How to Tax the Rich: And Live Happily Ever After
Blackburn, Robin
SHARPENING INEQUALITY, rocketing "financial partnership" income, and obscene levels of executive "compensation" make all the more unacceptable the accompanying massacre of...
...But if AMT is to go, or its threshold be raised permanently, where will the nearly trillion dollars of taxes it raises come from...
...It doesn't have to be like this...
...Taxes on the rich are routinely evaded...
...I have advocated such a levy and fund network as a way of anticipating the heavy future cost of meeting the retirement needs of the baby boomers...
...If all citizens had rights in this fund, then this might somewhat allay the small investor's fears...
...Recently, the Ontario Teachers' plan has mounted a $25 billion bid for Bell Canada, while the United Kingdom's Wellcome Trust backed an $18 billion bid for Boots Alliance, a retail chain...
...However, if the tax is really effective at discouraging pollution then it won't raise much revenue...
...About five hundred executives and financial officers have ended up in jail over the last few years...
...It would be possible to give a rebate to all whose holdings were in an approved retirement or health care insurance fund...
...48-54...
...New York Times, November 26, 2006...
...The overall tax take in most advanced countries is still pretty high—a quarter or a third, or more, of gross domestic products...
...Germany and Denmark have already embarked on this...
...A telltale sign of corporate tax avoidance showed up in a recent report from the Internal Revenue Service...
...And those that did pay tax on overseas profits reduced the effective tax rate from 24 percent to 20 percent...
...I cannot go home and tell my constituents," he declared, "that I Sources consulted for this article: Jesse Drucker, "Minding the Gap," Wall Street Journal, November 27, 2006...
...An administration that meant business could raise the effective tax rate...
...The offsetting of interest against tax benefits both the partner in a private equity deal and the modest home owner paying off a mortgage...
...The general partner will charge a fee of 2 percent on the funds under management and also claim— in the standard "two and twenty" formula-20 percent of the "carried interest," or gross profit on the sale of the reorganized company...
...Mounting foreclosures, bankruptcies, and threats to employment itself have led to a deepening and widespread sense of insecurity...
...On the whole, dividends are less volatile than either share prices or profits, so the future yield could be estimated...
...THE INDISPENSABLE task of taxing shareholding wealth could best be approached by a share levy...
...For example, some attack Hispanics rather than a tax system that the corporations and the rich evade almost at will...
...In each case, the huge funds are perfectly able to hire any needed financial expertise rather than groan 66 n DISSENT / Summer 2007 under the "two and twenty" burden...
...No tax is ever going to be popular, but there is a growing sense of insecurity as risks are shifted onto individuals and families...
...Although the allocation of notional partnership rights to the taxing authority will also help to curb financial privilege, the latter is also defended by a scary monster...
...Try to plug these, but be aware that many are there to ensure that the tax doesn't hit small business, struggling professionals, and the middle class...
...In the 2004 campaign, George W. Bush candidly explained that it was a waste of time simply raising nominal tax rates on the rich because they will avoid them, as "they have accountants to make sure of that...
...The tax rates in the Cayman Islands, Belize, or Liberia may be great, but do the rich want to live there...
...AMT is now gnawing away at medium-earning households, many of them in states that the Democrats have to win...
...The companies owned by private equity partnerships could also be taxed more fairly...
...the latter does not completely remove the case for raising taxes on commercial land but it could limit the yield...
...Likewise, almost nine times as many Wall Street fund managers earned more than a hundred million dollars a year in 2006 as public company chief executive officers...
...The levy would take the form of notional partnership rights in the "carried interest...
...In fact, the super-rich don't even have to practice avoidance to pay little tax...
...The yield of such taxes is always reduced by loopholes...
...It would not be difficult to retain the favorable treatment for the small-business and the home owner while removing it for large-scale investment...
...indeed, unscrupulous private equity promoters have spotted the opportunity and have adapted such plans to their own leveraged buy-out strategies...
