The Tax 'Gap'

THIS WEEK
Tim Cook became the CEO of Apple computer last August, on the same day the late Steve Jobs formally resigned. Apple, we learned last week, gave Cook a hearty welcome to his position. Enormously hearty. Cook began his CEO stint with a new pay deal that grants him one million shares of Apple stock that will vest a bit down the road. The value of those shares last August: $376 million. The value last week: over $422 million. We also learned something else last week, from a public radio broadcast by a self-professed “Apple fanboy,” monologist Mike Daisey, about his visit to plants in China that make his iPhone. Daisey found 36-hour shifts and suicide nets outside the factories, an Apple supplier’s response to a series of worker suicide leaps. On Friday, an official Apple report acknowledged still more horrors. Dr. Martin Luther King Jr., had he survived, would have turned 83 this past week. He could still be preaching. What would he be saying about Tim Cook and suicide nets? We won’t speculate. We will, in this week’s Too Much, explore the latest release of the annual report that updates the state of the Dr. King legacy.
GREED AT A GLANCE
China has finally surged past the United States — in Rolls-Royce orders. The 107-year-old UK automaker sold just over 1,000 cars in China last year, edging out the 990 sold stateside. Overall, Rolls moved 3,538 four-wheelers worldwide in 2012, with sales hottest for the Rolls Ghost, a new entry-level model that typically goes for $384,000. Rolls exec Torsten Müller-tvs last week told reporters that Rolls is hoping to make big inroads this year in South America. New Rolls dealerships will open this March in Chile and Brazil. The biggest problem facing Rolls in this new territory? The South American super rich, Rolls marketers worry, seem much more into private helicopters than fine motorcars . . . Private equity kingpins like their privacy. They like loot even more, the reason why three top guns at the Carlyle Group, the D.C.-based private equity power, last week filed papers that reveal their 2011 personal pay. Privately held firms normally don’t have to reveal their pay levels, but Carlyle is now preparing a public stock offering, and that requires a host of public disclosures. So how much did Daniel D’Aniello, William Conway Jr., and David Rubenstein pull in last year? Each took home $138 million, with the bulk of that in “carried interest” that qualifies for a special 15 percent tax rate, not the 35 percent that would otherwise apply. Bills to repeal the “carried interest” loophole have gone nowhere in the U.S. Senate. None of the GOP White House hopefuls who've blasted Mitt Romney for his “vulture” private equity exploits, oddly enough, back repealing the carried interest loophole . . . How much of an impact has the Occupy movement had on America’s psyche? In 2009, less than half of Americans felt the United States was experiencing “very strong” or “strong” conflicts “between the rich and poor.” At the end of 2011, the Pew Research Center reported last week, two-thirds of Americans felt that tension. A plurality of Americans — 45 percent — also feels that most rich amass wealth because “they know the right people or were born into wealthy families.” Numbers like these seem to be prompting some unusual reactions in circles normally averse to discomforting deep pockets. In the Wall Street Journal last week, Stanford economist Ronald McKinnon laid out a “conservative case for a wealth tax.” He called for a 3 percent levy on taxpayer wealth over $3 million.
PETULANT PLUTOCRAT OF THE WEEK
Don’t mess with Sheldon Adelson. Or any of his buddies. Casino mogul Adelson sent that message out loud and clear a week ago Friday when he dumped $5 million into the “super PAC” that backs the wobbling White House bid of former House speaker Newt Gingrich. Those dollars are this week bankrolling a $3.4 million TV ad buy in South Carolina against Mitt Romney, the GOP front-runner who bashed Gingrich with an ad blitz of his own before the Iowa primary. Adelson and Gingrich have been close buds ever since Gingrich helped Adelson hone his anti-union patter. Adelson now ranks as the 2012 election’s most generous giver. He can afford to give more. His $5 million for Newt equals less than 0.1 percent of his $21.5 billion fortune.
INEQUALITY BY THE NUMBERS
IN FOCUS
Law and Order 24/7, Except at Tax Time The rich don't much like paying taxes when tax rates run high. They don't much like paying taxes when tax rates run low either. Any tax system that subjects rich people to high taxes is asking for trouble. Or so the politicians who cater to people of means incessantly argue. The higher the tax rate on high incomes, the argument goes, the greater the incentive the rich have to waste time and energy figuring out ways to evade paying taxes. “Conservatives tend to talk about noncompliance as if it were solely a function of tax rates,” as former Reagan administration policy aide Bruce Bartlett noted last week, a perspective that makes tax evasion “yet another excuse to cut taxes.” In 2001 and then again in 2003, that convenient excuse helped the Bush White House chop away at the taxes the IRS expects rich people to pay. The tax rate on top tax-bracket income slipped from 39.6 to 35 percent, and the rates on capital gains and dividends both dropped to 15 percent, from 20 and 39.6 percent. According to rich people-friendly right-wing ideology, these cuts should have boosted tax compliance, since, as Bartlett points out, “the return to evasion fell.” What did happen? Tax evasion between 2001 and 2006, a new IRS studydocuments, actually increased. In 2001, $290 billion in individual and business taxes due went uncollected. In 2006, $385 billion. Need some context for all these billions? The 2006 federal budget deficit red ink totaled $248 billion. If the IRS had been able to collect every dime cheating taxpayers cost Uncle Sam in 2006, the federal treasury would have ended the year $137 billion in the black. Who’s doing all this tax cheating? Not average Americans. Average Americans get most of their income from wages and salaries. Almost all this income faces paycheck withholding. The result: Only 1 percent of the taxes due on wages and salary, the new IRS study reports, goes uncollected. Rich Americans, by contrast, collect huge chunks of their annual income from capital gains, business ownership, and other sources of income that face neither rigorous reporting mandates or withholding. Tax evasion for the income category that includes capital gains and private equity partnerships, the IRS calculates, ran at an 11 percent rate in 2006, ten times the evasion rate for wages and salaries. The new IRS report doesn’t break down the new tax evasion data by taxpayer income class. But five years ago, the last time the IRS released a major tax evasion analysis, two analysts — IRS economist Andrew Johns and the University of Michigan’s Joel Slemrod — went through the raw IRS data and did just that. Americans who make between $500,000 and $1 million a year, the pair found, underreport their