A corporate tax lawyer worth celebrating

April 1, 2013

THIS WEEK

Two tales of jackpots and taxes. The first: A New Jersey grocery store employee has just won the fourth-largest Powerball lottery pool ever. The 44-year-old Pedro Quezada will take his cash as a lump sum, about $211 million. Taxes? He’ll owe 46.2 percent of his lump in combined state and federal income taxes.

Hedge fund manager John Paulson likes to bet, too. In 2009, he bet that the feds would bail out banking giant Citigroup. He bet right — and cleared $1 billion. Taxes? The profits hedgies make qualify as “capital gains” and get preferential treatment at tax time. Paulson paid only a 15 percent tax on his winnings.

The basic capital gains tax rate did go up a bit, from 15 to 20 percent, in the January fiscal cliff deal. But hedge fund managers who cash out big this year will still be paying taxes at half the rate of Pedro Quezada.

In this week’s Too Much, more on taxes today — and a little on taxes yesterday, back in the middle of the 20th century, a wondrous time when even Wall Street tax lawyers advocated and applauded stiff taxes on America’s super rich.

GREED AT A GLANCE

Auditors at the IRS generally do a decent job identifying how much wealthy taxpayers are trying to shortchange Uncle Sam. But the understaffed IRS is only examining a fraction of the returns the wealthy file, just 12.1 percent of returns reporting over $1 million in income. How much in additional taxes due might the IRS identify if audit rates rose? Plenty. On 2011 returns, just-released IRS figures show, the IRS found an average $117,116 in taxes due on each return over $1 million examined. If the IRS had examined all 2011 returns reporting over $1 million, the total taxes due identified from millionaire filers would have likely leaped from the $4.9 billion actually identified to $39.7 billion . . .

CEO pay, USA Today reported last week, rose 8 percent last year, a figure calculated to include the value of new stock and option awards execs grabbed in 2012. But if we examine instead what CEOs actually took home last year, after cashing out awards granted in previous years, their pay hike soars to 40 percent! That doesn’t much bother Bill Huizenga, a Michigan member of Congress who has introduced a bill to repeal the 2010 Dodd-Frank Act provision that requires firms to disclose the ratio between what they pay their top exec and typical workers. No firms have yet had to make this disclosure, since the Securities and Exchange Commission still hasn't written the regulations necessary to enforce it. New York lawmaker Nan Hayworth introduced a similar ratio repeal in 2011. Voters repealed Hayworth last November . . .

Palm Beach — the 16-mile barrier island just off Florida’s coast — boasts a heavier concentration of awesomely affluent than any other zip code in America. What Palm Beach also boasts: more periodicals per capita than any place in the world. The 5,000 households of Palm Beach can partake of Palm Beach Life, Palm Beach Illustrated, Palm Beach Design, Palm Beach Woman, Palm Beach Society, and the venerable Palm Beach Daily News, a paper printed on newsprint “that prevents ink from smudging on well-manicured fingers.” What makes these pubs so popular? Endless pages devoted to photos from the Palm Beach party scene. The lushest annual party? That may be the March gala of the local historic preservation society. This year’s gala turned a ballroom “into a white Russian winter fantasy, complete with ballet dancers and ice sculptures of giant bears.”

Quote of the Week

“I'm shell-shocked. I can't believe this can go on.”
John Bogle, founder of the Vanguard mutual fund company, on last week's news report that CEO pay jumped another 8 percent last year, March 27, 2013

PETULANT PLUTOCRAT OF THE WEEK

The five top execs at cable giant Comcast are each making, at last count, over $15 million. What they’re not making: much progress narrowing the broadband speed gap between the United States and other nations. No problem for Comcast public policy VP Rebecca Arbogast. Her job: justifying dismal U.S. broadband performance. Her strategy: total denial. Public angst over the “alleged failing” of U.S. broadband, she’s charging, rests on “disinformation.” Contrasts with nations like South Korea rate as “silly at best.” One purveyor of this “silliness,” NetIndex, last week had the United States 33rd globally in speed. Arbogast's attitude isn't surprising industry analyst Karl Bode: “Denial has long been the battle cry” of broadband's corporate giants, “who’d prefer things stay exactly as they are . . . uncompetitive and costly.”

