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How the rich rob the poor and the politicians make it all...
Perfectly legal

May 28, 2004 | Pages 6 and 7

NICOLE COLSON looks at how the tax system lets the rich off the hook--at the expense of working people.

THE SYSTEM is rigged so that the wealth of U.S. society "trickles up," not down--from the poor and working class into the pockets of the rich. There's no other conclusion to draw from the growing gap between rich and poor in the U.S.

Between 1970 to 2001, the U.S. economy more than doubled in size. But working people didn't see any of the benefits of this huge increase in wealth. Over the three decades leading up to 2000, the 90 percent of U.S. households on the bottom end of the income ladder saw no increase at all in income on average, after adjusting for inflation.


Source: David Cay Johnston, Perfectly Legal, Penguin 2003

The top 10 percent, on the other hand, nearly doubled their income on average over the 30 years. By 2000, the wealthiest 0.01 percent of taxpayers--just 13,400 households--had an average annual income of $24 million, 560 times the average household.

How have the rich grown so unimaginably wealthy? There are many factors involved--above all, Corporate America's attack on working-class living standards by squeezing workers' wages and benefits. But one little-noticed reason has to do with the tax system.

Over the past 30 years, Washington politicians have deliberately shifted the tax burden off the rich and corporations, and onto workers and the poor. In his book Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super-Rich--and Cheat Everybody Else, journalist David Cay Johnston details how the tax system itself is helping to enrich a tiny elite at everyone else's expense.

During the Clinton years, the share of national income going to the richest 400 taxpayers doubled from 0.5 percent to 1.1 percent. But the portion of this super-rich's income that went to federal income taxes fell by 16 percent--even though it rose for everyone else by 18 percent.

As Johnston points out, this is often the result of outright tax giveaways to the wealthy and elite--such as allowing the rich to "defer" taxes for years on income held in corporate trusts. Or there's the fact that taxes on capital gains--the source of more than half of income for the richest 0.01 percent--have been slashed several times, from a rate of 28 percent in 1987 to just 15 percent in 2003.

There are plans for new giveaways, too--such as the Bush administration's ongoing attempt to get rid of the estate tax. Bush and Co. claim that repeal is necessary in order to save "family farms" from going bankrupt after being subject to the estate tax--though reporters have never been able to find a single example of this happening.

In fact, only the wealthy will benefit if the estate tax is eliminated. Just 2 percent of the 2.4 million Americans who died in 2000 left an estate that owed any taxes--because estates worth up to $1.3 million can be passed on virtually tax free.

Overall, the system is rigged to let business owners, investors and landlords play by a different set of rules--which are packed with ways to concoct deductions, hide income and so on. Thus, for example, the latest innovations in the tax code give new meaning to the term "friendly" skies.

Take former General Electric CEO Jack Welch. "Neutron Jack"--as he was nicknamed for having slashed the jobs of 100,000 GE workers--was given a luxury retirement package on the company dime that included a Manhattan apartment at Trump Towers, maids and linen service, chauffeured limousines and 11 country club memberships.

But the best perk of all was a corporate jet at his disposal--a luxury Boeing 737 Business Jet, equipped with a boardroom, bedroom suite and shower. The plane cost an estimated $3.5 million a year to operate, and though Welch paid nothing to use it, each flight he took was supposed to be taxed as a form of income.

But because the formula that Congress uses to calculate the tax is so discounted, the taxes that Welch owed for a flight from New York City to Paris were approximately $500. In other words, it was cheaper for Welch to fly in the luxury of the company's Boeing 737 than to fly coach!

Beyond the legal ways of skipping out on their taxes, there are hundreds of illegal and "not-quite-illegal" scams that involve shifting wealth into a variety of shelters and hedge funds. But with the blessing of the Bush administration, says Johnston, the Internal Revenue Service (IRS) regularly looks the other way--and lets the crooks off the hook.

In some cases, IRS agent Peter Coons was specifically told not to pursue cases against wealthy and politically connected families. "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.

