by Bud Meyers
The " Tax Code" has been " Tax Fraud" for the last 90 Years!
This is a comprehensive examination of the tax code, capital gains taxes, and how the rich (by way of our "semi-elected" politicians through the electorate) have been fleecing American taxpayers for almost a century. It should leave no room for doubt as to why in 2011 we see such massive and inequitable disparity in wealth between the rich and poor, and how it's been quickly escalating over the last 10 years since the Bush tax cuts. There has been no "class war" perpetuated on the rich. All along the ultra-wealthy have been paying historically low taxes...and they damn well know it. But the country (we, our nation, the government, the people) just can't afford it anymore.
I could simply say that the Republicans only want lower taxes so that lower income earners are forced to pay for defense spending, while at the same time higher income earners would no longer have to help pay for Social Security and Medicare. That really is their game plan. It's that simple.
I could elaborate by saying, "In 1921 Congress changed the tax code so that capital gains were no longer taxed as regular income, and that's why today we have a 'debt crisis'." But that would be too simple, and it wouldn't explain everything.
I could just say that capital gains taxes was only an ingenious tax mechanism that was put in place by a banker so that higher income earners (specifically the very wealthy) could escape paying higher taxes in a progressive tax system, but that would also be too easy.
If I only said that capital gains taxes was an unfair "redistribution of the wealth", would you know why? I know our politicians and the ultra-wealthy do. They've all known for a very long time. 90 years to be exact.
I could just Tweet, "Capital gains taxes robs from the poor and gives to the rich", but would you believe me? So allow me to explain...
In 1921 near the end of the Gilded Age, when America had its last greatest disparity in wealth between the rich and poor (until today), Congress changed the tax code so that capital gains were no longer taxed as regular income, but only taxed at 12.5%. This could be from income derived from stocks, bonds, dividends, interest, annuities, trust funds or from the sale of a mansion. "Regular" income (what working people usually receive from employer-paid wages) over a million dollars a year could be taxed as high as 73%. Today the highest bracket is 35%.
In 1969, when corporate taxes were at their highest tax rate ever, at 52.8%, America sent two men to the moon on Apollo 11.
Before 1978, over the years since 1921, the capital gains tax rate had been raised to 40%, but then congressional Republicans (joined by a substantial minority of Democrats) pushed through a major capital gains tax cut and lowered them to 28% in 1979 (during the Iranian revolution). Read this very thorough examination: The Hidden Entitlements: Capital gains.
Since then, after America's middle-class had just peaked, it has been steadily in decline...until the present day (1979 marking the half-way point between the end of World War II and today).
Over a quarter century ago, in 1984, the Washington, D.C. based Citizens for Tax Justice released its first in-depth report on how much America’s top profitable corporations were actually paying in taxes. The study found they were only paying 14.1% of their profits in taxes, less than a third of the corporate tax rate which had been 48%.
By current tax statutes, corporations are supposed to face a 35% tax on their corporate profits. But over the last three years, a new study by the Citizens for Tax Justice reports that top U.S. corporations have actually been paying only 18.5% of their profits to Uncle Sam. And the capital gains taxes paid by their CEOs were lowered to only 15% with the Bush tax cuts (the same exact tax rate that a person earning only $8,500 a year would pay).
For the past ten years, during two long wars, the U.S. Treasury has been literally starved for much needed revenues as corporations were earning record profits and CEOs were earning record salaries, all because of the rigged tax code. And now we have a "debt crisis"? And now a "super committee" wants cuts in Social Security and Medicare. (Can the American people say "revolution"?)
How a Banker Rigged the U.S. Tax Code
All throughout the ages, since ancient banking was first traced back to 2.000 B.C., it's been well known that money lenders (bankers) have had the ultimate influence on nations around the globe, no matter what the ideology of its people, or what kind of society or civilization was established, or whatever principle form of government they used. "Usury" does not discriminate when vacuuming the wealth from the masses.
For those of you who aren't familiar, see the video "The Money Masters" - A three-and-a-half-hour historical documentary that traces the origins of the political power structure. Watch it at YouTube.
But for the purpose of the current debate over the "debt crisis" and imposing taxes on millionaires and billionaires, I've chosen to only go back 90 years in the United States' tax code.
