have also been similarly lucky with their retirement plans?


The solution to America’s retirement crisis might be to give Mitt a job as retirement czar, showing the rest of us how we can earn similar stunning rates of return on our retirement savings. This could be a bipartisan initiative, with newly unemployed Hilary Clinton chipping in expertise on how to trade cattle futures.


Thu, 04/11/2013 – 05:44


 
AlterNet.org Main RSS Feed



10 Tax Dodges That Help the Rich Get Richer

10 Tax Dodges That Help the Rich Get Richer








Have you read about the billionaire who pays a lower income tax rate than his secretary and gives advice for how much income tax other people ought to pay? You might want to ask: “How does he do it? ”


We don’t know the complete answer to that question. No doubt, only his army of tax advisers does. What we’d instead like to share are 10 ways the current tax code allows the rich to accumulate vast fortunes, subject to little or no tax. And, unlike the offshore account tax fraud that gets so much press and regulatory attention, many of the most egregious tax avoidance scams are perfectly legal.    


1. No income means no tax. Imagine two men living in the same town. Joe owns an oil exploration corporation. Pete, a geologist, works for Joe. Pete finds oil, billions of dollars worth, and when he does, Joe gives him a $ 1 million bonus.


Pete pays income taxes on $ 1 million and keeps looking for oil. Joe, the boss is now a billionaire. Although he has not sold any oil yet, the bank lends him money against the find and he builds a mansion, buys a nice car and lives it up. Even though Joe has become richer by billions of dollars, he pays no income tax. Why? He has no income.


This simple example illustrates an important point: The biggest income tax loophole is the definition of income. For most people, what counts as income is simple to see—it’s their salary, and maybe, if they’re lucky, a bonus. Yet for the very wealthy, salary is trivial—if they earn one at all. That’s not where their riches come from. Instead, their money comes from “carried interest” (which we’ll explain more fully below) and from the appreciation of their ownership interests in stock, real estate and other assets. Every year, Forbes and other magazines show how the wealth of hundreds of individuals increases by hundreds of millions from one year to the next. As long as this increase is not defined as income, no income tax is due.


And, surprise, surprise: all these things are effectively taxed, if at all, at a much lower rate than the income tax rates that apply to simple salaries and bonuses. It gets even better: increases in the value of shares of stock, and of real estate, aren’t taxed until sold and if never sold, may never be taxed. What about estate tax, you say? After all, it used to be said, “The only things that are certain are death, and taxes.” But now, with good ”advice,” that’s no longer true. Stick with us and we’ll explain how.


2. Why investment managers pay lower tax rates than their secretaries. Some of the wealthiest people in America manage hedge funds, private equity funds, or real estate partnerships, and typically, these investment managers receive a very small salary, relative to their total compensation. But don’t feel too sorry for them—they’re not working for free. Instead, most of their compensation comes in the form of a share of the fund or project they manage. This ownership share is called a “carried interest.” And currently, it’s usually taxed as a capital gain instead of ordinary income.    


Okay, why does this matter, and what does it mean in plain English? It means that when the manager’s tax bill comes due, he owes the federal government 20 percent in taxes– the current tax rate on long-term capital gains– rather than the 39.6 percent rate that applies to ordinary income. This dodge halves his effective tax rate on these earnings. It’s just this loophole that Mitt Romney used to pay less than 15 percent— based on the legal capital gains tax rate at the time—on the millions he cleared while head of Bain Capital. This compares to the nearly 40 percent in federal income tax that a top surgeon, or anyone else whose earnings are defined as ordinary income, pays on his money.


Congress has been trying to eliminate this loophole since 2007, but every time they get close to a fix, lobbyists beat them back. After all, no one likes to pay more taxes. But some of us pay more than the favored few.


3. How tax delayed can become tax never paid.Taxes on the appreciation of assets—the value of a company, a stock portfolio, or the increase in real estate held for investment purposes—qualify as capital gains, rather than ordinary income. We’ve already seen the big advantage of calling something a capital gain: it’s taxed at a lower rate.


There’s another benefit to how the tax code treats these assets: no tax is due on the increase in the value of these assets until their owner sells them to realize the proceeds. That means, no matter how much one’s wealth increases on paper, one doesn’t need to pay the government a dime in income tax until the property—whether real estate or paper assets — is sold.  


Let’s go back to our simple example of the oil entrepreneur. What if he never sells his oil property? No tax is due. He just keeps spending money he’s borrowed against his holdings. Or suppose he trades one piece of real estate for another? Under like kind exchange rules there would also be no tax due, no matter how much the pieces of property are worth. Compare this to how the tax code treats the ordinary married couple who’ve done well with a home purchase, and has to pay capital gains tax on any gain of more than $ 500,000. Although this might sound like a lot of money, many retirees who live in places where real estate’s expensive have to pay such taxes. They cannot get exclusions for millions and billions. They must pay the tax that’s due.


Suppose the billionaire bequeaths his billions to his spouse. Spouses can receive unlimited bequests without estate taxes, and better still, the value for tax purposes is “stepped up” at death so that if everything is sold to realize the gains, no income tax is due as there is no capital gain. The “cost” of the billions was redefined to be value at death.