Wealthy corporations get special treatment, too. By 2002, the portion of federal revenue coming from corporate taxes had fallen to below 10 percent--down from approximately 33 percent during the Eisenhower administration.

Overall, in 2002, the IRS assessed just 22 negligence penalties against 2.5 million U.S. corporations, a decline of more than 99 percent from 1993, when nearly 2,400 penalties--a pitifully low number itself--were imposed. Meanwhile, corporations have been using legal tax shelters and creative "massaging" of tax laws to get away with tens of billions.

Take "inversion." In an inversion, a U.S.-based corporation creates an offshore subsidiary for about $27,000 (the cost of a mail drop, usually in Bermuda)--and then transforms the subsidiary into the corporate parent.

Presto--the U.S. company becomes the subsidiary of the new, offshore company, which escapes paying U.S. taxes by charging its "subsidiary" for everything from management services to use of the corporate logo. What would have been taxable profits are transformed into tax deductions.

Companies that have inverted include the now-bankrupt Tyco and Global Crossing--which also, as it turns out, "inverted" much of their stockholders' investments and employees' pensions 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.

While the rich are paying far less in taxes, to make up the difference, both Democrats and Republicans have systematically shifted the tax burden onto the shoulders of everyone on the lower rungs of the income ladder. 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. 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. Thus, a well-paid autoworker pays as much in Social Security taxes each year as Bill Gates.

These tax revenues aren't kept in a "lockbox" as many believe. Since the Reagan administration, Social Security tax payments have gone primarily to subsidize tax cuts for the wealthy and increased government spending on the military.

Another tax shift is coming in the form of the Alternative Minimum Tax (AMT). The AMT is a tax that was designed to go after the rich--those making the equivalent of more than $1 million in 2003 dollars.

However, a provision in the Bush tax cut proposal lowers the income threshold for taxpayers to become eligible for the AMT. By 2010, an estimated 35.6 million U.S. families will have to pay the AMT--including an incredible 97.2 percent of families with two children who make between $75,000 and $100,000 a year, which is what some two-income working-class make annually. By 2010, just 5 percent of AMT revenue will come from taxpayers making more than $1 million a year.

And as part of the Bush tax cut, Congress actually made sure that for the 130,000 richest families--as well as small businesses with revenues of up to $5 million--the AMT will disappear altogether. As Johnson 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."

IRS goes after the poor

WITH THE rich scamming billions on their taxes every year, you'd think that the IRS would spend a lot of time going after the "big fish." You'd be wrong.

Under Bill Clinton's Democratic administration, Congress allocated extra money to the IRS beginning to audit the poor--even as it reduced the IRS's ability to audit corporations and the rich. By 2001, the IRS audited eight times as many of the working poor who applied for the earned income tax credit--a tax break for people with low-income jobs--as taxpayers making $100,000 or more.

Maritza Reyes, a domestic worker from Los Angeles making just $7,000 a year, was audited because her address differed by a half digit from that of her children's father. In Reyes' case, when her marriage broke up, she moved with her youngest child to a cottage at the back of the property where she had been living--because she couldn't afford anything else. Her ex-husband stayed in the house on the front of the lot with the couple's older child.

The IRS sued, claiming she illegally claimed to be head of a household. Maritza tried to explain the situation at the IRS office on several occasions. But because she speaks Spanish and had to rely on informal translations by whoever happened to be around, she couldn't get IRS agents to believe her--and the IRS went after her.

Luckily, she was able to find help through a tax clinic for low-income people run by a local law school, and a judge eventually threw the case out. But as Johnston notes, many others are not so lucky. Many of the working poor that the IRS audits are too poor to have a telephone, are unable to take time off work or don't know how to obtain documentation, such as birth certificates or marriage licenses.

Yet in 2003, Congress decided to punish the poor even further--requiring that as many as 5 million of those seeking the earned income tax credit prove in advance that they qualify by submitting strict marriage, birth and residency records within 60 days--even though, in some states like California, there is a two-year wait for copies of marriage licenses.

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