...The idea of taxing increases in commercial land values is not at all new—it was a favorite of Henry George more than a century ago—but is still worth exploring...
...The share levy would not harm the stock market, but the emergency fund would add an extra standby that could be put toward whatever seemed most urgent in the future...
...SHARPENING INEQUALITY, rocketing "financial partnership" income, and obscene levels of executive "compensation" make all the more unacceptable the accompanying massacre of job-related entitlements to health care and pensions...
...companies that reported $707 billion in profit to Wall Street in 2004 scaled that back to $523 billion when submitting their tax returns...
...An ESOP to the workers," Economist, April 14, 2007...
...TAXES the rich will be better placed to minimize their exposure...
...Congress...
...It would DISSENT / Summer 2007 • 65 TAXES also be possible to reduce the tax advantage applying to interest payments and provide that interest payments paid to any stringently defined related party be subject to taxation...
...The same goes for tax policy...
...But another approach would be to leave open the precise use to which the future revenue would be put...
...74-96...
...Indeed, the very structure of the partnership form was designed to favor the mom-and-pop store or small business, yet has ended up awarding huge tax breaks to the mega-wealthy...
...One half of all corporate stock is owned by the richest one percent of the population—those with incomes over one million dollars a year.* So the $64-billion question is how to restore progressivity and how to make the corporations and those who own them contribute at a more serious rate...
...Ben Stein, "In Class War Guess Who's Winning...
...It pointed out that U.S...
...In fact, there is no country in the world where estate duties have raised serious sums, partly because they can be anticipated and partly because legislators don't want to penalize the widows of farmers, shopkeepers and home owners...
...Unfortunately, some populists aim at the wrong target and fail to press the most important measures of redress...
...What is really needed are taxes that cannot be easily evaded and that target the new financial aristocracy, especially hedge fund managers and the general partners in private equity outfits...
...HOWEVER, THERE is one type of large investor whose interests would be worth safeguarding, those of bona fide pension funds and endowments...
...One response has been outbreaks of economic populism...
...Issuing each citizen with tradable carbon quotas is likely to be more effective in reducing emissions but won't raise revenues for general purposes...
...These gentry raise cash from investors, including pension funds, using it to acquire public companies that they believe to be undervalued...
...Thus Robert Rubin, the former treasury secretary, has warned that Democratic spending promises cannot be met by an already overburdened public purse...
...As a result, even Wall Street bankers find themselves paying some taxes on their bonuses...
...The pure rent that accrues to commercial property owners is thus a windfall profit that can be heavily taxed without harmful effect of any sort—and the property itself is visible, making evasion difficult or impossible...
...What could be done with the fruits of a share levy...
...They have undermined redistribution via taxes at a time when inequality abounds and the corporate world regards employee welfare as no longer its concern...
...Such a network might be linked to state-level trust funds and could be monitored by the regional Federal Reserve Banks...
...A number of towns in Pennsylvania, including Harrisburg, the state capital, have raised serious sums in this way...
...But the real steal is the booty carried home by private equity general partners...
...They take the company private and carry out a financial reorganization that typically involves selling property and then leasing it back, shrinking employee entitlements, and taking out huge loans...
...However, if such a land tax is not addressed at a federal level, different jurisdictions may be tempted to compete with one another by offering lower rates...
...Commercial land increases in value either because of public investments (on infrastructure and social facilities) or a general increase in national prosperity...
...In the meantime, TAXES the fund network would promote more enlightened and responsible corporate governance...
...The latter have taken to investing huge sums in private equity in recent years...
...Shares held in a tax haven would not escape dilution...
...In fairy tales, the real treasure is guarded by a scary monster...
...Lucy Komisar, "Profit Laundering and Tax Evasion," Dissent, Spring 2005, pp...
...W. Elliot Brownlee, 2nd ed., Federal Taxation in America, A Short History (Cambridge University Press, 2004...
