The rich increasingly dodge taxes paid by the rest

By DON McINTOSH, Associate Editor

David Cay Johnston has a tale that not just working people, but all Americans, need to hear. The New York Times reporter, who won a Pulitzer Prize in 2001 for a story exposing tax loopholes and inequities, visited Portland Oct. 22 to tell of “the Greenspan betrayal” and other “tales of the tortured American tax system.”

Speaking before the Portland City Club and the First Unitarian Church, Johnston spelled out how Federal Reserve Chairman Alan Greenspan is in effect helping to con working people out of a decent retirement.

Johnston set out 10 years ago to find out how the tax system really works, as opposed to how people think it works or politicians say it works.

His conclusions are contained in a book, Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich – and Cheat Everybody Else.

Reversing decades of progress in the other direction, since 1970 the rich have been getting richer, and the poor, working people and the middle class have been losing ground.

“One of the major reasons we are seeing the change in income at the top is the changes in the tax structure,” Johnston said.

The rich pay less than they used to in income taxes, capital gains taxes, dividend taxes and estate taxes.

Income: The federal income tax, when it began in 1913, applied only to the highest incomes. It expanded to most wage earners after World War II, but it retained an essential fairness, since the tax is based on ability to pay. The poorest pay no tax, while as taxpayers go up in income, they pay a higher percentage. That fairness has been eroded by successive waves of tax changes benefitting the very rich. At the end of World War II, the top rate was 94 percent — on regular income above $200,000. That top rate drifted mostly downward until it reached 33 percent in 1988, and then went up in the Bush Sr. and Clinton years to about 40 percent. Under President George W. Bush, the top rate was cut again — to 35 percent.

Capital gains: In the Clinton and Bush Jr. years, the tax rate was also cut in half on capital gains — the increase in value of stocks or real estate when it is sold. The top capital gains tax rate fell from 28 to 20 percent under Clinton, and from 20 to 15 percent under Bush, Jr. A capital gains tax cut is by definition a tax cut for the rich. On average, capital gains make up 3 to 4 percent of the income of taxpayers earning less than $100,000 a year. But capital gains make up about 60 percent of the income of those earning over $10 million a year.

Dividends: Taxes on dividends have also fallen — from 70 percent in 1980 to 15 percent today.

Estate: Under a law passed by the Bush Jr. Administration, estate taxes are scheduled to fall from 50 percent to 0 percent through 2010.

Paying less in income tax, capital gains tax, dividend tax and estate tax, the wealthiest have been able keep much more of their wealth — and use it to make even more.

Bob McIntyre of the Washington, D.C.,-based Citizens for Tax Justice calculates that since the Reagan era, the cumulative value of all of the federal tax cuts adds up to roughly $2.8 trillion. In other words, a very sizable portion of today’s $7.4 trillion federal debt is the result of these tax cuts.

What makes the tax cuts on the wealthiest especially unfair is the fact that taxes on working people have been going up at the same time. Medicare taxes, in response to rising health care costs, have risen from 1.8 to 2.9 percent, split between employees and employers.

Changes to Social Security have been more significant still. Since its founding in 1935, Social Security was always a “pay as you go” system, funded by a flat tax with half paid by the employer and half by the employee (on income up to a certain amount, currently $90,000). In other words, today’s workers and employers pay to support today’s retirees.

But in the ’70s and ’80s, a change was made, on the recommendation of a commission chaired by Alan Greenspan. The retirement age was raised, benefits above a certain level would now be taxed, and the Social Security payroll tax was increased from 9.9 to 12.4 percent.

Now, workers were to pay in advance for future benefits, with the money held in a “trust fund,” which is “loaned” to the federal government at interest, currently 6 percent. Last year, for example, Social Security took in $531 billion in taxes and paid $479 billion in benefits and administrative costs. The difference was added to the trust fund, which totalled $1.5 trillion at the beginning of 2004.

The theory was that this extra tax revenue would help the federal government pay down its debt, so that when the baby-boom generation came due for retirement, it would be feasible for the government to borrow money again.

Instead, the government cut taxes on the richest.

Looked at one way, the federal government increased taxes on workers by a cumulative $1.5 trillion, and decreased taxes on the wealthiest by a cumulative $2.8 trillion.

Back to Alan Greenspan, then. He was chair of the commission that advocated increasing Social Security taxes in the 1980s. Then as Federal Reserve chairman, he spoke in favor of the 2001 Bush tax cuts on the very rich, which exacerbated the budget deficit. He has since advocated making those cuts permanent. And now this year, he has been telling Congress that because of the deficit, the Social Security retirement age will need to be raised (by indexing it to increases in lifespan) and benefits will need to be cut (by changing the formula used to calculate cost-of-living increases.)

It’s a bait-and-switch Johnston calls a betrayal, though he adds it should surprise only those who were taken in by Greenspan’s image in the financial press as a politically neutral technocrat.

In fact, Greenspan is a Republican conservative, appointed by Reagan to head the Federal Reserve, which sets interest rates. Greenspan was well-liked by Wall Street, and Clinton reappointed him on condition that he kept interest rates low. Reappointed by Bush Jr., Greenspan has been become a high-profile spokesman for conservative ideology of small government and low taxes on the wealthy.

That’s why critics like Johnston are now painting Greenspan as a throwback to discredited “laissez-faire” economics, and out of touch with the modern era.

“All wealthy societies have high taxes,” Johnston said, because to have a well-educated workforce, a well-maintained transportation system, and a court system to enforce contracts, costs money.

But instead of making these investments, America has been cutting back, lowering taxes on the wealthiest, and borrowing to cover the deficit.

“But you can’t keep borrowing money you don’t have,” Johnston said.

Responsibility to future generations requires that expenses be matched by revenue. Johnston said the “national industrial wage economy” America once had has been changing into a “global services asset economy.” But the tax system hasn’t changed to catch the new forms of wealth.

“We need a tax system for our era.”

Unfortunately, he said, “tax” has become the vilest four-letter word in Congress. “There’s no rational discussion of it anymore.”

“But if we don’t fix the tax system,” Johnston said, “America will not endure.”

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