Politics Magazine

There Are 2 Tax Systems - One For The Rich And One For Us

Posted on the 01 January 2016 by Jobsanger
There Are 2 Tax Systems - One For The Rich And One For Us (Cartoon image is by Dave Granlund at davegranlund.com.)
If you listen to the Republican politicians, you might be convinced that the rich in this country are overtaxed (and need another tax cut). That is not even remotely true. The rich are currently paying less in taxes than at any time since World War II. Part of it is because their income is taxed differently than that of working Americans (taxed at a lower "capital gains" rate, instead of the "earned income" rate paid by most Americans).
But that is just part of the problem. Their ability to hire an army of CPS's and tax lawyers, and the ability to hide money overseas, has resulted in them paying a lower percentage of their income in taxes than most in the middle class must pay. This has created, in effect, a different tax system for the rich than is applicable to ordinary Americans.
The New York Times has written an excellent article on this. I post only a portion of it below, but I urge you to read the whole article. It is quite shocking.
With inequality at its highest levels in nearly a century and public debate rising over whether the government should respond to it through higher taxes on the wealthy, the very richest Americans have financed a sophisticated and astonishingly effective apparatus for shielding their fortunes. Some call it the “income defense industry,” consisting of a high-priced phalanx of lawyers, estate planners, lobbyists and anti-tax activists who exploit and defend a dizzying array of tax maneuvers, virtually none of them available to taxpayers of more modest means. . .
Operating largely out of public view — in tax court, through arcane legislative provisions and in private negotiations with the Internal Revenue Service — the wealthy have used their influence to steadily whittle away at the government’s ability to tax them. The effect has been to create a kind of private tax system, catering to only several thousand Americans.
The impact on their own fortunes has been stark. Two decades ago, when Bill Clinton was elected president, the 400 highest-earning taxpayers in America paid nearly 27 percent of their income in federal taxes, according to I.R.S. data. By 2012, when President Obama was re-elected, that figure had fallen to less than 17 percent. . .
The ultra-wealthy “literally pay millions of dollars for these services,” said Jeffrey A. Winters, a political scientist at Northwestern University who studies economic elites, “and save in the tens or hundreds of millions in taxes.”. . .
While Democrats like Bernie Sanders and Hillary Clinton have pledged to raise taxes on these voters, virtually every Republican has advanced policies that would vastly reduce their tax bills, sometimes to as little as 10 percent of their income.
At the same time, most Republican candidates favor eliminating the inheritance tax, a move that would allow the new rich, and the old, to bequeath their fortunes intact, solidifying the wealth gap far into the future. And several have proposed a substantial reduction — or even elimination — in the already deeply discounted tax rates on investment gains, a foundation of the most lucrative tax strategies. . .
Each of the top 400 earners took home, on average, about $336 million in 2012, the latest year for which data is available. If the bulk of that money had been paid out as salary or wages, as it is for the typical American, the tax obligations of those wealthy taxpayers could have more than doubled.
Instead, much of their income came from convoluted partnerships and high-end investment funds. Other earnings accrued in opaque family trusts and foreign shell corporations, beyond the reach of the tax authorities. . .
Organizing one’s business as a partnership can be lucrative in its own right. Some of the partnerships from which the wealthy derive their income are allowed to sell shares to the public, making it easy to cash out a chunk of the business while retaining control. But unlike publicly traded corporations, they pay no corporate income tax; the partners pay taxes as individuals. And the income taxes are often reduced by large deductions, such as for depreciation. . .
The wealthy can also avail themselves of a range of esoteric and customized tax deductions that go far beyond writing off a home office or dinner with a client. One aggressive strategy is to place income in a type of charitable trust, generating a deduction that offsets the income tax. The trust then purchases what’s known as a private placement life insurance policy, which invests the money on a tax-free basis, frequently in a number of hedge funds. The person’s heirs can inherit, also tax-free, whatever money is left after the trust pays out a percentage each year to charity, often a considerable sum.
Many of these maneuvers are well established, and wealthy taxpayers say they are well within their rights to exploit them. Others exist in a legal gray area, its boundaries defined by the willingness of taxpayers to defend their strategies against the I.R.S. Almost all are outside the price range of the average taxpayer. . .
The combination of cost and complexity has had a profound effect, tax experts said. Whatever tax rates Congress sets, the actual rates paid by the ultra-wealthy tend to fall over time as they exploit their numerous advantages. . .
“We do have two different tax systems, one for normal wage-earners and another for those who can afford sophisticated tax advice,” said Victor Fleischer, a law professor at the University of San Diego who studies the intersection of tax policy and inequality. “At the very top of the income distribution, the effective rate of tax goes down, contrary to the principles of a progressive income tax system.”. . . 
For the ultra-wealthy, “our tax code is like a leaky barrel,” said J. Todd Metcalf, the Democrats’ chief tax counsel on the Senate Finance Committee. ”Unless you plug every hole or get a new barrel, it’s going to leak out.”

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