Taxation and the Deficit Scam

THE UNITED STATES IS THE LEADING PARADIGM OF THE MARKET economy at its "successful best"; yet both Republicans and Democrats have made the national debt a pivotal national issue. Why a successful market economy should not generate enough revenue to allow this government to cover domestic social needs that are quite modest when compared to modern Western nations, without having to borrow, remains unanalyzed. Both Republicans and President Clinton insist that seven hundred billion dollars must be cut from the federal expenses between 1997 and 2002 to reduce spending to anticipated tax receipts. With predictions of dire consequences if the federal budget is not balanced, they have zealously advanced legislation that, in the first instance, has or will savagely cut welfare provisions -- those already skimpy forms of public assistance that provide a last guard against homelessness, hunger, despair, unnecessary suffering, moral degeneration, and premature death.

One must go back to the Reagan years to understand fears raised by deficits in present domestic politics. Prior to his election in 1980, the two-hundred-year-old American republic had amassed a national debt of less than one trillion dollars. Basing himself on a wealth-friendly "supply side" economics, Reagan, a parroting ignoramus in most disciplines, espoused the view that large ax cuts on the wealthy and corporations would produce an economic boom of such magnitude that new tax receipts would cover the lost revenue and even pay for huge new armament spending. The "tax reforms" of 1981 and 1986, passed by a Democratic-dominated Congress, slashed rates on top incomes from 70 to 28 percent;¹ consequences included the acceleration of mega-concentration of total U.S. wealth in a few hands, towering deficits, and the actual raising of taxes on the middle and working classes. By the end of the Republican Reagan and Bush presidencies in 1992, the national debt had leaped to over $5 trillion, a quintupling in 12 years, and by then consuming 18 percent or more (depending on source) of all federal tax returns.

In reality, one explanation for Clinton's victory in the 1992 election was his promise to reign in these deficits. By then, right-wing politicians had learned the advantages of using the deficit in pursuit of an old right-wing goal. Begun in the Reagan years but not successfully attempted in national politics until later, conservatives realized that popular social programs such as aid to the disabled, old-age pensions, and medical coverage for the elderly under Social Security and Medicare could not be attacked directly. The same might be accomplished by offering tax cuts, exaggerating their pay-back advantages, and by denouncing government as wasteful and bureaucratic to undermine both the ability and expectation of government-sponsored help. This tactic first worked in California,² but singularly failed for the Republican presidential candidate Bob Dole in the 1996 election. Nevertheless, the tactic remains in the political limelight, and received additional backing when Clinton, socially more conservative than the Richard Nixon of a generation earlier and in the same sleaze category, endorsed the balancing of the budget by 2002. A note of hysteria was added with the assertion that the Social Security pension fund will "go broke" when the postwar "baby boomers" begin retiring in a few years.

The obverse side of the deficit problem is taxation, that is, government revenues. When one looks at this underside with its many never publicly-explained or -understood statutes, statutes of special interest, statutes purposely cast in arcane and almost incomprehensible legalese, then the more accurate explanation emerges: the economy does not suffer from deficits, but from a tax system that has abandoned all pretense of progressivity and fairness, tolerates and encourages the shifting of taxation from the wealthy to the bottom 80 percent of society, limits the flow of tax revenue, and forces the most needy to survive in increasingly Spartan conditions.

THIS ARTICLE IS NOT A RESTATEMENT OF TESTED FORMS OF TAX AVOIDANCE. For example, the tax-free interest of "$18 millions to more than $87 millions" by Ross Perot in 1991 alone,³ and the nearly $65 billion in tax-free interest paid between 1987-1991 to some 300,000 persons with incomes of over $200,000; or that the 7.65 percent direct annual Social Security deduction on wages up to $65,400 falls overwhelming on the working majority, whereas income above that figure pays nothing; or that for years excess annual surpluses -- $75 billions and above -- have been collected from this regressive Social Security tax and used to replace income lost from eliminating progressivity on upper incomes, thus stealthily lifting money from the pockets of the lower classes to the purses of the topmost.