The current tax "debate" is really a fraud that's been perpetrated on the American public by their elected leaders in Congress for the past 90 years (by Republicans and Democrats alike). They haven't changed the tax code to the betterment of government because members of Congress personally benefit from the tax laws as they are written. (Also read The Sixteenth Amendment).
But just as importantly, if not more so, their major campaign donors and their political backers usually benefit far greater. Lobbyists are paid huge sums of money by the banks, hedge funds, and other corporate interests to influence members of Congress to rig the tax code on their behalf. (Not so much labor unions in this aspect). Read my post: Lobbyists on K St. paid like CEOs on Wall St.
Members of Congress can also get an advantage (in their bid to get elected or just to hold on to their lucrative congressional jobs) with unlimited campaign donations that are funded through secret corporate SuperPACs. This is what's called "greasing the wheels", and yes, it's really that simple. That's why lately we've been hearing so much about Citizens United and getting money out of politics - - and to start having publicly funded elections again to help get corruption out of politics. Read my post: Insider Trading by Congress.
In a capitalist economic system, any law, any legislation, any regulation, any "over-sight", any amendment to any bill, and any and all tax codes, will always be dominated by "capital" - - because after all, capitalism is all about the money - - who gets it, how much, when, and how.
So it only stands to reason, if there's money involved, we have to follow the money, and so therefore, it should come as no great surprise that the current tax code (that primarily and mostly benefits the wealthiest individuals and the largest corporations) was all initiated by a banker (and a Republican one at that). Are you surprised?
And today these corporate entities (usually by proxy through their Republican representatives in all levels of government) have tried using the argument of "double taxation" as their reason for fending off higher taxes, which is nothing more that a deliberate and deceptive myth that's been sold to the American people.
How do you think the rich got to be, soooo rich? One reason is because of low capital gains taxes, which are currently at an historically low tax rate, almost since capital gains were first taxed in 1921 - - and this has been a tremendous windfall for the rich and famous for the last ten years.
To better understand this, we have to go back 90 years in history.
The History of Capital Gains Taxes
From 1913 to 1921 capital gains were taxed as ordinary income until 8 years before the stock market crash of 1929 when the Revenue Act of 1921 was introduced during the Roaring Twenties. It was the first Republican tax reduction in history, and was enacted on November 23, 1921 under the Republican President Warren G. Harding.
At the end of the Gilded Age (when America had its last greatest disparity in wealth between the rich and poor until today) after World War I a banker wanted to raise incomes for the rich and famous, while depleting revenues for the U.S. Treasury. Ironically, this was achieved by both the U.S. Treasury itself and a rich Wall Street banker.
Then U.S. Secretary of the Treasury Andrew Mellon, the Republican banker of the Mellon Bank of New York, was instrumental in pushing this bill through congress. He had argued that significant tax reduction was necessary in order to spur economic expansion and restore prosperity - - and this is the exact same argument that Republicans still use today, even though we've witnessed 20 million lost jobs and 40,000 lost factories over the last 10 years with the Bush tax cuts.
The 1921 tax law also allowed tax write-offs for net losses in one year (such as for any devaluation in property or stock) to be offset by net income in the following year. This was supposed to encourage risk and capital investment.
Andrew Mellon also obtained a repeal of the wartime excess profits tax (used to help fund the war), and the top marginal tax rate on individuals was lowered from 73% to 58% (today in 2011 it's only 35% for "regular" income, but only after a certain limit, and usually after many tax deductions that the wealthy can mostly benefit from).
The 1921 tax act also allowed for the preferential treatment of capital gains, which was also introduced at a rate of 12.5 percent for assets held for two years (today in 2011 it's only for one year). And just like the Republicans of today, Andrew Mellon had also hoped for more significant tax reductions.
But Andrew Mellon's advice as "an economist" was not necessarily true as it pertains to the majority of the working-class, but his advice as "a banker" worked out very well for his fellow bankers, wealthy industrialists, robber barons, and oil tycoons (and any other corporate Trusts of the day). Because 8 years later on October 29th we had the Crash of 1929 and the Great Depression.
* Read the brief history of Andrew's Mellon bank below, or just skip it and continue to the article further below.
During the Great Depression most all the major players of the day - the tycoons, moguls, magnates and robber barons - survived and actually prospered during this time when 12 million Americans had been suffering the hardships of the day.
