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International Socialist Review Issue 38, November—December 2004

"Trickle Up" Economics


Nicole Colson is a reporter for Socialist Worker.

WEALTH IS "trickling up"–from the poor and working class into the hands of the rich. From 1970 to 2001, the U.S. economy more than doubled in size after adjusting for inflation. However, the poor and working class saw almost none of this huge increase in wealth. By 2000, the wealthiest 0.01 percent–the 13,400 richest households in the U.S.–had an average annual income of $24 million, 560 times that of the average household. In all, those 13,400 richest households had more income than the 96 million poorest Americans.

It wasn’t always this way. Back in 1970, the top 0.01 percent of the population had about one hundred times the average annual income–still a huge gap, but nowhere near the disparity seen today. How have the rich grown so unimaginably wealthy? There are many factors involved–above all, Corporate America’s attack on working-class living standards that squeeze workers’ wages and benefits. However, one little-noticed reason has to do with the tax system. Over the past thirty years, politicians have deliberately lowered the tax burden on the wealthy and raised it for everyone else.

In his recent book Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich–and Cheat Everybody Else,1 reporter David Cay Johnston details how the tax system is helping enrich a tiny elite at the expense of everyone else.

Tax cut–or tax shift?

Over the past three decades, the tax burden has been increasingly shifted–by Republicans and Democrats alike–onto the shoulders of those on the lower rungs of the economic ladder.

"When President Bush and Congress trumpet, ‘Here’s a tax cut’, we say, ‘Taxpayer beware!’" Chuck Collins, co-founder of United for a Fair Economy, stated recently. "Unless you are super-rich, it’s a tax SHIFT, not a cut. Non-wealthy taxpayers will pay for these tax cuts with increased state and local taxes or cuts in public services." During the Clinton years, for example, the share of income going to the top 400 taxpayers doubled from 0.5 percent to 1.1 percent. The portion of income from those wealthiest 400 households that went to federal income taxes fell by 16 percent, while rising for everyone else by 18 percent. According to Johnston, today most people making $60,000 a year pay a larger share of their income in federal taxes than the richest 400 American households, whose average income in 2000 was $174 million each.

One of the biggest tax shifts comes in the form of Social Security payroll taxes. From 1984 to 2002, the government collected $1.7 trillion more in Social Security taxes than it paid out to retirees, widows, and orphans. But Social Security taxes hit the working class the hardest–since the government takes 6.2 cents out of every dollar, but only up to a ceiling of approximately $87,000. In other words, a well-paid autoworker pays as much in social security taxes each year as Bill Gates. The taxes aren’t kept in a "lockbox" as many believe, either. Since the Reagan administration, they’ve gone primarily to subsidize a tax cut for the wealthy and increased government spending on the military.

Another tax shift is coming in the form of the Alternative Minimum Tax (AMT)–an extra tax that some people are expected to pay in addition to their regular income tax. The AMT was designed to prevent the rich–those making the equivalent of more than $1 million in 2003 dollars–from using various loopholes to pay little or no taxes. A provision inside the Bush tax cuts, however, lowers the income threshold for eligibility for the AMT. By 2010, an estimated 35.6 million families will be forced to pay the AMT–including a staggering 97.2 percent of families with two children who make between $75,000 and $100,000, what many two-income working-class families make. By then, just 5 percent of AMT revenue will come from those making more than $1 million a year. As a bonus for the rich, part of the Bush tax cut included a provision that got rid of the AMT altogether for the country’s 130,000 richest families, as well as small businesses with revenues of up to $5 million.

As Johnston says, "Fundamentally, that a tax cut designed to catch aggressive rich tax avoiders is being applied to middle-class families to finance tax cuts for the super rich shows how both parties in Washington have become two wings of the same party. The party of money."

Do the rich pay more?

According to Johnston, when the 2000—2003 Bush tax cuts are fully in place in 2010, the share of taxes paid by the bottom 95 percent of taxpayers will rise by 3.8 percent, while falling 3.8 percent for the richest 5 percent. United for a Fair Economy estimates that between 2002 and 2004, a full $197 billion in new tax breaks went to the top 1 percent of American taxpayers.

The Federal Bureau of Labor Statistics has calculated that for 2001, taxes at all levels of government consumed 18 percent of the income of the poorest one-fifth of Americans–whose average annual income for that year was just $7,946. For that same year, taxes at all levels of government consumed 19 percent of the incomes of the wealthiest one-fifth of Americans–people whose average annual household income was $116,666.

As Johnston points out, in many cases it’s the result of outright tax giveaways to the wealthy and elite–such as allowing the rich to "defer" taxes for years on income that is held in corporate trusts, often at huge profits. Taxes on capital gains–the source of more than half of income for the richest 0.01 percent–were slashed several times, from a rate of 28 percent in 1987 to just 15 percent in 2003. The Bush administration is attempting to get rid of the estate tax–claiming that repeal is necessary in order to save "family farms" from going bankrupt, even though reporters have never been able to find a single example of it happening. In fact, only the wealthy will benefit. Just 2 percent of the 2.4 million Americans who died in 2000 left an estate that owed any taxes–because estates up to $1.35 million in assets can be passed on virtually tax-free.

Overall, the system is rigged to let business owners, investors, and landlords play by one set of rules, which are filled with ways to make up deductions, hide income, and avoid taxes. Beyond the legal ways of skipping out on their taxes, there are hundreds of illegal and "not-quite-illegal" ways that the rich avoid paying taxes by shifting their wealth into a variety of shelters and hedge funds.

