How profoundly has Occupy Wall Street altered our political discourse? Consider Laura D’Andrea Tyson, a former top economic adviser to President Bill Clinton. Tyson has just penned an op-ed that applauds Occupy protestors for focusing the nation’s “attention on rising income inequality.” They’re right to worry, she goes on, about our “concentration of income and wealth.”
Back during the Clinton administration, Tyson and her fellow insider economists — Republicans and Democrats alike — sang a somewhat different tune. All seemed to agree, by century’s close, that only the plight of the unfortunate, not the wealth of the fortunate, rated the nation’s rapt attention.
At a 1998 Federal Reserve conference, Tyson asked Americans to imagine the nation’s economy as an apartment building. Some people live up high in penthouse luxury. Others live in the rat-infested basement. What should the nation do? Pillage the penthouse? Forget the penthouse. Advised Tyson: “We need to do something about that rat-infested basement.”
We now know better. We now know we’ll never empty those basements so long as we allow folks in our penthouses to accumulate ever more wealth and power. In this week’s Too Much, more evidence why.
|GREED AT A GLANCE|
|plowed $500 million into buybacks, over double the firm's investment in R&D. U.S. corporations overall have so far this year authorized $445 billion worth of buybacks . . . Ask David Dvorak, the CEO at medical device maker Zimmer Holdings, what explains his ample compensation and you may get a primer on “pay for performance.” Dvorak only “earns” bonus when his company “performs.” One measure of that performance: “earnings per share,” or company income divided by outstanding shares of stock. Execs like Dvorak have figured out they don't have to boost earnings to hit their per-share targets. They simply reduce the number of company shares — by having their companies “buy back” shares of their own stock off the open market. Zimmer last year |
Former Presidents of the United States haven't exactly rushed to line up behind the Occupy Wall Street movement. Former Canadian prime ministers seem to be a different story. Paul Martin, a former corporate CEO and a former prime minister, believes the Occupiers “have touched a chord” on inequality. The top 1 percent? Says Martin: “That's not what built North America.” Adds the former Canadian leader: “For the last hundred years, certainly in North America, every generation has felt it’s going to have a better life than their parents. For the first time, that’s not there.”Another surprise warrior for the world's 99 percent: Hassan Heikal, the CEO of EFG Hermes, the top investment bank in the Middle East. Last week, in a Financial Times commentary, Heikal called for a one-time “global wealth tax” of 10 to 20 percent on all individual net worth over $10 million. Proceeds from this “Tahrir Square tax” would go to the “country of citizenship” of each wealthy taxpayer. The levy, says Heikal, would raise $5 trillion. Sums up the global investment banker: “The super-rich have not paid their dues to society in recent years, and more and more of us now know it.”
Newt Gingrich, the top “idea” man among the 2012 GOP presidential candidates, has a new idea. Newt wants to bring back child labor. The former House speakertold a Harvard audience last week that “stupid” laws against child labor were preventing schools from replacing union janitors with student part-timers. This Gingrich pitch shocked America's leading advocates for kids. But America's greatest child advocate of the early 1900s, Columbia University philosopher Felix Adler, wouldn't have found Newt's remarks the least bit surprising. Adler chaired the national committee against child labor and saw a direct link between the concentration of America's wealth and the exploitation of America's kids. The chase after grand fortunes made grand miseries — “the evils of surplus wealth,” as Adler dubbed them — inevitable . . .
Just a few years ago the world's top public policy wonks considered economic growth the absolute be-all and end-all. All would be well if nations simply grew their economies. But global policy wonks today are executing an amazing about-face. Their latest advice? The Organization for Economic Co-operation and Development, the developed world's wonk central, last week urged nations to drop any single-minded focus on growth and start worrying about inequality. Or else. Rising gaps between rich elites and the rest of society “can sow the seeds of future conflict and social unrest,” says the new OECD Social Cohesion in a Shifting World report. Both the poor and middle class, adds the study, feel “increasingly alienated from the richest.” This alienation, warns OECD secretary-general Angel Gurría, is fraying “social cohesion, the glue that holds societies together.”
|INEQUALITY BY THE NUMBERS|
The Alchemy of Our Awesomely Affluent
Today's super rich can't turn tin into gold. But they can get Uncle Sam to loan them free money. At the expense, of course, of the bottom 99.
How much money is pouring into the pockets of America's richest 1 percent? How much of this income are America's richest paying in taxes?
