It’s not news that the 1% get off easy, but it still sucks. Here’s how to make Congress fix it.
By David Cay Johnston, DCReport
Editor-in-Chief
But there is a major problem: stealth welfare for the rich.
In good conscience, the Biden administration can’t overlook
this hidden welfare system for wealthy people who neither need nor deserve
a handout. Congress lets this elite group scoop up welfare money by the
boatloads.
Raising tax rates on incomes above $400,000 and on corporate profits, as Biden pledged, will bring in revenue. It will make our tax system less unfair. That’s faint praise.
The plan misses the big money; our system of
upward redistribution, which I’ve spent decades documenting from the public
record.
The core problem: Not all income is verified equally nor taxed equally, if at all. The current tax system is has big holes that can be closed easily by tweaking existing law. In terms of drafting a law—that’s easy.
Getting the American people to demand it and overcome the influence of those
who benefit is another matter entirely.
Earn Now, Pay Taxes Later
The first hole allows corporations and partnerships to earn now
but pay income taxes by-and-by.
The second hole is income from legal sources that the IRS never knows about, especially in real estate and art. We’ll examine this second hole in a future DCReport article.
Unlike you and me, corporations and certain partnerships large
enough to afford sophisticated advice — and super-rich individuals who own and
control big businesses — get to earn now and pay much later.
This happens because Congress requires them to keep two sets of
books. If that sounds like the kind of organized crime schemes made famous by
Eliot Ness in pursuing Al Capone, you got it right. What should be a crime is
legal thanks to Congress.
The number for income tax that a big company like Amazon puts on its
financial statement line does not indicate taxes actually paid. It’s not like
your W-2 wage statement of taxes withheld from your paycheck, which are
promptly turned over to our Treasury. That line (see Item 6) just shows the tax
that the company may, someday, pay.
Hidden
in Plain Sight
The actual taxes paid in any given year may be less than zero as
a company collects refunds on past taxes. Many big companies including Amazon have
enjoyed a negative income tax in recent years. Matthew Gardner of the Institute on Taxation and
Economic Policy explains more here.
Source: Visual Capitalist
Taxes actually paid are disclosed, sort of, in a footnote to the
financial statements. But even that is misleading because our government’s
disclosure rules lack transparency and integrity.
And the taxes that should be paid are known only if the very best IRS tax auditors conduct examinations.
But under rules that Congress
enacted two decades ago, the IRS must notify companies in advance of what they
are looking for. The IRS auditors are not allowed to pursue anything else they
find, no matter how much money is at stake, unless they have clear evidence of
fraud. That’s official corruption.
Contrast this with Congress requiring your employer, pension plan, mutual fund, bank and stock brokerage to report how much money you collected.
Petty merchants have the total of their credit card payments
reported to prevent understating revenue. And it’s all automated, making
inexpensive the cost of ensuring that gross incomes are reported fully. The
system for making regular people pay taxes is almost perfect in its
effectiveness.
Taxes
as Profits
Complaints about the burden of taxes on the wealthiest among us
and corporations make the front pages in the evening network news frequently.
But you almost never hear that many of these complainers profit off our tax
system. That’s because through the modern alchemy of accounting and tax rules
they can convert the burden of taxes into a profit center.
The trick is to get a loan from Uncle Sam at 0% interest. Better
yet, take out a new loan every year and the amount of capital the taxpayers are
giving you to invest snowballs.
How do you apply for and qualify for these 0% interest loans?
That’s one of the best parts. You don’t. Congress hands them out automatically
under our accounting and tax rules. For simplicity, we will ignore inflation in
explaining this program of stealth welfare for the rich.
Don’t
Pay for 30 Years
Now please imagine our government sent you a letter today saying
you can keep all the taxes withheld from your 2020 paychecks for the next 30
years, but you must pay up at the end of 2050.
Now invest that money in a stock that pays no dividend and
increases in value at a modest 4% annual rate of return through 2050.
For each dollar of deferred tax, you will have $3.24 in 2050.
After paying the $1 tax you are left with $2.24. You’ll owe a 20% long-term
capital gains tax on that money. That leaves you with $1.79. You are richer
than if withholding took the tax in 2020.
If the investment you made grew at a 10% annual rate, which
wealthy individuals with sophisticated advisers should be able to achieve, the
riches that flow from tax deferral balloon. Each dollar of deferred tax becomes
$17.45. After paying both the deferred tax and the 20% levy on the capital gain
you walk away with $13.16.