The current US income tax system doesn’t impose taxes on wealth. Nor is much appreciation in assets such as stocks and real estate ever taxed by the estate tax system. The result: tax delayed can become tax never paid.


4. The charity scam. Another way the wealthy avoid paying taxes on their billions is to make charitable donations. If you donate property, you never have to pay income tax on that donation, whatever it costs you and how much it’s worth right now. Well you might say, at least someone benefits from the charity. Whether or not the charitable donation is a scam in whole or in part depends on the answer to that old question: qui bono? Aka, who benefits? That’s where the real scam takes place.


And there’s no legal requirement that a charity must spend its wealth. In fact, IRS rules require only that charities spend about 5 percent of their investment assets annually, and all or part of this amount can be spent on salaries and “expenses,” rather than devoted to the charitable purpose the charity purports to be serving. So, what happens with a charitable trust, set up by a billionaire, and controlled by one of the billionaire’s children? The child gets a job and a salary for life. Maybe a mansion to live in and entertain in as a fringe benefit. This is a great gig for the heir.


What about the taxes due? No income tax is due on the money the parent donated to set up the charity—even though the parent may have made the charitable donation so as not to pay any tax on an appreciated asset.  


Similarly, no estate tax is due on this donation, ever. And all the money donated to the charity is protected from divorce, or any creditors because even though the donor’s heir controls the charity, the law says that heir does not “own” the trust.


The non-profit sector is a very big tent. It houses genuine do-gooding institutions that contribute to society by deploying resources to improve public health, reduce poverty, and improve the environment. But charitable trusts that just go through the motions so that the lion’s share of benefits is realized by a donor and heirs are also allowed inside. And other types of distortion are rampant, such as charities that promote a certain worldview or political philosophy, often cloaked in some form of intellectual or educational rhetoric.


Bill Gates and Warren Buffett got lots of great press in 2010, when they launched the Giving Pledge, committing America’s wealthiest to giving away half their wealth to charity. Since then lots of big names— Michael Bloomberg, Larry Ellison, Carl Icahn, George Lucas, Michael Milken, Peter Peterson, Ted Turner, Mark Zuckerberg– have all signed on. Sounds great—so philanthropic. Would it be churlish under the circumstances to ask for more details?


5. What is an expense? Those damn Yankees. Our main focus is on personal income taxes. But we can’t resist taking a few swipes at corporate income tax rules, especially since these largely benefit rich people.


One way to lower taxes is by claiming offsetting expenses. When you go to a baseball game, who rents all those expensive skyboxes? Almost always it’s a corporation. The most expensive restaurants are called expense account restaurants because businesses foot the bill for these meals, and individuals who dine out on the corporate dime aren’t taxed on these benefits. After all, they’re working while they devour vintage wines, eat foie gras, and if they’re lucky, catch foul balls.


Of course, there is a limit on how much even pigs can eat. The real tax-free compensation comes from corporate limos, corporate jets, corporate chefs, corporate apartments, and even corporate barbers. Not everyone gets a chance to enjoy these freebies, which are in fact largely limited to the 1 percent at the top of the corporate food chain.


So, you cannot deduct the interest payments for the used car you need to get to work, since the tax code says your car isn’t a business expense.  Nor can you deduct the price of your daily subway or bus ride to go to and from the office. But you can bet that the Goldman Sachs banker who works late, pays nothing for his free ride home in a corporate limo. That’s considered a business expense for Goldman, and is allowed as a deduction on its corporate tax return. And if you’re a fat cat who rides in a Gulfstream, even better. A corporate jet trip for the offsite meeting in the Caribbean followed by a few rounds of golf is also a perfectly legal tax deduction. Some companies even insist that their CEOs use corporate jets for all their trips, even vacations. Why? “Security,” they say. It wouldn’t do for these folks to have to stand in line with the rest of us, and remove shoes, surrender Swiss Army knives, and discard oversize shampoo bottles before they’re allowed to board an airplane.


Good record keeping is all it takes to avoid taxes on what some would say should be treated as untaxed compensation.


6. Catch me if you can. All rules are subject to interpretation. Is this starting to sound familiar? Many tax shelters are created to reduce income or delay the recognition of income by redefining it as something else or offsetting it with cash or non-cash expenses such as depreciation. The way U.S. tax law works is that if the IRS or a court hasn’t said a tax shelter is illegal, you’re free to try it. If you’re caught, the worst that will happen is that you’ll have to pay taxes due, plus interest and perhaps some penalties. And that only happens if you’re caught. The IRS and state tax authorities have no idea of what interpretation is being used—no matter how ridiculous–  unless it is discovered in an audit. Now, how likely is that? Currently, about 1 percent of tax returns are audited in any one year. Even when they occur, audits are seldom all encompassing. Many creative interpretations go unnoticed for years.


Other countries follow more sensible rules. They require prior approval of creative tax code interpretations. So, in other words, it’s not legal to follow a certain tax strategy unless the tax authorities declare, upfront, that it is. Such a policy discourages the most aggressive tax avoiders from pushing their luck, and places all tax players on a level playing field. Our system instead encourages companies and individuals to pioneer the most creative tax minimization strategies. Do we really want to be a world leader in such activity?


