Rigged Systems: How the U.S. Tax Code Subsidizes the Super-Rich

The whole American tax code is rigged for the super-rich. David Cay Johnston is a Pulitzer Prize-winning reporter for The New York Times who wrote the book Perfectly Legal: The Covert Campaign to Rig our Tax System to Benefit the Super Rich – and Cheat Everybody Else, published in 2003. In this book, he brings to light some fascinating and disturbing issues. Starting on the second page, one sees the seriousness of the situation when Johnston states, “What surprised me more than anything was the realization that our tax system now levies the poor, the middle class, and even the upper middle class to subsidize the rich. If you make $30,000 to as much as $1 million you are literally being taxed so that the super rich, the 28,000 men, women, and children with incomes of more than $8 million per year, can pay less. That a quarter century of tax cuts has produced not trickle down economics, but Niagara up.”

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One of the best techniques the rich use for tax avoidance is charity, coupled with other various tax activities. Blattmachr is basically a tax avoidance company whose head honcho, Jonathan Blattmachr, is referred to by celebrities, CEO’s, and politicians on a first-name basis. His client list reads like the Forbes 400 list, and it is easy to see why. The following is an example of his cunning and incite to how he cheats the tax code. This is a plan he drew up for Bill Gates to avoid paying taxes. 

"The trick was in manipulating charitable trusts, a common enough device used by generous people who own an asset, such as stock or a building that has appreciated in value. Instead of selling the asset and investing the after-tax proceeds, an individual or married couple can donate the asset to a charitable trust that they control. The trust sells the asset tax-free and invests the proceeds, giving the donating individual or couple a lifetime income, typically 6 percent per year. When the donors die, what remains in the trust, typically half its value, goes to charity. 

Blattmachr’s plan was to take back not 6 percent annually for life, but 80 percent per year for two years. Gates could have pocketed at least $192 million without paying any tax. Then the trust would fold and a charity would get the remaining sum, less than $8 million. Under the plan Gates could have converted into cash more than 96 percent of gains on the Microsoft shares he donated, not the 72 percent he was entitled to after federal capital gains taxes. The charity would get less than four cents on each donated dollar. The government would collect nothing.” 

This is just the tip of the iceberg. Corporations avoid taxes by making a foreign country their tax home. A commonly used one is Bermuda. “Corporations are busy moving intellectual property such as patents, trademarks and the tile to the company logo to entities organized in tax havens like Bermuda. These corporations then pay royalties to use their own intellectual property, allowing them to convert taxable profits in the United States into tax-deductible payments sent to Bermuda and other havens that impose little or no tax.” 

The American people pay for this in higher taxes and reduced services when corporations move. This is because corporations are not paying their fair share of taxes, and the American people must make up for the loss. American employees also suffer because corporate factories are being displaced to foreign locations. 

The most influential and shocking chapter in this book is chapter three, which is appropriately titled "The Rich Get Fabulously Richer." The first four pages of this chapter are very important to understand and should be mandatory reading in all educational institutions. The following will make you see that our tax system holds the middle class in place and squeezes the lower tax bracket so the poor get poorer and the rich get fabulously richer!

“Thomas Piketty and Emmanuel Saez, both French economists, wrote a paper the National Bureau of Economic Research published in 2002 that examined in fine detail income and wealth data for the years 1917 through 2000. They relied mostly on the National Income and Products Accounts, the most comprehensive economic data the government collects, and on tax data. Their study focused not on all Americans but on those who made the most and how they fared compared to everyone else. 

They drew their first line between the top 10 percent and the bottom 90 percent. Overall, the bottom 90 percent lost ground. Their share of national income fell from two-thirds to slightly more than half. And their average income adjusted for inflation was essentially the same in 200 as in 1970. The average income for the bottom 90 percent in 2000 was $25,035, which was $25 less than three decades earlier. 

However, the top 10 percent of Americans had done very well since 1970, or so it seemed at first blush. These 11.3 million households, comprising roughly the population of California, saw their share of national income grow by almost half, from just under 33 percent in 1973 to just above 48 percent in 1998. When examined more closely, however, a curious trend appeared. The figures showed that the higher the income group, the larger the income gains!

Piketty and Saez cut off the top 10 steps on the ladder and divided the top 10 percent into ever-smaller segments of the population. They examined those on the rungs from 90 to 95. Their share of the national income was flat. Next came the slightly smaller group between rungs 95 and 99; their share grew by 19.5 percent. 

Next, the professors sliced off the top rung on the ladder, the top 1 percent or about 1.3 million households, roughly the population of Kentucky. This group earned more than a fifth of all the income in the country. The economist broke the top 1 percent down into ever-finer amounts, into minuscule amounts on the ladder, the smallest of which represented a hundredth of 1 percent, or about 13,400 of the country’s 134 million taxpayer households. 

They examined the bottom half of the top 1 percent. Their share of national income grew by 47 percent, which was more than twice the rate of the group just below them on the income ladder. The professors then looked at those on the minirungs from 99.5 to 99.9. Their share of national income grew even more, rising by 90 percent. Next came those on the minirungs from 99.9 to 99.99, just 120,000 households. Their share of national income more than tripled, growing 227 percent. 

Finally, the professors examined the very top rung, the richest 13,400 households. These are the people who made more than 99.99 percent of their fellow Americans. They had by far the biggest gains. Their share of national income in the year 2000 was more than five times what it had been in 1970. Back then, this elite group received 1 percent of the national income, while in 2000 it received more than 5 percent. Even more telling was how it had done compared to those fortunate enough to stand between the 90th and 95th rungs—the top group’s share of income had grown almost 1,000 times faster.

The average income of all households in 2000 was $42,700, while the 13,400 households at the very top had an average income of $24 million each, or 560 times the average. It was not always this way. In 1970, the very top group had about 100 times the average. 

Clearly the only significant income gains over three decades went to a very narrow slice at the top. After adjusting for inflation, for each dollar of income in 1970, the top 13,400 households had four additional dollars plus a dime to spend in 2000, while the average household in the bottom 99 percent had only eight cents more per dollar.

The enormous concentration of income among a very, very few becomes even clearer with a simple comparison of income growth between 1970 and 2000. How did the top one-hundredth of 1 percent compare to the bottom 99 percent? For each dollar of additional income going to each of those in the bottom 99 percent of American the riches each averaged an astonishing $7,500.

Applying the National Bureau of Economic Research report to the incomes reported on tax returns in 2000 produces an astonishing result. The 13,400 top households had slightly more income than the 96 million poorest Americans. That is a chasm vastly greater than the liberal Center on Budget and Policy Priorities reported when it said that the top 2.7 million had as much as the bottom 100 million. 

Here is the most important news in these pages—just 28,000 men, women, and children had as much income in 2000 as the poorest 96 million Americans. Each group had about 5 percent of all reported income that year. To visualize the enormity of this chasm, imagine these two groups in geographic terms. The super rich would occupy just one tier of the seats at Yankee Stadium, while those as the bottom are the equivalent of every American who lives west of Iowa—plus everyone in Iowa.”

Sources: 

1. Johnston, David Cay. Perfectly Legal: The Covert Campaign to Rig our Tax System to Benefit The Super Rich—and Cheat Everybody Else. Portfolio: Penguin Group Books. 2003. 

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