IMAGES OF INEQUALITY

At last month’s annual auto show in Geneva, onlookers ogled Lamborghini’s new Veneno. Only three will be made. All three have already sold, at $4 million each.

Web Gem

New Economy Working Group: Equitable Economies for a Living Earth/ A forum for freely exploring possibilities unbounded by established ideologies and conventional wisdom

PROGRESS AND PROMISE

Let's Measure What We Treasure: Here's Why

What if inequality in America had not grown over recent decades? Where would we be now? In Maryland, a landmark new report vividly relates, families in the state's poorest fifth would be making twice the $15,000 they take home today if they held the same income share Maryland’s poorest held back in 1968. And if Marylanders remained as equal today as then, the state would also have less crime, fewer divorces, and better health. How do we know? Maryland has, since 2009, been collecting data on the 26 measures of social, environmental, and economic well-being that make up the Genuine Progress Indicator, or GPI. Unlike the standard “GDP,” this new study notes, the GPI measures what matters — and can help people understand the terrible price we pay for tolerating inequity.

Take Action
on Inequality

CEOs at America's top 30 corporations have trimmed taxes on their profits by half since the 1970s, the Washington Post reported last week. Back the new bill, the Corporate Tax Fairness Act, that shuts the loopholes that let execs sidestep taxes and pump up their own pay.

inequality by the numbers

Stat of the Week

On a typical winter’s day last year, federal stats detail, over 663,000 people went homeless in the United States. Single-room-occupancy shelter rates run about $558 per month. At that rate, notes analyst Paul Buchheit, any one of America’s ten richest collected enough in 2012 income to pay an entire year's rent for all of America's homeless.

IN FOCUS

A Question for Tax Time: Why Do We Tax?

Years ago, right after World War II, America's most famed corporate tax lawyer gave an answer that had the nation's super rich squirming.

April 15 is fast approaching, and Americans are naturally thinking about taxes. But most of us won’t be thinking about taxes the same way Americans once did. Over the past half-century, we’ve had a profound transformation in our attitudes toward income taxation.

How profound? Consider the tax perspective of Randolph Paul, the corporate tax attorney who helped shape federal tax policy during and after World War II.

Randolph Paul probably thought about taxes — and their role in our society — as deeply as any American of his time. Paul lived and died taxes, literally. In 1956, he slumped over and passed away while testifying about tax policy before a U.S. Senate committee.

Paul’s tax career had started decades earlier. In 1918, just a few years after the federal income tax went into effect, Paul began specializing in tax law. By the 1930s, he had become one of Wall Street’s top tax experts. His clients ranged from General Motors to Standard Oil of California, and probably no one in America knew the tax code — loopholes and all — any better.

That knowledge made Randolph Paul invaluable to Franklin Roosevelt’s New Deal. In 1940, Paul helped New Dealers write an excess profits bill. In 1941, right after Pearl Harbor, he joined the Treasury Department and worked to make sure that all Americans, the wealthy included, contributed financially to the war effort.

Paul succeeded. By 1944, the federal income tax had become a major presence in American life. Most Americans, for the first time ever, were paying income tax — and rich Americans were paying the most taxes of all. During the war, the tax rate on income over $200,000, about $2.6 million today, jumped to 94 percent.

Two years after the war, back in private practice, Paul published his masterwork, the ultimate distillation of his thinking about tax policy. His new book, Taxation for Prosperity, presented a carefully argued case for continuing high wartime tax rates on peacetime high incomes.

Taxation for Prosperity drew a distinction between “a mature economy” and a “mature approach to economic problems.” The immature in a mature economy, Paul noted, preach “the gospel that taxes are for revenue only.”

In fact, Paul would argue, taxes in a mature economy offer us “powerful instruments for influencing the social and economic life of the nation.” With “well-planned taxes,” we could avert a next depression.