7. He who pays the piper calls the tune: corporate welfare. Currently, 17,500 registered tax lobbyists work overtime to pack the U.S. tax code with special interest benefits. Big agri, ethanol producers, mine owners, clean energy companies—all line up to demand special tax concessions. Some of them might seem to make sense: allowing drug companies to deduct the costs of research and development into the next big drug blockbuster. But even when they do seem to make sense, there’s a big overall cost to the economy of all these tax breaks. They distort economic activity, moving it away from profit-seeking endeavors to where the biggest tax concessions may flow.


A second serious concern is how these tax concessions worsen inequality: how many of those lobbyists do you suppose work on behalf of the ordinary U.S. taxpayer, the two-income family working hard to make ends meet? And when it comes time to draft a new tax law to squeeze out a bit more revenue, where do you think it comes from: the rich whose interests are well-represented in Washington, or the rest of us?


8. You get what you pay for. If you think this discussion is impossibly convoluted and complex and wonder why, you have no further to look than the experts. Our tax preparation and avoidance industry is massive. It bills by the hour. The more complex the tax code, the more complex the avoidance vehicles, the more billable hours. Therefore it’s no accident that the U.S. income tax code, when last we checked, is now nearly 74,000 pages long. More than 1.2 million people are employed as tax preparers—more than the number of police and firefighters combined, according to Face the Facts, a nonpartisan project of George Washington University– and about 3 million people are involved in ensuring “compliance” with the tax code, including 90,000 IRS employees. Those who can afford it can hire the most astute experts, whose stock in trade is interpreting and defining the tax code to their best advantage. Remember Leona Helmsley? “Only the little people pay taxes.” Leona, you may recall, did do time for tax fraud, but for those who aren’t quite in the Queen of Mean’s class, and get competent advice, there’s usually no penalty.


9. Sorry, your fishing boat doesn’t count: it has to be a yacht. Our income tax system purports to be progressive. Yet one of the biggest tax breaks, the mortgage interest deduction, is anything but. This deduction allows homeowners to deduct mortgage interest payments on both a principal residence and one vacation property to reduce their income taxes due. But if you’re a renter, no such luck: someone making minimum wage cannot deduct his rent payment.


If you’re rich enough to afford a yacht, it’s another story. So long as it contains a built-in galley, an installed toilet, and a sleeping berth—no fishing boats, please– you’re entitled to a tax deduction on the interest you pay to finance this “vacation property.”


Most other countries, by the way, don’t subsidize home ownership in the same way via the tax code. And it’s worth mentioning that some of these countries—such as Australia, Canada, France, and Germany— have not seen the same vicious boom-bust real estate cycle that we have.


10. Individual Retirement Accounts (IRAs): $ 21 million makes a nice nest egg.Congress has set up various programs that allow people to fund retirement accounts that accumulate, tax-free, until these savings are tapped to fund someone’s retirement. Regular IRAs allow a person to contribute money, on a “pre-tax basis.” No tax is due on the money when it’s earned, so long as it’s placed in an IRA account. Nor is any tax due on interest or dividends earned, or the increase in the value of the investment. Income tax is only due when sums are withdrawn, after a person hits retirement age, and if a person dies before he withdraws his money, this money isn’t subject to estate tax.


The maximum IRA contribution limit is $ 5500 annually (rising to $ 6500 for those over 50). Similarly, many Americans participate in 401(k) plans offered by their employers. With these plans, the maximum annual contribution is $ 17,500 (increasing to $ 23,000, for those over 50). Finally, certain types of pension plans—used by law firm partnerships, consulting firms, joint medical practices, and sole proprietors—allow individuals to contribute as much as $ 50,000 to a retirement plan, under similar tax-advantaged conditions.


So, we wonder, with such clear contribution limits in place, how did Mitt Romney end up with between $ 21 million and $ 102 million in a tax-free retirement account, as he himself reported in his tax returns?


If Mitt contributed the current annual maximum donation — $ 50,000 — for 20 years, he’d only end up with a contribution of $ 1 million. Where did the rest of the money come from? It must be from the returns he earned on his investment. As the rest of us know when we look at our 401(k) statements, it’s, ahem, extremely unusual — some would say next to impossible– for an investment to increase by 20 times, or 100 times, even if we hold it for 20 years. These wonderful returns could be the result of good fortune, but more likely are the result of the best tax advice, with Mitt’s IRA able to invest on favored terms not available to anyone else. 


The only reason we know about Mitt’s spectacular run of luck with his IRA is that he was forced to disclose his income tax returns when he decided to run for president. How many other 1 percenters, we wonder, have also been similarly lucky with their retirement plans?


The solution to America’s retirement crisis might be to give Mitt a job as retirement czar, showing the rest of us how we can earn similar stunning rates of return on our retirement savings. This could be a bipartisan initiative, with newly unemployed Hilary Clinton chipping in expertise on how to trade cattle futures.


Thu, 04/11/2013 – 05:44


 
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10 Tax Dodges That Help the Rich Get Richer