See how tax deferral can make you rich? See how it enables
dynastic wealth?
How
to Become a Billionaire
Now multiply that $13 by millions and billions. And now further
imagine you do that year after year, as many corporations controlled by a
single individual do. Except for his propensity to squander money and cheat,
Donald Trump’s solely owned Trump Organization really would be worth more than
$10 billion today thanks in good part to legal tax deferral.
Wage-earners, small and medium-sized businesses are not allowed
this deferral, except in retirement plans.
But you don’t get the same tax deal.
When you collect from your pension, IRA or 401(k) you won’t
enjoy the low rates Congress levies on capital gains even though most of the
money in your retirement plan comes from such gains.
Congress says you must pay at the higher rate for labor, up to
37%. Except for those so poor they are exempt from all income taxes you will be
burdened more than the owner of a company that deferred.
More
for Their Heirs, Too
Also, while business owners can exempt more than $11 million from the estate tax, whatever is left in your retirement plan when your time runs out will be fully taxed before your heirs collect a dollar. And it will be taxed at the highest rate your heirs pay.
Indeed, under new rules if you leave
$4 million or more your heirs will be taxed at the highest income tax rate
while heirs of a business owner leaving the same would pay nothing.
Paying higher tax rates and losing out on the estate tax
exemption are not the only way Congress puts workers at a disadvantage to the
wealthiest business owners.
Those 0% interest loans are not free. Someone had to extend the
loan money. That someone is you. A dollar of tax not paid is no different from
a dollar given out by our government. And in this area, we are talking in
billions, perhaps trillions, of dollars of interest-free loans.
Here’s how you pay. Congress spends each deferred $1 today. To
cover that expense, it borrows money equal to what is deferred.
At the current blended average federal borrowing rate of about
2%, the value of the tax-deferred for three decades will cost you 81 cents in
interest paid on government debt.
But wait, it gets worse.
After taking those interest payments into account our government
will net 19-cents on each dollar of tax-deferred for 30 years.
Warren
Buffet Gets a Free Loan
One of Warren Buffett’s companies has a loan that, the last time
I found it in his disclosure filings, was worth $660 million. Half of it would
still be unpaid 38 years later. With apologies to Mel Brooks, it’s nice to be
Warren.
Thanks to dynasty trusts that help generations build wealth even
as the number of descendants expands and to the eternal nature of corporate
persons, deferring a tax is one of the most lucrative opportunities out there.
These are riches made first in the marketplace, where riches
should be made. But then they grow. thanks to the stealth welfare program.
How
to Change It
Solutions?
- Require one set of corporate books
- Have government define profits
- Ditch the cumbersome system of reconciling Generally Accepted Accounting Principles to tax rules
- Ensure that income taxes are paid under the same rules as your pay – when you make your money
Congress could end all existing deferrals. It did in 2017 for
profits siphoned out of America untaxed and nominally held overseas. The
Republicans established that principle in the Trump/Radical Republican Tax Law
in 2017.
To prevent a shock to the system, Congress could require
companies to:
- declare how much is deferred
- send the IRS a detailed report documenting this
- allow companies to spread tax payments across four years with an annual interest charge on the unpaid balance
A rate equaling our government’s blended-average borrowing rate
would be a boon to these companies. That rate plus 1 percentage point —
so about 3% — would encourage prompt payment.
Failure by the Biden administration and the majorities in
Congress to address this stealth welfare for the rich would be a betrayal of
the voters.
It would run contrary to the promise in the preamble to our
Constitution to promote the general welfare.
But unless you spread the word so people know how they are
paying taxes to make zero-interest loans, this burden on working Americans will
continue.
ACTION
BOX / What You Can Do About It
Tell
President Joe Biden and your senators and representatives that it’s time they
fix the inequities in our tax laws that let the richest Americans get by with
paying much less than you or your neighbors.
Call
the White House at 202-456-1414.
Call
the U.S. Capitol at 202-224-3121. Ask for your senators or representative by
name.
Find your representative here and write
to them at: [Name] U.S. House of Representatives / Washington, D.C. 20515
Find your senators here and write to them
at: [Name] United States Senate / Washington, D.C. 20510
The Ways and Means Committee is the tax-writing committee in the House of Representatives. Contact chair Rep. Richard Neal (D-Mass.) at 202-225-3625. The ranking Republican is Rep. Kevin Brady (R-Texas) at 202-225-4021.