incomes by a whopping 21 percent, triple the 7 percent“misreport” rate of taxpayers making between $30,000 and $50,000 and well over double the 8 percent cheating by taxpayers making $50,000 to $100,000. The new IRS tax evasion numbers cover the 2006 federal fiscal year. Has the tax evasion story improved since then? Some signs certainly do seem positive. Earlier this month, the IRS announced that audit rates on tax returns reporting over $1 million a year in income have doubled over recent years. In 2011, 12 percent of millionaires faced audits, up from only 6 percent in 2009. The higher audit rates, says IRS enforcement chief Steven Miller, should assure “those at the lower end of the spectrum” that “those at the higher end of the spectrum are subject to the same rules and enforcement as everyone else.” And the IRS is toughening up elsewhere as well. The agency has created a “Global High Wealth” unit, an initiative designed “to better cope with the growing complexity of income and assets of the high-income, high-wealth population.” IRS investigators are also going to court against Swiss and other foreign banks that have helped the U.S. wealthy hide their assets. But this momentum may be difficult to sustain. Budget cuts have undermined the IRS enforcement capacity. The agency’s $11.8 billion budget for the current 2012 federal fiscal year stands $300 million under last year’s budget — and $1.5 billion under what the Obama White House requested. The IRS this year, enforcement chief Miller acknowledges, will have about 3,000 fewer enforcement staff on the job than in 2010. The “imbalance” between the agency’s workload and resources, IRS national taxpayer advocate Nona Olsontold Congress last week, “is becoming unmanageable.” More budget resources would certainly help turn that situation around. Every $1 added to the IRS for enforcement, the data show, yields over $4 in revenue.   But really putting the kibosh on tax evasion will likely take much more aggressive political leadership from the top. On that score, the politicos in Washington could take some inspiration from Mario Monti, the new prime minister in Italy, the home to some of the world’s most notorious wealthy tax evaders. Italy is losing the equivalent of $152 billion a year to tax evaders, and the rich have for years flagrantly underreported their actual incomes. On New Year’s, prime minister Monti had his tax police swoop down on luxury ski resorts and seaside spas. Their mission: find evidence of tax evasion. They found plenty. At resorts in Cortina, police found 42 super luxury cars — average price, over $250,000 — registered to owners reporting less than $25,000 in income. Monti’s aggressive raids on the haunts of the rich and famous have allies of the disgraced former Italian prime minister, billionaire media mogul Silvio Berlusconi, fuming. They figure to be fuming for some time. The new prime minister doesn’t appear to be content with enforcing current tax law. He’s now hinting support, say news reports, for “a new, higher tax bracket for high-income individuals” and a tax on speculative financial transactions. And that makes ample sense. If the rich are going to evade taxes when tax rates run low, after all, society might as well jack those tax rates up much higher.
IN REVIEW
King Day Musings: A Nest-Egg for Every Baby United for a Fair Economy, State of the Dream 2012: The Emerging Majority, January 13, 2012 In the two decades between 1948 and 1968 — years that saw the income gap between America’s rich and everyone else narrow significantly — the income gap between black and white Americans also narrowed significantly. United for a Fair Economy has the numbers on that narrowing in State of the Dream 2012: The Emerging Majority, the Boston-based group’s just-released latest annual Martin Luther King Jr. holiday report. In 1948, the typical African American family in the United States made 53 cents for every dollar of typical white family income. In 1968, the median black family was making 60 cents for every dollar that went to the median white family. But that progress has ended. In 2010, typical African American and Latino families made only 57 cents for every typical white family dollar. And wealth disparities run far wider, especially since the Great Recession hit. Between 2005 and 2009, the wealth of the typical U.S. white family dropped 16 percent to $113,149. The typical black family net worth dropped 53 percent, to $5,677 — and the typical Latino household net worth sank 66 percent, to $6,325. These figures ought to send a shudder through anyone who worries about America’s future. In 2030, the majority of U.S. residents under 18 years old will be people of color. If current household wealth trends continue, the majority of America’s young people will be growing up in economically insecure households. So what do we do as a nation? We do, the new United for a Fair Economy State of the Dream suggests, exactly what we did after World War II. We make the public investments that help working families accumulate enough household wealth to “cushion the blow of a layoff, enable someone to take time off from work to return to school or care for an ailing parent, or be used as seed money to start a new business.”    Those public investments that America made after World War II — in everything from housing to education — worked marvelously well. But not for families of color. Black veterans, for instance, couldn’t take full advantage of the G.I. Bill because most colleges either discouraged or refused to accept black applicants. Historically black colleges simply didn’t have enough seats. State of the Dream 2012 urges a package of new initiatives that would essentially amount to a new G.I. Bill — for everybody. The package, the new United for a Fair Economy report notes, would include programs like “KidSave” and “individual development accounts,” or IDAs. IDAs offer matching funds that can give lower-income families greater incentive “to save and build wealth,” and some IDA programs already exist in a handful of communities. “KidSave” would establish for every newborn child a small trust fund that could later be tapped, as the child enters adulthood, for college, job training, or a home downpayment. Stiff taxes on America’s wealthy, notes the new State of the Dream, could go a long way to help financing the KidSave-like efforts America needs to revitalize the nation's beleaguered middle class and close the racial wealth gap. How long? America’s 400 richest currently hold $1.53 trillion in personal wealth, Forbes reported this past September, a total 12 percent up from the previous year — and 608 percent more than the combined wealth of the Forbes400 in 1982, after adjusting for inflation. A simple 10 percent tax on just the wealth of Forbes 400 alone would raise enough money to bankroll a $35,000 KidSave nest-egg for every baby born this year in the United States. Dr. King would approve. “A society based on making all the money you can and ignoring people’s needs,” as he told his future life partner Coretta Scott in 1951, “is wrong.”