By “well-planned taxes,” Paul meant progressive taxes, steeply graduated levies that kept as much money as possible in the pockets of “people in the lower brackets.” Lower-income people, Paul explained, “have a higher propensity to spend.” Their spending keeps “the wheels of industry turning.”

For people in higher income brackets, by contrast, a “well-planned” tax system meant high tax rates.

“The people with high incomes can best afford to contribute to the support of the government,” as Paul noted, “and the failure to impose substantial taxes in the upper brackets would seriously injure the morale of the rest of the taxpaying public.”

High taxes on people of high income, Paul continued, also “perform the valuable service of preventing more saving than our economy can absorb,” soaking up the excess that would otherwise wind up devoted to destabilizing speculation.

Could taxes on the rich ever go too high? That danger, Paul acknowledged, does exist in an economy that “depends upon the profit motive.” So taxes on the rich ought always be kept at a level that “fosters economic activity.”

But the “need for this incentive,” Paul added, fades away “when we reach the highest brackets.” At that point, tax rates ought to rise “very sharply ” to help “counteract undue concentration of wealth.”

In other words, Paul summed up, we need a tax system that keeps “the nation’s wealth” from flowing “into the hands of too few.”

Over the next two decades, in the 1950s and 1960s, we had a tax system that for the most part played that role. Tax rates on America’s rich hovered at high, near World War II-era levels, and average Americans, over the course of these years, prospered as never before.

Since then, we’ve gone in the opposite direction. Our nation’s tax experts — and the elected officials they advise — no longer think about taxes as a tool for combatting our “undue concentration of wealth.” They see taxes as a matter of raising revenue pure and simple.

Randolph Paul considered that attitude “immature.” We should, too.

New Wisdom
on Wealth

Rick Wartzman, Why ‘Pay For Performance’ Is a Sham, Forbes, March 26, 2013. Exposing a key rationale for excessive executive compensation.

Brad Plumer, ‘Trickle-down consumption’: How rising inequality can leave everyone worse off, Washington Post, March 27, 2013. A new study examines what happens to everyday life when wealth starts concentrating.

Robert Reich, Why Pols Are Sensitive to Public Opinion on Same-Sex Marriage, Immigration, and Guns, But Not on the Economy, March 28, 2013. Deals over economic policy almost always compromise away what most Americans want because these deals impact the holders of large fortunes in ways that guns and gay marriage don't.

How the U.S. is redistributing income to the wealthy, an interview with Pulitzer Prize-winner David Cay Johnson, Current TV, March 28, 2013.

Krishnadev Calamur, French President Tries Again for Tax on Rich, NPR, March 28, 2013. Francois Hollande is proposing that corporations pay a 75 percent tax on any paycheck income over 1 million euros.

The introduction chapter
to Too Much editor Sam Pizzigati's new book now ready to read online.

new and notable

A Specific Goal for the CEO-Worker Pay Gap

Trade Union Voting and Engagement Guidelines, Trades Union Congress, London, March 26, 2013

How wide a gap between CEO and worker pay can a rational society accept? The British labor movement last week delivered an answer: No corporations should be paying their top executives over 20 times what they pay their workers.

From now on, the UK Trades Union Congress announced last week, Britain’s leading unions will be voting the shares their pension funds hold in UK corporations — currently worth over $1.5 billion — against any corporate pay plans that top this 20-to-1 ratio.

“We are going to use the power of our pension funds,” vows Trades Union Congress general secretary Frances O’Grady, “to make a difference.”

In the UK, starting later this year, corporate boards will have to gain shareholder approval for their executive pay plans.

British unions will apply the 20-to-1 ratio at first to the gap between executive and average or median worker pay. They hope eventually to apply the ratio to the gap that divides top executives and their company’s lowest-paid workers.

The Trades Union Congress, the UK national labor federation, spells out this approach in detailed new guidelines that will govern how unions vote their share holdings — on everything from compensation to executive hiring practices — at Britain’s 350 largest corporations.

“As union investors,” the new guidelines pronounce, “we support the creation of a more equal society and are committed to taking the impact on wider inequality into account in our consideration of executive pay.”