Attention here is on recent techniques -- the new industry that has arisen specifically to broaden the tax escape hatches of wealth. One is the rapid growth of "deferred compensation" extended to executives and other high managerial officers. Very simply, some or much of the executive's salary is withheld by the company, guaranteed a higher-than-market rate of interest, and supplemented with additional funds. Thus corporate executive John L. Clendenin, CEO of Bell South, has some $10 million in deferred compensation, and last year he was credited with nearly triple-the-bank rate interest, plus an additional $415,700. The mogul of them all is Roberto Goizueta of Coco-Cola, who may have deferred taxes on about $1 billion, after paying $75 million on other income. Almost always hidden from public view, these arrangements constitute a large withholding from the already burdened public treasury, accelerate the quest to find ever more legal avoidance, and spur both cynicism and the call for further "deficit cutting." This, at a time when the hard face of "managerial responsibility" is shown to the work force: citing costs, employers constantly cut retirement benefits. By now, half of those privately employed work without any retirement benefits, aside from the federal Social Security which is meager at best.⁴

Nothing, however matches what is being brewed daily in the witches' cauldrons of Wall Street and in bank and lawyers' offices ever avid to serve the wealthy -- for an appropriate fee! In the U.S., the capital gains tax -- a tax on any gain due to speculation or appreciation -- is pegged at 28 percent; much less than the originally progressive income tax. By its very nature, it falls largely on the more affluent upper 20, 10 and especially top 1 percent, and is among the "least painful" of taxes. Amidst property appreciation and soaring stocks, this can be the source of immense additional riches for the very rich who are able to avoid even that minimum 28 percent tax. Hence, meet the new world of "upreits, swaps, DECS, Strypes, ACES, zero-cost collars," not to speak of "ESOP" or the more prosaic "borrowing" and "trusts," typical of the all-new tax avoidance schemes constantly being thought up. They are difficult to understand and, except to the initiated insider, as foreign to a native New Yorker as to a Muscovite. Several examples will limpidly illustrate their function. When the extremely wealthy Estee and Ronald Lauder disposed of their well-known Estee' Lauder stock, they used a system of borrowing that netted them close to $400 million and (legally) avoided some $95 million (28 percent) in capital gains tax. Or another: former Treasury Secretary William Simon and partners sold the Avis car-rental agency under an ESOP arrangement for a $700 million gain, walking away tax-free. Typical of less affluent imitators, a well-to-do couple entrusted their half-million dollar home for 25 years to their children, and will live rent free; whereas the market value of the property may more than double in that time, for tax purposes it will devaluate drastically leaving a minimum or no tax obligation at the end. The purpose of all these strategies, noted one banker, is to defer capital gains taxes for as long as needed to avoid them entirely. Indeed, in 1993, the last year of reported capital gains taxes, less was collected in that rising-stock-market year than in 1985, suggesting the degree of tax escape. "You can have your cake," he titillated his appreciative audience by revealing that the market economy had created magic realism, "and eat it, too."⁵ Suspicions are that the amount of taxes not paid to the commonweal may be gargantuan.

Moving to the lower classes, the price to be paid for all these forms of tax avoidance reemerges and may be felt directly by Ms. Abdur-Rahman, a 24-year old African-American mother of 20-month old Alexcya. Alexcya suffers from cerebral atrophy and will never know an independent life. Along with some one million children, she is helped by a monthly Supplemental Social Security (SSI) check, $497 in this case, sent to her working mother. Recently, Ms. Abdur-Rahman along with 260,000 other parents received notice that this aid may be terminated. New guidelines and the deficit! The same could be said for John Cresenzo, 44, father of two, suffering from a rare cancer. The HMO he was forced to enter, in the absence of universal health coverage, will not pay for an experimental treatment that alone may save his life. Profits count: the HMO is not in business simply to save lives, but to make profit and also save lives!⁶ They would join some 31 percent of the population, roughly between 80-90 million persons, with no medical coverage or who face difficulty paying medical bills. These examples do not even include the common tens of millions who live with low wages, job uncertainty, and are constantly skidding along the edge of personal financial catastrophe. No doubt, a Ronald Lauder would commiserate with Ms. Abdur-Rahman, and most likely William Simon would even open his purse to extend a few dollars to John Cresenzo, but both they and their class live increasingly insulated from the misery left in the wake of the market economy and its drive for personal gain and profit, regardless of the social cost.