...Taxes on middle-class earners and spenders currently raise a lot of cash because this population has few ways of evading them...
...now they are eager to be rid of them...
...He teaches at the New School for Social Research in New York and the University of Essex in the United Kingdom...
...Moreover, the princes of private equity will typically pay tax on much of their declared capital gains at a 15 percent rate, while chief executive officers will find much of their income caught by the 35 percent rate...
...Those interested in such possibilities would do well to skip the standard literature put out by tame partnership tax jocks and turn instead to papers submitted to the "Junior Tax Scholars Conference" (see, for example, Victor Fleischer, "Two and Twenty: Taxing Partnership Profits in Private Equity Funds," University of Colorado Law School, Working Paper No 06-27...
...But despite an extraordinary raft of financial scams, the number of Wall Street professionals who have ended up behind bars can be counted on the fingers of one hand (and those against whom prosecutions are pending are almost all small fry...
...In recent years the dilution effect of stock options and of takeovers has often been greater than this...
...Voters might find quite reassuring the idea that an emergency fund was building up in a way that did not harm today's economy...
...Sarah Hansard, "House Democrats eyeing reduction in the AMT," Investment News, May 7, 2007...
...The Democrats' spending plans are too modest, but they still require more, not less, public revenue...
...companies paid no federal income tax...
...With the looming shocks in prospect, there is a need for a social reserve fund...
...Capital gains and dividends pay tax at lower rates than income...
...Boston Consulting Group estimates that offshore private banking assets now total almost six trillion dollars...
...A further advantage is that the levy would mildly tax shares wherever they were held...
...Eliot Spitzer's thumping victory as New York governor showed that most voters like a tough approach to the financial and corporate skimmers...
...The really rich have access to the hedge funds that can prevent this, but small and medium investors have been fleeced repeatedly by money managers...
...The funds could have a small but expert staff dedicated to monitoring corporate behavior and to redressing the "information asymmetry" between insiders and outsiders...
...In any case, the money raised from green charges should probably be reserved to defray the heavy costs of climate change...
...There is no harm in removing the income tax cut for the wealthy or in reprieving the estates duty or "death tax...
...Just don't expect to raise more than a trickle by so doing...
...If legislators could throw off their fear of tax innovation, what could they do...
...Without doubt global competition and "financialization"—techniques for swapping and disguising income streams or assets—have given special advantage to the high rollers...
...Many of these insecurities affect the middle class as much as the poor...
...Last year's elections showed that most people can tell the difference between their own well being and a buoyant stock market...
...It would also be possible to charge the reserve fund network with using its growing stake in corporations to ensure good governance...
...ROBIN BLACKBURN is the author of Age Shock: How Finance Is Failing Us, published by Verso...
...Corporations used to supply 20 percent of federal revenue, now the figure is only 4 percent...
...As quoted by W. Elliot Brownlee, he did so in the same speech in 1862 in which he proposed—another first— a progressive tax on income...
...Please note that the logic here is very different from an Employee Self-Ownership Plan (ESOP), which concentrates employee risk...
...After all, one half of all Americans own shares—and the other half dreams of doing so...
...The rich prefer to live in countries that are law-abiding, safe, and prosperous...
...But something more would have to be offered...
...They used to be proud of their health and retirement programs...
...However, such ventures would work even better as a species of social entrepreneurship if several large public sector funds went together...
...The network should also be obliged to hold the shares indefinitely, not to sell them...
...They pay no tax on the interest accruing on these loans...
...The April 12, 2007, headline put on this story by the Financial Times says it all: "Much Better Returns without the Fees...
...GLOBALIZATION AND sophisticated tax avoidance have greatly weakened progressive taxation, but we do not have to give in to fatalism and despair...
...And if assessing the levy purely on net profit was thought too trusting, then it could be assessed on gross profit or even as a percentage of total market value...
...Too much of it is paid by the struggling middle class and the low paid...
