Nel's New Day

April 15, 2013

How the Wealthy Come Out Ahead on Tax Day

Filed under: Uncategorized — trp2011 @ 7:50 PM
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Today is Tax Day. What percentage of your income did you pay? President Obama and his wife gave 24.6 percent of their adjusted gross income to help keep the government running, while Vice-President Biden and his wife submitted 27.3 percent of their adjusted gross income in federal and state taxes. Last year, Mitt Romney said that he paid 14.1 percent–after he declined to report over a million in charitable income to keep it that low. Of course, there can always be an amended return to drop the percentage lower and get back over $600,000. That sum alone is 60 percent higher than Biden’s income before taxes.

According to the Center for American Progress’ Director of Fiscal Reform Seth Hanlon:

  • 1,470 households reported income of more than $1 million in 2009 but paid zero federal income tax on it.
  • The average federal income tax rate of the richest 400 people in the country, the so-called “Fortunate 400,” in 2008 was 18.11 percent. In 2007, it was 16.62 percent.
  • The tax rates paid by the “Fortunate 400” have plummeted since the mid-1990s, when their average effective rates were about 30 percent.

People complain about the United States being a country of rapidly increasing income inequality, long-term unemployment, and loss of hope. It’s a place where corporations own lawmakers who encourage an economy allowing the top 1 percent to grow wealthier on a daily basis.

These complaints parallel the problems of the “Gilded Age” during the nineteenth century when people started protesting for an income tax. That was a time when import taxes protected U.S. industries from competition, allowing them to charge high prices and protecting the monopolies. The government created a regressive tax system with high excise taxes on tobacco and alcohol. The poor paid almost all the taxes while the wealthy paid virtually nothing. Although Abraham Lincoln instituted a graduated tax to pay for the Civil War, the Republicans backed off racial equality in the 1860s and overturned Lincoln’s tax in 1872.

The Panic of 1893, the nation’s greatest economic collapse before the Great Depression, started with a popped railroad bubble, and almost 20 percent of workers were unemployed by 1894. Outraged at greedy monopolists, the People’s Party, Populists, forced government regulation of railroads and control of the inflationary monetary policy. The Populists supported the graduated income tax so the wealthy would start paying their share. Congress reluctantly passed a law to force the rich to pay income taxes for the first time since 1870.

Corporations said that taxes would drive them into poverty, and the Supreme Court declared the tax unconstitutional in 1895. By 1913, a grassroots movement forced lawmakers to pass the 16th Amendment, income tax, so that the right-wing Supreme Court could not overturn it.

The success of this graduated income tax led to a growing middle class, with high rates of unionization, and a consumer economy promoting home ownership, college without much debt, and a developing infrastructure including the interstate system. By the 1960s the country had begun to address the problems of racial segregation.

Then the Republicans took over, driving the economy downward through their anti-union, austerity programs and their incessant wars. Forty years later conservatives are determined to exterminate unions, eliminate social programs such as Social Security and Medicare, eradicate the safety net programs for everyone, and destroy the environment by overturning regulations.

Today conservatives complain about progressive taxation, trying to convince voters that they want to help the middle class. Conservatives also convince people that the white people are subsidizing minorities with the safety net, despite the fact that the average welfare recipient is a white mother in the suburbs who remains on welfare about two years and is actively searching for employment. The real beneficiaries of welfare are the huge corporations and the top 1 percent of the income chart. The bottom 99 percent have grown resentful and envious because wealthy people like Mitt Romney have many loopholes and pay a smaller percentage of taxes that they do.

As Warren Buffett wrote in the New York Times last year, super-rich people who “make money with money” pay a lower tax rate than many middle class Americans and pointed out that he paid 17.4 percent of his taxable income. That means that workers who bring home $50,000 pay higher tax rates than those in the $50-million income bracket. Yet the GOP has pulled out its tired canard that the country should not raise tax rates for those at the top of the income scale.

