The Great American Tax Debate Misses the Point


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.



Weekend Edition
October 9-11, 2015
David Price – Roberto J. González
The Use and Abuse of Culture (and Children): The Human Terrain System’s Rationalization of Pedophilia in Afghanistan
Mike Whitney
Putin’s “Endgame” in Syria
Jason Hribal
The Tilikum Effect and the Downfall of SeaWorld
Gary Leupp
The Six Most Disastrous Interventions of the 21st Century
Andrew Levine
In Syria, Obama is Playing a Losing Game
Louis Proyect
The End of Academic Freedom in America: the Case of Steven Salaita
Rob Urie
Democrats, Neoliberalism and the TPP
Ismael Hossein-Zadeh
The Bully Recalibrates: U.S. Signals Policy Shift in Syria
Brian Cloughley
Hospital Slaughter and the US/NATO Propaganda Machine
Paul Street
Hope in Abandonment: Cuba, Detroit, and Earth-Scientific Socialism
John Walsh
For Vietnam: Artemisinin From China, Agent Orange From America
John Wight
No Moral High Ground for the West on Syria
Robert Fantina
Canadian Universities vs. Israeli Apartheid
Conn Hallinan
Portugal: Europe’s Left Batting 1000
John Feffer
Mouths Wide Shut: Obama’s War on Whistleblowers
Paul Craig Roberts
The Impulsiveness of US Power
Ron Jacobs
The Murderer as American Hero
Alex Nunns
“A Movement Looking for a Home”: the Meaning of Jeremy Corbyn
Philippe Marlière
Class Struggle at Air France
Binoy Kampmark
Waiting in Vain for Moderation: Syria, Russia and Washington’s Problem
Paul Edwards
Empire of Disaster
Xanthe Hall
Nuclear Madness: NATO’s WMD ‘Sharing’ Must End
Margaret Knapke
These Salvadoran Women Went to Prison for Suffering Miscarriages
Uri Avnery
Abbas: the Leader Without Glory
Halima Hatimy
#BlackLivesMatter: Black Liberation or Black Liberal Distraction?
Michael Brenner
Kissinger Revisited
Cesar Chelala
The Perverse Rise of Killer Robots
Halyna Mokrushyna
On Ukraine’s ‘Incorrect’ Past
Jason Cone
Even Wars Have Rules: a Fact Sheet on the Bombing of Kunduz Hospital
Walter Brasch
Mass Murders are Good for Business
William Hadfield
Sophistry Rising: the Refugee Debate in Germany
Christopher Brauchli
Why the NRA Profits From Mass Shootings
Hadi Kobaysi
How The US Uses (Takfiri) Extremists
Pete Dolack
There is Still Time to Defeat the Trans-Pacific Partnership
Marc Norton
The Black Panthers: Vanguard of the Revolution
Andre Vltchek
Stop Millions of Western Immigrants!
David Rosen
If Donald Dump Was President
Dave Lindorff
America’s Latest War Crime
Ann Garrison
Sankarist Spirit Resurges in Burkina Faso
Franklin Lamb
Official Investigation Needed After Afghan Hospital Bombing
Linn Washington Jr.
Wrongs In Wine-Land
Ronald Bleier
Am I Drinking Enough Water? Sneezing’s A Clue
Charles R. Larson
Prelude to the Spanish Civil War: Eduard Mendoza’s “An Englishman in Madrid”
David Yearsley
Papal Pop and Circumstance
Christopher Washburn
Skeptik’s Lexicon