Major media outlets have been asking questions like these ever since the Occupy Wall Street movement first started gaining traction earlier this fall. But the numbers in their answers, suggests a groundbreaking new analysis from Bloomberg reporter Jesse Drucker, aren’t telling the full story.
America’s mega rich are actually taking in much more in income, Drucker shows, than their tax returns indicate. Hundreds of millions more. And this hidden income has reduced their effective tax rate — a figure already lower than the rate average Americans pay — even lower.
We’re not talking patently illegal tax evasion here. We’re talking complex financial transactions that would do medieval alchemists proud.
Those alchemists long ago struggled mightily to turn common metals into gold. Lawyers and money managers for today’s mega rich can routinely pull off a trick almost as lucrative: They can make money off unrealized capital gains.
This trick carries various arcane labels like “variable prepaid forward contracts.” But the goal always remains simple and straightforward: to grab as much tax-free cash as possible out of assets that have increased in value.
How does the trick work? Imagine yourself a major corporate CEO. You hold a huge stash of stock in your company. That stock has appreciated. If you sold your shares, you could clear a quarter billion dollars in personal profit. But you would also immediately face a capital gains tax on that quarter billion.
Now that prospect shouldn’t leave you particularly upset. The capital gains tax you face, after all, only runs 15 percent. That’s less than half the 35 percent you would be paying if capital gains were taxed at the same rate as ordinary income.
Some super rich in this situation do indeed just take their capital gain, pay Uncle Sam his 15 percent, and buy a bigger yacht. Others get creative. They don’t pay Uncle Sam. They get Uncle Sam to pay them.
These super rich go ahead and sell their shares — for colossal sums — but don’t deliver them to the buyer until a few years after they cut the deal.
At delivery time, these mega rich do report the income from the sale on their tax returns and pay the capital gains tax upon it. But in the meantime they’ve enjoyed what amounts to an interest-free loan from Uncle Sam.
Setting these deals up can cost the super rich millions in dollars in fees. But the returns make that outlay to accountants and tax lawyers well worth the expense. The rich, observes former New York State Bar Association tax section chair David Miller, “can use complex transactions not available to most Americans to get cash from their appreciated stock without paying any taxes at all.”
Dole Food chairman David Murdock, notes Bloomberg’s Jesse Drucker, played this game in 2009 when he pocketed $228.6 million for his Dole shares. He won’t “deliver” them until next November. Hank Greenberg, the former CEO at insurance giant AIG, parlayed a “prepaid forward agreement” into $278.2 million. Clear Channel Communications founder Red McCombs grabbed $259 million.
“Prepaid forward” deals first became all the rage for the wealthy about a decade ago, the New York Times reports. The IRS is still playing catch-up. An IRS crackdown of sorts did start in 2008. But the super rich haven't flinched much.
One reason: The odds of getting audited remain low. Another: Even if wealthy taxpayers do get challenged on prepaid forwards, notes New York tax analyst Robert Willens, they can count on a tax court settlement that lets them keep a hefty chunk of whatever the prepaid forward helped them make.
“Who wouldn’t want that?” asks Willens.
Maybe the 99 percent. And what could protect the 99 percent from the continuing super-rich drive to exploit appreciated assets? David Miller, the New York State Bar Association tax expert, wants the super rich to have to pay a tax on the annual increase in the value of their immense stock holdings.
Such a tax, even if only levied on America’s richest 0.1 percent, could raise as much as three-quarters of a trillion dollars over a decade’s time. At that prospect, even the super rich might have to flinch.
The Best Case Yet for Ending CEO Pay Excess
Bob Diamond, an American banker, currently runs the British banking behemoth Barclays. By U.S. standards, Diamond doesn’t rate as particularly overpaid. At last count, he’s only pulling in £4.4 million a year, the equivalent of about $6.7 million.
The real outrageousness of Diamond’s paycheck only becomes unmistakably evident when we mix in some historical context. Back in 1980, the top executive at Barclays took home just 13 times the annual pay of the average British worker. Bob Diamond’s pay today equals 169 times average UK worker pay.
Final “plea” might be a more accurate description. You have one last chance, this powerful indictment of executive excess is warning Britain’s wealthy and powerful, to restore some common sense to executive pay. If you fail, you have only yourselves to blame for the “social unrest” that will surely befall you.