Wealthy people manage to pay almost no taxes–sometimes none at all–because they have advantages that the average worker doesn’t:

The definition of income: Workers have income because they have salaries; the wealthy have no income because they have “carried interest.” Increases in the value of shares, real estate, etc. aren’t taxed until sold and, if never sold, won’t be taxed. The wealthiest people manage hedge funds, private equity funds, or real estate partnerships. They are largely paid with shares of the fund or project that is then taxed as a capital gain instead of income—at a tax rate half what the salary would be.  If they need money, they just borrow on their assets.

The definition of expense: Wealthy people in corporate leadership go to expensive restaurants, use corporate skyboxes at sports events, have corporate apartments, and on and on deductible corporate “expense.” Ordinary workers cannot deduct interest payments for their car or other transportation to get to work; they can’t deduct their food.

Tax shelters: All these are legal until the IRS or courts say they aren’t. The IRS finds these only in an audit, and only 1 percent of tax returns are audited each year. Even those audits aren’t all encompassing. Other countries require prior approval of “creative tax code interpretations,” the U.S doesn’t.

Regressive taxes: Mortgage interest is deductible; rent isn’t. Yachts are deductible; fishing boats aren’t. Mortgages on second homes, sometimes used as vacation rentals, is deductible although the rate is intended to support home ownership. Limiting the deduction to primary residences would raise $1 billion per year in revenue.

Bluegrass boondoggle: Thanks to Senate Minority Leader Mitch McConnell (R-KY), wealthy horse owners got a $126-million tax break over 10 years through faster depreciation of race horses.

Sheryl Crow loophole: Wealthy musicians get a tax break by selling their publishing catalogs at capital gains rates; when Crow sold her publishing rights for $10 million, she saved $2 million in taxes.

S Corporation scam: By forming these corporations, individuals can classify money as “business profits,” exempting the money from payroll tax. Popular with lawyers, doctors, and accountants, this benefit is not available to regular wage-earners.

Individual Retirement Accounts (IRAs): If U.S. law restricts contributions to $5500 annually ($6500 for people over 50) and a maximum of $50,000 to a retirement plan with tax-free contributions, how did Mitt Romney have between $21 million and $102 million in his tax-free retirement account? The maximum $50,000 for 20 years is $1 million. Did he increase that by between 20 and 100 times? And how many others in the top 1 percent get the same benefits?

Expensive tax preparers get better results!

Corporations are able to take advantage of even more loopholes than wealthy people. Tomorrow’s blog will describe many of these, including the offshore havens that are available for both wealthy people and big corporations.



October 30, 2012

Bain Capital, Romney – Part Two

Before I continue with Part Two of the Bain Capital debacle, I want to say how sad I feel for the devastation of Hurricane Sandy, both in the Caribbean and in the United States. In addition, I am grateful for the speed with which government has moved to keep the storm’s effects from as much tragedy as possible. In watching all the work that has been done to save people’s lives and make their lives a bit better, I am also angry at the outrageous comments made by Michael Brown, head of FEMA largely responsible for the disaster in New Orleans following Hurricane Katrina and now a radio host in Colorado. From his safety on the other side of the country, he criticized President Obama for moving too fast. Yesterday he talked about how New Yorkers were saying that the storm, Sandy, isn’t a big deal. The people hit by Sandy are indeed fortunate that he is no longer in charge of government emergency assistance.

The same people are also fortunate that the United States has a president who believes that government should help people in need after such an act of nature. Mitt Romney not only said in the primary debates that the federal government, and probably the state governments, should have no part in emergency aid, he also refused to answer any questions today—14 times after one interview–about how he sees the role of FEMA.

In his writings, David Stockman, budget director for Ronald Reagan, summarized Bain Capital in less than glowing terms: “Bain would put in a little money, borrow much more, and buy out a company. It wasn’t hostile because Bain paid company executives so much they welcomed a takeover. Bain would have the company fire the workers and sell off assets to pay the crushing debt and high ‘management’ fees to Bain. Often the ‘saved’ company would go bankrupt after Bain left. Companies almost never produced more useful goods or services or employed more people after Bain than before.”

