Investigative Journalism that is as
Radical as Reality Itself.

The Great American Tax Debate Misses the Point

by EILEEN APPELBAUM

Casting the tax debate as an argument in which liberals want to use the tax system to reduce income inequality after the fact by taxing the wealthy at higher rates than middle and lower income classes, while conservatives favor flat taxes that tax rich and poor at the same rate, misses the main point.

Deregulation of the financial system over the last 35 years and tax preferences that benefit corporations and wealthy individuals have done much to increase the before-tax incomes of the top 1 percent. An army of tax accountants, many of them recruited from the IRS, has figured out how to push the envelope on tax avoidance for the big businesses and wealthy individuals that can afford their high-priced services. For these folks, tax accounting has been transformed from a service that makes sure that required taxes are paid to a profit center that manipulates the tax code to generate huge returns at the expense of the tax-paying public. Increasingly what we see in the United States is the growing importance of tax-payer financed capitalism.

There is no economic reason that the debt taken on by corporations should be treated differently in the tax code from the equity invested by shareholders, but it is. Corporations get to deduct the interest paid on debt from their earnings, thus reducing the corporate income tax they have to pay.

The tax code also provides an incentive for private equity firms, which plan to hold companies they acquire for their portfolios for just a few years, to load these companies with debt. In good times, this greatly increases the returns to investors. In poor economic conditions, this greatly increases the risk of financial distress and even bankruptcy, and imposes great costs on workers, creditors and communities. For investors with a time horizon measured in years and not decades, this is a risk worth taking for the promise of higher returns.

Tax preferences mean that income from owning stock is taxed at a far lower rate than income from working—a point made by Warren Buffet who famously pointed out that his secretary pays a higher tax rate than he does. The fiction that bonuses earned by partners in private equity and hedge fund firms is ‘carried interest’ that should be taxed at the lower rate on earnings from owning stock, rather than at the higher rate on ordinary income that ordinary workers and managers pay on their bonuses, boosts the income and wealth of these already wealthy economic players.

The use of aggressive tax avoidance schemes is rampant among big businesses and wealthy individuals. Setting up a subsidiary that lives in a file drawer in a tax haven and owns the company’s intellectual property and collects the royalties on it, or that owns the loans the company has made and collects the interest, allows financial institutions, pharmaceutical companies, and IT companies to park their profits outside the United States and defer taxes on this income indefinitely while waiting for a tax holiday to bring their profits home. Setting up so-called blocker corporations in offshore tax havens to launder taxable income for foreigners and pension funds, and turn it into nontaxable income is another favorite scheme.

Tax preferences and tax loop holes enrich the already wealthy and increase their incomes while starving the country of much needed tax revenue. The meaning of this rise in tax-payer financed capitalism is that the rest of us must either pay higher taxes or do without necessary services.

Eileen Appelbaum is a senior economist at the Center for Economic and Policy Research.

This article originally appeared on Economic Intelligence.

 

 


July 08, 2015
Norman Pollack
Post-Senescent Stage of Advanced Capitalism; EU and Greece
July 07, 2015
Bruce K. Gagnon
Sanders Bullshit Meter Goes Off the Charts in Portland, Maine
ANDRE VLTCHEK
In Ecuador, Fight for Mankind; In Greece, Fight for Greece!
Nile Bowie
Obama’s Pacific Trade Deal Trails Behind China’s Development Vision
Binoy Kampmark
Warrior Economist: the Varoufakis Legacy
Shamus Cooke
Unions Must Act Now to Survive Supreme Court Deathblow
Dave Lindorff
The Greek People Have Voted ‘No!’ to Austerity and Economic Blackmail
Mateo Pimentel
The Pope’s Letter: Neoliberalism and Fukushima
Raouf Halaby
Beware Those Who Speak With Forked Tongues
Ron Jacobs
The Grateful Dead: The Ship of the Sun Bids Farewell
Jonathan Cook
Hasbara Industry: Why Israel’s Army of Spin-Doctors is Doomed to Defeat
Rev. William Alberts
Charleston: a Reality Check on Racism in America
Ellen Brown
A Franciscan Alternative: the People’s Pope and a People’s Bank?
Colin Todhunter
The Warped World of the GMO Lobbyist
John Wight
Who Will Join With Greece?
W. T. Whitney
Colombia’s Fensuagro Union is Revolutionary, Persecuted, and Undaunted
Mel Gurtov
Keep It in the Ground, Obama
July 06, 2015
MICHAEL HUDSON
Greece Rejects the Troika
Steve Hendricks
Will FIFA’s World Cup Sexism Ever Die?
Binoy Kampmark
Oxi in Greece
Gareth Porter
How US Spin on Access to Iranian Sites has Distorted the Issue
Peter Bach
ISIL and Ramadan in the Rag
Paul Craig Roberts
A Rebuke to EU-Imposed Austerity
Quincy Saul
The View from Mount Olympus
Robert Hunziker
Looking Inside Fukushima Prefecture
Norman Pollack
Capitalism’s Self-Revealing Practices
ADRIENNE PINE, RICHARD JOHNSTON, FIONA WILMOT, et al.
Seven Reasons to Scrap the USA’s $1 Billion Aid Package to Central America
David Macaray
Could Justice Scalia Be the One to Rescue Labor?
Linn Washington Jr.
Storm Smashes Chris Christie’s Presidential Candidacy
Benjamin Willis
US and Cuba: What Remains to be Done?
Robert David Steele
The National Military Strategy: Dishonest Platitudes
Joan Roelofs
Whatever Happened to Eastern European Communism?
Weekend Edition
July 3-5, 2015
Mike Whitney
The Pentagon’s “2015 Strategy” For Ruling the World
Jason Hirthler
Going Off-Script in St. Petersburg
Rob Urie
Greece and Global Class War
DIMITRIS KONSTANTAKOPOULOS
The Future of Greece Without Illusions
David Rosen
White Skin Crisis
Jerry Lembcke
Nobody Spat on American GIs!
Stavros Mavroudeas
The Greek Referendum and the Tasks of the Left
ANDRE VLTCHEK
Ecuador Fights for Survival – Against its Elites
Andrew Levine
Dumping on Dixie Again
Richard Pithouse
Charleston (It’s Not Over)
Arun Gupta
What Does It Mean to Call Dylann Roof a “Terrorist”?
Michael Welton
The Tragedy of Harper’s Canada
Brendan McQuade
The Right Wing Resurgence and the Problem of Terrorism