But with the blessing of the Bush administration, the IRS has looked the other way time and time again to let the crooks off the hook. In one case, IRS agent Peter Coons was told not to pursue cases against the wealthy and well-connected–like Oakland Raiders owner Al Davis and San Francisco’s politically connected Alioto family–because it "will look bad" if cases against prominent people are pressed. "While influential taxpayers were getting a break, myself and many division managers were being pressured to establish quotas and collect more revenues from the average person," Coons told the San Jose Mercury News.

Corporate welfare

Wealthy corporations get special treatment, too. By 2002, the portion of federal revenue coming from corporations had fallen to below 10 percent–down from approximately 33 percent during the Eisenhower administration. According to United for a Fair Economy, between 2002 and 2004, there was a 67 percent drop in the share of federal revenues contributed by corporations and a 17 percent rise in individuals’ share.

Yet for years, endless corporate tax shelters and creative "massaging" of the tax laws have allowed corporations to get away with tens of billions. From 1983 to 1999, for example, the profits that U.S. corporations made off of various tax havens in Bermuda, the Cayman Islands, and eleven other countries rose a whopping 735 percent, to $92 billion. In contrast, corporate profits in countries that are not tax havens grew only 130 percent, to $114.2 billion.

It’s no wonder why companies choose to move offshore as much as possible. While the official U.S. tax rate for corporations is 35 percent, the official federal tax rate on corporate profits in tax havens ranges from 1 percent to 12.5 percent.

But to qualify for a tax haven takes some pretty nimble legal gymnastics–like the process known as "inversion." In an inversion, U.S.-based corporations create an offshore subsidiary for about $27,000 (the cost of a mail drop, usually in Bermuda) and then transform the subsidiary into the corporate parent company–making the U.S. company the subsidiary of the new, offshore company. The Bermuda parent escapes U.S. taxes by charging its U.S. "subsidiary" for everything from management services to use of the corporate logo–turning what would once have been taxable profits into tax deductions.

Companies that have inverted include the now-bankrupt Tyco and Global Crossing–which also, as it turned out, inverted much of their stockholders money and employees’ pensions right into corporate executives’ pockets at the same time.

Tyco, for example, estimated that it saved about $450 million in taxes every year after it made Bermuda its "headquarters" in 1997. Likewise, in five of the last six years before it went bankrupt, energy giant Enron managed to pay zero federal taxes because, during that time, the company created 881 subsidiaries. Of those, 692 were located in the Cayman Islands.

Even if corporate crooks get caught cheating on their taxes, they probably won’t have to pay. For the right price, corporations can buy a letter from a legal firm saying that their tax schemes are probably legal–even if they aren’t. These letters act as a kind of "get out of jail free" card, almost guaranteeing that the government won’t try to assess penalties for any corporate tax evasion. Enron paid $1 million for just such a letter from a tax firm set up by Ernst & Young. Overall, in 2002 the IRS assessed just twenty-two negligence penalties against 2.5 million corporations, a decline of more than 99 percent from 1993, when nearly 2,400 penalties–an already pitifully low number–were imposed.

As Johnston concludes,

There is much talk these days about our income tax as a socialist redistribution scheme. That is indeed what it has become. But the scheme is not to take from the rich and give to the poor, deserving or not, as the courtesans of wealth in Washington would have us believe as they pontificate on the Sunday morning talk shows. Rather, as Orwell taught us, ours is like all systems in which some animals are more equal than others–it is the pigs who grow economically fat off the tax system.

The gravy train that never ends

If you thought that an election year might put the damper on politiclans handing out money to the rich, think again. On Monday, October 11, the Senate passed a bill showering $137 billion more in tax breaks for corporations. Ironically, the bill had its origins in moves

to replace a $5 billion annual tax break for American exporters that the World Trade Organization had ruled illegal. It ended this week with a 633-page behemoth that offers new tax giveaways to everyone from corporate titans like Boeing and Hewlett-Packard to an array of oil and gas producers, shopping mall developers, wine distributors, even restaurants. Many companies, like General Electric and Dell, are likely to end up with far more tax relief under the new bill than they had ever received from the old tax break. Some, like Exxon Mobil, never qualified for the old tax break at all but will enjoy tax savings now.2

According to the New York Times, "Everybody involved was a winner." Keith Ashdown, vice president of Taxpayers for Common Sense called it "a perfect storm for pork."3

This comes on the heels of a bipartisan vote to pass Bush’s most recent tax cut package in September, which includes business tax breaks worth $13 billion. Kerry didn’t show up for the vote. Nevertheless, always ready to prove his conservative, pro-business credentials, he issued a statement supporting the tax cuts.4 Only one Democratic Senator and a third of Congressional Democrats voted against it. In the context of the billions spent for a war supported by both parties, any future deficits caused by handouts to corporations and bloated military spending will be taken out, once again, of social programs for the poor and working class–no matter who is in office by the time you read this.

1 David Cay Johnston, Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich–And Cheat Everybody Else, (New_York: Penguin USA, 2003) 

2 Edmond L. Andrews, "How Tax Bill Gave Business More and More ," New York Times, October 13, 2004

3 Ibid.

4 Doug Ireland, "The Democrats Capitulate to the Supply-Siders," Direland, September 25, 2004.

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