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Home / Articles / News / Cover Story /  9 Reasons the Rich Get Richer Page 2
Cover Story

9 Reasons the Rich Get Richer Page 2

A tax expert's story on tax myths may not be sexy, but it could arouse you—and not in a good way.

By David Cay Johnston
Posted // April 13,2011 -

JohnPaulson.jpg4. Many of the very richest pay no current income taxes at all.
John Paulson (right), the most successful hedge-fund manager of all, bet against the mortgage market one year and then bet with Glenn Beck in the gold market the next.

Paulson made himself $9 billion in fees in just two years. His current tax bill on that $9 billion? Zero.

Congress lets hedge-fund managers earn all they can now and pay their taxes years from now.

In 2007, Congress debated whether hedge-fund managers should pay the top tax rate that applies to wages, bonuses and other compensation for their labors, which is 35 percent. That tax rate starts at about $300,000 of taxable income—not even pocket change to Paulson, but almost 12 years of gross pay to the median-wage worker.

The Republicans and a key Democrat, Sen. Charles Schumer of New York, fought to keep the tax rate on hedge-fund managers at 15 percent, arguing that the profits from hedge funds should be considered capital gains, not ordinary income, which got a lot of attention in the news.

DonaldTrump.jpgWhat the news media missed is that hedge-fund managers don’t even pay 15 percent. At least, not currently. So long as they leave their money, known as “carried interest,” in the hedge fund, their taxes are deferred. They only pay taxes when they cash out, which could be decades from now for younger managers. How do these hedge-fund managers get money in the meantime? By borrowing against the carried interest, often at absurdly low rates—currently about 2 percent.

Lots of other people live tax-free, too.

I have Donald Trump’s (left) tax records for four years early in his career. He paid no taxes for two of those years.

Big real-estate investors enjoy tax-free living under a 1993 law President Bill Clinton signed. It lets “professional” real-estate investors use paper losses like depreciation on their buildings against any cash income, even if they end up with negative incomes like Trump.

TerrenceWalls.jpgFrank and Jamie McCourt, who own the Los Angeles Dodgers, have not paid any income taxes since at least 2004, their divorce case revealed. Yet they spent $45 million in one year alone. How? They just borrowed against Dodgers ticket revenue and other assets. To the IRS, they look like paupers.

In Wisconsin, Terrence Wall (right), who unsuccessfully sought the Republican nomination for U.S. Senate in 2010, paid no income taxes on as much as $14 million of recent income, his disclosure forms showed.

Terrence Wall was asked about his living tax-free while working people pay taxes; he had a simple response: Everyone should pay less.

5. And (surprise!) since Reagan, only the wealthy have gained significant income.
The Heritage Foundation, the Cato Institute and similar conservative marketing organizations tell us relentlessly that lower tax rates will make us all better off.

“When tax rates are reduced, the economy’s growth rate improves and living standards increase,” according to Daniel J. Mitchell, an economist at Heritage until he joined Cato. He says that supply-side economics is “the simple notion that lower tax rates will boost work, saving, investment and entrepreneurship.” 

One way to look at it is with marginal tax rates. The marginal rate is the highest rate you pay on your income. Since tax rates increase as you make more money, the next dollar you earn will be taxed at that highest rate. When Reagan was elected president, the marginal tax rate for income was 70 percent. He cut it to 50 percent and then 28 percent starting in 1987. It was raised by George H.W. Bush and Clinton and then cut by George W. Bush. The top rate is now 35 percent.

ItWasn_tAlwaysLikeThis.jpgSince 1980, when President Reagan won election promising prosperity through tax cuts, the average income of the vast majority—the bottom 90 percent of Americans—has increased a meager $303, or 1 percent. Put another way, for each dollar people in the vast majority made in 1980, in 2008, their income was up to $1.01.

Those at the top did better. The top 1 percent’s average income more than doubled to $1.1 million, according to an analysis of tax data by economists Thomas Piketty and Emmanuel Saez. The really rich, the top 10th of 1 percent, each enjoyed almost $4 in 2008 for each dollar in 1980.

The top 300,000 Americans now enjoy almost as much income as the bottom 150 million, the data show.

6. When it comes to corporations, the story is much the same—fewer taxes.
Corporate profits in 2008, the latest year for which data is available, were $1,830 billion, up almost 12 percent from $1,638.7 in 2000. Yet, even though corporate tax rates have not been cut, corporate income-tax revenues fell to $230 billion from $249 billion—an 8 percent decline, thanks to a number of loopholes. The official 2010 profit numbers are not yet added up and released by the government, but the amount paid in corporate taxes is: In 2010 they fell further, to $191 billion—a decline of more than 23 percent compared with 2000.

7. Some corporate tax breaks destroy jobs.
Despite all the noise that America has the world’s second-highest corporate tax rate, the actual taxes paid by corporations are falling because of the growing number of loopholes and companies shifting profits to tax havens like the Cayman Islands.

And right now, America’s corporations are sitting on close to $2 trillion in cash that is not being used to build factories, create jobs or anything else, but act as an insurance policy for managers unwilling to take the risk of actually building the businesses they are paid so well to run. That cash hoard, by the way, works out to nearly $13,000 per taxpaying household.

A corporate tax rate that is too low actually destroys jobs. That’s because a higher tax rate encourages businesses (who don’t want to pay taxes) to keep the profits in the business and reinvest, rather than pull them out as profits and have to pay high taxes.

The 2004 American Jobs Creation Act, which passed with bipartisan support, allowed more than 800 companies to bring profits that were untaxed but overseas back to the United States. Instead of paying the usual 35 percent tax, the companies paid just 5.25 percent.

The companies said bringing the money home—“repatriating” it, they called it—would mean lots of jobs. Sen. John Ensign, a Nevada Republican, put the figure at 660,000 new jobs.

Pfizer, the drug company, was the biggest beneficiary. It brought home $37 billion, saving $11 billion in taxes. Almost immediately it started firing people. Since the law took effect, it has let 40,000 workers go. In all, it appears that at least 100,000 jobs were destroyed.

Now, Congressional Republicans and some Democrats are gearing up again to pass another tax holiday, promoting a new Jobs Creation Act. It would affect 10 times as much money as the 2004 law.

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REPLY TO THIS COMMENT
Posted // October 24,2012 at 15:46

Not one word about the Federal Reserve or the debt within all of this tripe. The author is just another sycophant who wants to funnel more stolen money into his beloved state.