New Wisdom
on Wealth

Alameda County Public Health Department,Economic Inequality Is Bad for Our Health. A new six-page fact sheet from California that ought to be an inspiration for health departments all across the United States.

Greg Sargent, Romney: Questions about Wall Street and inequality are driven by `envy,’Washington Post, January 11, 2012. A solid parsing.

Stewart Lansley,Enrichment at the top is deepening the recession,Independent, January 11, 2012. Skewed distribution of national income drove the 2008 crash. The same inequality now drives our “relentless slide into near-permanent slump.”

Joseph Stiglitz, The Perils of 2012, Project Syndicate, January 12, 2012. A Nobel laureate makes the case for taxing the rich.

Nicholas Johnson, More States Propose Reverse-Robin-Hood Tax Policy,Off the Charts, January 13, 2012. Two more states, Kansas and Oklahoma, move to raise taxes on the working poor to finance tax cuts for the well-to-do.

Dean Baker, NPR Does Fluff Piece for Private Equity, Center for Economic and Policy Researcg, January 13, 2012. A primer on how private equity superstars can make millions while creating zilch value.

Deaglan De Breadun, Lack of humility among privileged unbalances society, Irish Times, January 14, 2012. The sense of entitlement among many wealthy makes the “idea of a maximum wage”" the “general approach that needs to be taken.”