The UK's wealthy and powerful won’t be able to easily slough off this High Pay Commission admonition. The commissioners — from chair Deborah Hargreaves, a former Financial Times editor, on down — have too much national credibility to ignore. And the British media certainly haven’t ignored them.
The high pay panel has been making headlines ever since its launch a year ago. Last week’s final report release drew extensive coverage, from media outlets across the British political spectrum.
The new High Pay Commission report, entitled Cheques With Balances, essentially demolishes all the defenses that overpaid executives and their flacks, in the UK and the United States, have advanced to justify why executives today merit so much more than their counterparts a generation ago.
Excessive rewards for the UK’s corporate and banking elite, the commission details, have helped quintuple the share of national income that goes to Britain’s top 0.1 percent, from 1.3 percent of national income in 1979 to 6.5 percent.
If executive pay continues to rise at its current pace, the commission adds, that top 0.1 percent will be pulling in 14 percent of UK income by 2035, an inequality level not seen since the days of Charles Dickens.
To curb that current pace, the High Pay Commission has proposed a series of 12 eminently moderate reforms, a set of proposals that don’t go nearly as far as the original advocates for a High Pay Commission may have hoped.
Back two years ago, these advocates — a group of 100 nationally known lawmakers, scholars, journalists, and activists organized by the Compass think-and-act tank — called on the then-ruling British Labour Party to create a commission that would “consider proposals to restrict excessive remuneration” via “maximum wage ratios and bonus taxation.”
The Labour Party government ignored that call, and Compass a year later would establish the commission on its own, with the help of one of Britain’s most highly regarded foundations.
The high pay panel's six members haven't called, in their final report, for a “maximum wage.” They do call for disclosure of the ratio between chief exec and median worker pay, worker representation on the corporate panels that set CEO pay, and the replacement of intricate CEO pay deals with straight-salary arrangements that include, at most, one performance-related bonus element.
The remainder of the commission’s dozen recommendations all fall within the “interlinked and inseparable” principles of “transparency, accountability, and fairness.” Their adoption, says the panel, “could mark an important turning point.”
But these dozen proposals, the commissioners note, amount to no “quick fix.”
“It took 30 years to get us to this place and it may easily take that long to reverse,” the high pay report acknowledges. “This is not to admit defeat, but is a recognition that these are just the first steps in what is the much longer and deeper process of cultural and economic change that is required.”
What relevance does the new High Pay Commission report hold for the United States? All the reforms the Commission advances would, for starters, make equally good sense here. In fact, one of these reforms — ongoing disclosure of CEO-median worker pay gaps — has already become U.S. law.
But this pay ratio disclosure provision, enacted last year as a little-noticed feature of the celebrated Dodd-Frank financial reform legislation, has not yet gone into effect. Corporate America has unleashed a full-throttled lobbying assault against it, at both the regulatory and legislative levels.
The new UK High Pay Commission final report ought, at the least, help American executive pay reformers save pay ratio disclosure. If that happens, Americans will be better able, as the High Pay Commission puts it, to “move away from an economy predicated on a flow of rewards to the top.”
“A business model where corporate profits accrue in the hands of the few,” the high pay panel sums up, “is deeply flawed and over the long term unsustainable.”
Quote of the Week
“When pay for senior executives is set behind closed doors, does not reflect company success, and is fueling massive inequality, it represents a deep malaise at the very top of our society.”
Deborah Hargreaves, chair, UK High Pay Commission, November 22, 2011, upon the release of the executive pay panel's final report
Stat of the Week
The taxpayers in America's top 0.1 percent certainly do like those capital gains. They're together pulling in about half the nation's total income from the sale of stocks, bonds, real estate, and other assets, notesForbes, and the richest of the rich — the Forbes 400 — can currently credit these capital gains for 60 percent of their income.
Patriotic Millionaires meet with Grover Norquist, The Agenda Project. A video of a recent meeting between the right wing's point man on cutting taxes on the rich and a group of wealthy Americans who feel people like them ought to be paying more at tax time.
Paul Krugman, We Are the 99.9%, New York Times, November 25, 2011. Why we need to focus more attention on the richest one-thousandth of the population.
John Berthelsen, The Rich Get Richer Off the Backs of the Poor, Asia Sentinel, November 25, 2011. How bankers, hedge fund managers, and other financial speculators have turned food, fuel, and other commodities into a new global casino.