Stockman was kind enough, however, not to explain the source of Romney’s capital to set up Bain. When Romney says he knows how to start a small business, he may mean one that is funded by Central American elites linked to death squads in El Salvador. After initially struggling to find start-up investors, Romney traveled to Miami in 1983 to win pledges of almost 40 percent of Bain’s $37 million start-up money. Huffington Post reporter Ryan wrote, “There’s no possible way that anybody in 1984 could check out these families–which is the term that [Romney’s campaign] use, these families–and come away convinced that this money was clean.”

During the 1980s, Romney managed to get lots of cigarettes into Russia. Bain & Co.—and Romney–worked with British American Tobacco (BAT), which is behind brands like Kool and Lucky Strike, to move their products into Russia. Before Bain, BAT was largely locked out of the Russian market; now it controls almost one-fourth of cigarette sales that have skyrocketed since the Soviet Union collapse. Then Bain moved into the U.S.; a month after Romney took over, the first got a $1 million contract with Philip Morris.

Romney clearly described Bain’s goal in 1985: its purpose has never been to create jobs; its purpose is to “harvest” companies. The most recent harvested company is moving into China right before this year’s general election.

Although Romney is no longer active in Bain, he’s still reaping the benefits from moving Sensata Technologies from Freeport (IL) to China. The company made record revenues last year, and workers have been working three shifts for 24 hours a day. They make $14-$17 per hour with benefits. The first thing that Bain did after buying the company was to organize its capital funds in the Cayman Islands so Bain could avoid paying taxes on these funds. Now Bain will get money for relocating the plant offshore while U.S. taxpayers have paid $780,000 to retrain some of Sensata’s fired workers.

Romney has a history with Bain and China. In 1998, when he was running Bain, he saw the horrible conditions of workers making $.24 an hour at the Global-Tech Appliances plant in Dongguan and invested millions in the firm. But he could make money by exploiting these workers.

William Cohen wrote in Bloomberg, “Is there any fairness in a system where a group of people can borrow a bunch of money to buy a company and pay themselves millions of dollars in dividends and fees, while the company itself ends up bankrupt and its employees lose their jobs, health insurance and pensions?”

Romney’s experience with Bain makes him uniquely unqualified to be president of the United States. In campaigning he said, “A prairie fire of debt is sweeping across Iowa and our nation. Every day we fail to act, that fire gets closer to the homes and children we love.” Our collective debt is no ordinary problem: According to Romney, the debt will “burn our children alive.” Yet he made his personal fortune by borrowing vast sums of money that other people were forced to pay back. His experience with Bain shows that he is one of the greatest and most irresponsible debt creators of all time, piling more debt onto more unsuspecting companies and writing more gigantic checks that other people have to cover than perhaps all but a handful of people on planet Earth.

A private equity firm like Bain typically finds floundering businesses with good cash flows. It puts down 10-30 percent of its own money and then borrows the rest from a large bank to buy a controlling stake in the company. Bain avoided the hostile takeover, done without the company’s consent, by buying off the management with huge bonuses. The takeover companies, including Bain, aren’t on the hook for the debt; the company they purchase is. That company is destroyed by just the interest they have to pay, either going bankrupt or slashing benefits and firing workers. Then Bain can swoop in and purchase the company for pennies on the dollar, the vulture approach.

Romney is a prime example of why lowering taxes doesn’t create jobs. He pays low taxes while he destroys jobs or sends them offshore. And he can’t pretend that he doesn’t know what happens at Bain.  “I insisted on having almost dictatorial powers.” Colleagues described him as cunning, manipulative and a little bit nuts, with “an ability to identify people’s insecurities and exploit them for his own benefit.”

In the business world, lying and changing positions is praised because it makes money. Romney seems genuinely puzzled by the public’s insistence that he be consistent. “I’m not going to apologize for having changed my mind,” he’s fond of saying. But that doesn’t translate into successful leadership of a country.

