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Thursday, August 23, 2012

Shameless Tax Loopholes

Sen. Lindsey Graham says tax-avoiding gimmicks are "American."

Don't just hang
Your head and moan,
Buy a loophole
Of your own.

One intriguing aspect of today's taxation debate is that it's so shameless.

Republican leaders aren't embarrassed in the slightest to shill for the rich. Consider this gem from Sen. Lindsey Graham: "It's really American to avoid paying taxes, legally."

A few examples will illustrate what's wrong. Much of America's great wealth comes not from the sweat of one’s brow, but from asset growth — stocks mostly, but also real estate, art, and collectables. That labor-free income is taxed at a flat 15 percent, not our normal sliding IRS scale.

Dividends, the bulwark of the wealthy, are taxed at 15 percent too. This is why Warren Buffett, one of the world's richest men and foremost philanthropists, pays a lower tax rate than most card-carrying members of the middle class.

Someday, the 81-year-old Oracle of Omaha will finally move on to trading ethereal assets in the sky. At that point — after a 35-percent estate tax — his remaining earthly holdings will pass to his heirs with no tax at all on their increased value. That's all exempt.

His kids will simply list their new portfolios as valued at the time of his death, not when he actually bought them. When his descendents eventually do sell, there will be no tax on those accrued profits.

Buffett opposes this kind of arrangement and that's why he's giving 99 percent of his fortune to charity. The solutions here are fairly obvious: tax capital gains and dividends like regular income and end the windfall for heirs who avoid taxes on their late pop's capital gains. This isn't rocket science — it's political science, a much murkier discipline.

Another increasingly popular reform (enthusiastically backed by American nurses) would levy a tiny federal sales tax on securities, maybe between a quarter and a half of 1 percent.

This "Robin Hood" tax on financial transactions wouldn't hurt much when you buy a share of Apple, but for electronic speculators who move shares around like ping pong balls, it could bite enough to restrain the kind of rampant speculation that triggers financial crises. And the revenue generated every year could potentially raise as much as $300 billion.

Corporate loopholes pose another glaring challenge. When General Electric pays no taxes at all and Google pays precious little, it is small wonder that the Occupy movement sprang up.

Perhaps the biggest loophole is the one that lets American companies pretend they are really foreign corporations not subject to our taxes. The British Virgin Islands, for example, has a population of 30,000 people but hosts 457,000 companies. Very entrepreneurial, those islanders.

And the famous Ugland House on Grand Cayman, pictured occasionally in The New York Times, boasts 19,000 corporate mailboxes. The beaches are nice too.

Then there is the gimmick we all use — buying stuff online, which usually means avoiding local sales taxes. This undermines both local stores and local governments.

Even if — and this is quite unlikely — the Democrats wind up with control over both houses of Congress and the presidency starting in 2013, there's no reason to count on them to cure all these and other inequities. Money pretty much controls both parties, and money isn't howling for reform.

If you seek change, voting surely can help get things rolling. But as Emma Goldman put it, "If voting could change things, they wouldn't let us do it."

OtherWords columnist William A. Collins is a former state representative and a former mayor of Norwalk, Connecticut.