...This would require every public corporation to issue shares equivalent to 10 percent of its profits each year...
...And what could be done to appease those who are, or would like to be, small investors...
...At present those who own the home they live in pay annual property taxes, but the rich who own a pile of shares or partnership rights pay nothing...
...Warren Buffett doesn't use any tax planning, yet disDISSENT / Summer 2007 • 63 TAXES covered that the proportion of his income taken by tax and Social Security payments was lower than that of anyone else in his Omaha office...
...DISSENT / Summer 2007 .67...
...By my calculations, a 10 percent share/ partnership levy would have raised $141.7 billion in 2005, which, if reinvested over a twentysevenyear period, would be worth $10.9 trillion in 2033, generating annual income of around $400 billion, equivalent to the entirety of today's Social Security program or to 2 percent of future GDP...
...Of course, withdrawal from Iraq could save the treasury hundreds of billions of dollars...
...The share-levy proceeds could be channeled to a regional network of reserve social funds, and every citizen could be given a say in how they were used...
...Capital gains tax is not paid at regular intervals but only when a share is sold...
...The effect would be a mild dilution of share value—equivalent to about 0.68 percent of share value each year...
...Scandals have revealed the multiple ways in which chief executive officers and money managers have looted the assets entrusted to them to manage...
...Still, the credibility of the New York Stock Exchange is as compromised as that of the U.S...
...Yet there are many good causes out there that demand funding— health care insurance, lower college tuition fees, more research and development, better pension funding, and protection against climate change, to mention just a few...
...The funds would be held to generate future revenue from dividend income...
...The share levy would have the advantage that it would not take a toll—as does corporation taxation—from the cash flow of the company...
...Taxing property rather than income offers interesting possibilities...
...Green taxes—aimed at high carbon producers, say—could produce useful revenue...
...The familiar taxes are the most easily avoided, so why not try something new...
...Steven R. Weisman, The Great Tax Wars (Simon and Schuster Paperbacks, 2002...
...It would probably be best for genuine pension funds to shun these expensive investment opportunities and instead band together and take over the general partner function...
...Although some have done well, the gains of these "limited partner" investors as a whole are heavily eroded by the general partners' "two and twenty" charging formula...
...The tax debate should really be about taxing the haves, not squeezing the have-nots...
...The idea of taxing shareholding wealth was first proposed by a Republican, Representative Schuyler Colfax of Indiana...
...Likewise, hedge fund managers park their compensation offshore, but when they need to retrieve it they 64 n DISSENT / Summer 2007 will have to pay some tax...
...The Democrats talk about permanently raising the Alternative Minimum Tax (AMT) so that it will not apply to households earning less than $200,000 or $250,000 a year...
...In the boom years 1996-2000,61 percent of U.S...
...The latter weakens investment and can cut jobs...
...The monster preventing politicians and wonks from thinking about taxing shares is the knowledge that—however concentrated shareholding wealth may be—it is also sufficiently widely held to make trespassing upon it a minefield...
...But much of the trillion-dollar cost has already been incurred, so even a rapid withdrawal would still leave a sizable spending gap...
...A system that fails to tax those most able to pay creates a spending problem...
...it also may not be progressive, in that 'Edward N. Wolf, "Who Are the Rich?," Does Atlas Shrug?: The Economic Consequences of Taxing the Rich, edited by Joel B. Slemrod (Harvard University Press, 2000), pp...
...voted for a bill that would allow a man, a millionaire, who put his entire property into stock, to be exempt from taxation...
...In effect it is the owners of the corporations— large-scale shareholders and private equity partnerships— who gain...
...What defines an aristocrat today, as in the France of the ancien regime, is not blue blood but privileged exemption from the ordinary workings of the law and of the tax system...
...The real treasure is locked up in the holdings of the richest 1 percent who, as noted above, own half of all shares...
Vol. 54 • July 2007 • No. 3