And it’s all legal. The entire business of leveraged buyouts wouldn’t be possible without a provision in the federal code that allows companies like Bain to deduct the interest on the debt they use to acquire and loot their targets. And he couldn’t pay such low taxes if it weren’t for the same tax code. Romney rails against the national debt at the same time he exploits a tax deduction specifically designed for mortgage holders. He bilks every dollar he can out of U.S. businesses before burning them to the ground.

Romney also shows his lack of ethics in his tax avoidance strategies. He used a loophole to “rent” the Mormon church’s tax exemption status and defer paying taxes for 15 years. Bloomberg News reported that Romney set up a charitable remainder unitrust (CRUT) in June 1996 just before Congress cracked down on the loophole in 1997. “In this instance, Romney used the tax-exempt status of a charity — the Mormon Church, according to a 2007 filing — to defer taxes for more than 15 years,” Bloomberg’s Jesse Drucker explained. “At the same time he is benefiting, the trust will probably leave the church with less than what current law requires.” The amount available to go to the Mormon Church has decreased from at least $750,000 in 2001 to $421,203 at the end of 2011 as Romney has collected yearly cash payments from the trust. Although a small amount when compared to Romney’s fortune, he has many other methods of avoiding taxes.

Romney’s hypocrisy is overwhelming. His strong opposition to federal aid has no relationship to the experiences of himself and his family. According to Romney’s biography The Real Romney, written by  journalists Michael Kranish and Scott Helman, the United States first helped the Romney family in 1912: “Fortunately for the Romneys, the U.S. government, which had once chased Miles [Romney] to Mexico due to his polygamy, now welcomed the Romneys and other Mormons to the United States. Congress established a $100,000 relief fund that enabled the Romneys and other Mormon exiles to receive food and lodging. Initially, the [Romneys’] stay on U.S. soil was to be temporary. The El Paso Herald reported on October 25, 1912, that Gaskell Romney and his family, including little George, had gone to Los Angeles “until it is safe for his family to return to the colonies in Mexico.’”

Much later George Romney received welfare from the federal government. According to his wife,Lenore Romney, [George Romney] was a refugee from Mexico. He was on relief, welfare relief for the first years of his life. But this great country gave him opportunities.” Romney is unwilling to give anyone else the same opportunities that his family had.

The Olympics is a classic example of Romney’s hypocrisy. While describing his magical leadership to save the faltering Winter Olympics in 2002, much of his success came from the $1.5 billion that he took from the federal government, an amount 1.5 times the amount, adjusted for inflation, spent by the federal government to support all seven Olympic games in the United States back to 1904.  These expenditures averaged $625,000 in taxpayer money for each athlete, an increase of 5,582 over the $11,000 average at the 1984 games in Los Angeles. Even Sen. John McCain pointed out that at the time that this was a bailout.

Donald Barlett and James Steele reported that “wealthy Utahans used the games as an excuse to receive exemptions for projects that would otherwise never meet environmental standards, or to receive generous subsidies for improvements of questionable value to the games—but with serious value to future real estate developments.” bailout.

Romney has always been clear about all his priorities. The Salt Lake games came just months after 9/11. When a representative of widows and orphans whose husbands and fathers were firefighters killed in the terrorist attack inquired about free or discounted tickets to games, Romney twice denied the request, saying that there was a policy against giving away tickets. Six weeks later, Romney offered a hundred tickets, valued at $885 each, free to Utah legislators.

Romney has always used Bain to justify his ability to become president instead of his time as governor of Massachusetts. During his one term the state ranked 47th in job growth; suffered the second-largest labor force decline in the nation with only Louisiana greater because of Hurricane Katrina in 2005; lost 14 percent of its manufacturing jobs, double that of the nation at the time perhaps because he vetoed legislation that would have banned companies doing business with the state from outsourcing jobs to other countries; experienced “below average” economic growth and was “often near the bottom”; and piled on more debt than any other state despite his raising fees while he was in office.

That’s what would happen to the United States if he were to be elected—or appointed—president.


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