THIS MULTI-TIERED SOCIETY, THE EUPHEMISM FOR DESCRIBING a multi-class society shaped by the driving dynamics of the market economy, i.e. advanced capitalism, is reminiscent of the structural physiognomy assumed by society in the last decades of the ancien regime: the absolute monarch rested on a social order distended at the top by a handful of nobiliary magnates whose vast landed properties were serviced by an enserfed or impoverished peasantry.

Does this Hobbesian scene of omo omnium lupus represent the future? Perhaps. The report indicates that the possible loss of aid to her daughter filled Ms. Abdur-Rahman with anger; also, John Cresenzo who paid $6,000 for his faux coverage is no fool. Despite a legal right to vote, at the moment they have no political means of redress, and for all practical purposes are disfranchised. Given the wiping out and subversion of popular wisdom in the past half century, which must itself be the subject of an intense study, it would be difficult for them to understand at this moment that in the scales of the market economy they are irrelevant, and that their problems are rendered acute by social and economic policies designed by government to favor the privileged few at the expense of the majority. We may have reached the "end of history," but in the U.S. the biased operation of class society remains unchanged, as from the very beginning. In the epigrammatic words of Bartlett and Steele, a two-class, two-tax society. Ninety one million working individuals and families holding their own or losing out, as they pay ever more, and those clustered around the less than one million uppermost elite households enjoying ever more wealth and less taxation, one facet of the political economy of U.S. capitalism. Perhaps the single most Herculean task facing the remnants of the American Left is that of bringing to these two, and the many tens of millions they stand for, a virtual knowledge of how the system exploits, manipulates, and degrades, and once more ask them to give consideration to the only way out. For this, a forthright new politics is required.

Citing the findings of Top Heavy, a study sponsored by the non-radical Twentieth Century Fund, Leon Friedman notes that "nearly all the increase in total wealth in the past decade has gone to the top one-fifth of the population"; that a one-time 20 percent tax on the new private wealth would raise $800 billion, a 40 percent tax would raise $1.6 trillion, enough to rebalance the system on a fairer basis.⁷ Such a likelihood with this Democratic President and Republican Congress does not exist. In the real world, water never has been known to run uphill.

More likely, there is a clock ticking. It is not heard by the Lauders, the Simons, and the Wall Street gang. A whole system is on the cusp of judgment. When we read from afar that Massimo D'Alema, a leader of the Democratic Party of the Left, the strongest parliamentary force behind the present ruling coalition in Italy, advised of the need "to move from a welfare of guarantees to a welfare of opportunity,"⁸ we know that a clock is ticking there, too, for he is simply updating in seriousness the tongue-in-cheek observation made by Anatole France about a century ago: the majestic fairness of bourgeois justice prohibits rich and poor alike from sleeping under bridges and on park benches. If the shades from the Court of Versailles could return, they would immediately recognize the sound. Who amongst the haughty present lords of wealth espy their future in that past?

NOTES

1. As with much economic data, this is well-known. Ample studies have been devoted to these changes, perhaps the best being Donald L. Bartlett & James B. Steele, America: Who Really Pays the Taxes? (New York: Simon & Shuster, 1994). See especially the role of Majority Democratic leader Representative D. Rostenkowski; symbolic were his tax savings for wealthy breeders and racers of horses. Today he sits in prison for embezzlement, among his several malpractices. Aptly, George Bush called them "supply side" "Voodoo economics," and then opportunistically applied them. return

2. This subject is treated in detail by Harvard professor Theda Skocpol in Boomerang (New York: W.W. Norton, 1995), as part of the analysis of Clinton's 1993 failed universal coverage proposal. return

3. America: Who Really Pays the Taxes?, pp. 95-136. The law allows the taxpayer to indicate non-specific income range. return

4. The New York Times, October 13, 1996, and editorial October 18. return

5. The New York Times, December 1 & 22, 1966. Often referred to as the "fourth branch of the U.S. Government," it is not without significance that the Times has highlighted these legal tax evasion practices. See also p. 1, "Money & Business " section, Times, December 3, 1995. return

6. The New York Times, December 23 & 28, 1996; also, October 23, 1996. return

7. The Nation, January 6, 1997. return

8. America Oggi, October 4, 1996. Formerly, the Italian Communist Party (PCI), in the last decade, it has moved from "moribund Marxism" to social democracy and beyond. Its present stance approximates classical liberalism. return

Contents of No. 23