FacebookTwitterGoogle+RedditEmail

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.

 

 

 

More articles by:
Weekend Edition
June 24, 2016
Friday - Sunday
Pepe Escobar
Goodbye to All That: Why the UK Left the EU
Michael Hudson
Revolts of the Debtors: From Socrates to Ibn Khaldun
Andrew Levine
Summer Spectaculars: Prelude to a Tea Party?
Kshama Sawant
Beyond Bernie: Still Not With Her
Mike Whitney
¡Basta Ya, Brussels! British Voters Reject EU Corporate Slavestate
Tariq Ali
Panic in the House: Brexit as Revolt Against the Political Establishment
Paul Street
Miranda, Obama, and Hamilton: an Orwellian Ménage à Trois for the Neoliberal Age
Ellen Brown
The War on Weed is Winding Down, But Will Monsanto Emerge the Winner?
Gary Leupp
Why God Created the Two-Party System
Conn Hallinan
Brexit Vote: a Very British Affair (But Spain May Rock the Continent)
Ruth Fowler
England, My England
Norman Pollack
Fissures in World Capitalism: the British Vote
Paul Bentley
Mercenary Logic: 12 Dead in Kabul
Binoy Kampmark
Parting Is Such Sweet Joy: Brexit Prevails!
Elliot Sperber
Show Me Your Papers: Supreme Court Legalizes Arbitrary Searches
Jan Oberg
The Brexit Shock: Now It’s All Up in the Air
Nauman Sadiq
Brexit: a Victory for Britain’s Working Class
Brian Cloughley
Murder by Drone: Killing Taxi Drivers in the Name of Freedom
Ramzy Baroud
How Israel Uses Water as a Weapon of War
Brad Evans – Henry Giroux
The Violence of Forgetting
Ben Debney
Homophobia and the Conservative Victim Complex
Margaret Kimberley
The Orlando Massacre and US Foreign Policy
David Rosen
Americans Work Too Long for Too Little
Murray Dobbin
Do We Really Want a War With Russia?
Kathy Kelly
What’s at Stake
Louis Yako
I Have Nothing “Newsworthy” to Report this Week
Pete Dolack
Killing Ourselves With Technology
David Krieger
The 10 Worst Acts of the Nuclear Age
Lamont Lilly
Movement for Black Lives Yields New Targets of the State
Martha Rosenberg
A Hated Industry Fights Back
Robert Fantina
Hillary, Gloria and Jill: a Brief Look at Alternatives
Chris Doyle
No Fireworks: Bicentennial Summer and the Decline of American Ideals
Michael Doliner
Beyond Dangerous: the Politics of Climate
Colin Todhunter
Modi, Monsanto, Bayer and Cargill: Doing Business or Corporate Imperialism?
Steve Church
Brexit: a Rush for the Exits!
Matthew Koehler
Mega Corporation Gobbles Up Slightly Less-Mega Corporation; Chops Jobs to Increase Profits; Blames Enviros. Film at 11.
David Green
Rape Culture, The Hunting Ground, and Amy Goodman: a Critical Perspective
Ed Kemmick
Truckin’: Pro Driver Dispenses Wisdom, Rules of the Road
Alessandro Bianchi
“China Will React if Provoked Again: You Risk the War”: Interview with Andre Vltchek
Christy Rodgers
Biophilia as Extreme Sport
Missy Comley Beattie
At Liberty
Ron Jacobs
Is Everything Permitted?
Cesar Chelala
The Sad Truth About Messi
Charles R. Larson
A Review of Mary Roach’s “Grunt”
David Yearsley
Stuck in Houston on the Cusp of the Apocalypse
FacebookTwitterGoogle+RedditEmail