It's easy to visualize the bleak bread lines, the black storms of the Dust Bowl, the jaunty angle of FDR's cigarette during the 1930s. Though the Great Depression and the New Deal were the defining characteristics of the decade, they weren't the only characteristics. It was also a time of staggering technological innovation.
Air-conditioning, commercial television, airline travel and color film all date from the 1930s. New types of businesses - - supermarkets, miniature golf courses, photo magazines - - were founded and flourished. Nor did all investments founder: Savvy speculators who poured money into steel, oil and sugar companies at the bottom of the market in 1933 made out like bandits.
While millions suffered, others like Howard Hughes, Gene Autry and Aristotle Onassis laid the cornerstones during these years for vast fortunes. JFK's father, Joseph Kennedy, fared very well too (using inside information and the public's lack of knowledge it stock trades).
While although fortunes were made and fortunes were lost during this time, "old money people" (such as the Rockefellers, Du Ponts, Vanderbilts, and Astors) and all the major bankers of the time, all came out on top...just as they did in 2008 (even if the bank itself had supposedly "failed").
The Current Economic Crisis
In 1999, as a Republican U.S. Senator and chairman of the Senate Banking Committee, Phil Gramm introduced the Gramm-Leach-Bliley Act which was signed into law and deregulated the banks. Three years later after he left the Senate, Phil Gramm went to work for the Swiss bank UBS. (The IRS says wealthy Americans are hiding money in secret UBS accounts.)
Four years later George W. Bush and his fellow Republicans lowered the capital gains taxes to historic lows in 2003.
Five years later after two un-funded wars we had several stock market crashes in September and October of 2008 - - and then the long Great Recession in the aftermath.
(Below) Newspaper headlines on Tuesday, September 30, 2008 announced the previous day's 777 point drop of the Dow Jones Industrial Average, the biggest one day point drop in Wall Street's entire history. (Click photo to enlarge)
It's been argued that what happened in 1929 almost happened again under Bush, if it had not been for the banks' bail outs. The Troubled Asset Relief Program, known as TARP (or "the bank bailout'') was hastily put in place in September 2008 as stock markets plunged, credit markets around the globe seized up and the world seemed on the verge of a cataclysmic financial meltdown.
Congress authorized the Treasury Department to use up to $700 billion to stabilize financial markets through the TARP program - - a step that inspired widespread public outrage, helping to fuel what became the Tea Party Movement, and, in the mind of most economists, one that played a crucial role in pulling the global economy back from the brink.
I personally don't believe in that "theory", as economists have been wrong as many times as they've been correct - - which leads me to believe it's all a guessing game, just based on past statistics.
And I believe the bank bail out was really a massive con job on the America people to use their money to cover the bank's losses. After they received the money, the banks just used the spare cash for more acquisitions and executive bonuses. Read my post: Inside Job: The Film that Cost Over $20 Trillion to make!
The banks tightened their credit and squeezed small businesses, and they only made a token gesture to help Americans modify their home mortgages, and they used robo-signing to foreclosure on millions of homes.
Taxpayers gave billions of dollars to "bail out" the biggest of the banks because they made and sold fraudulent securities, even though these very same banks did not pay their share of taxes for years.
Today as state attorney generals are ramping up their own investigations and
possible prosecutions, banks
are trying to negotiate an immunity clause for themselves. U.S. Attorney
General Eric Holder and the state attorney generals have been working with the
nation's five largest mortgage firms (Ally Financial, formerly GMAC, Bank
of America, Citigroup, JPMorgan Chase and Wells Fargo)
pleas agreements for their crimes to settle disputes over their
illegal foreclosure practices, such as the robo-signing
of foreclosure documents.
Three years later not one banker has yet to be arrested or charged, let alone have gone to prison or spent a single day in jail...it's absolutely amazing! The most that we can expect is the banks will get slapped on the wrist with a fine, which investors will have to pay for (not the bankers themselves, they'll continue to draw their huge excessive salaries.)
Today as regulators and shareholders sifted through the rubble of the current financial crisis, questions are being asked about what role their lavish bonuses played in the debacle.
Critics say bonuses never should have been so big in the first place, because they were based on ephemeral earnings. These people contend that Wall Street’s pay structure, in which bonuses are based on short-term profits, encouraged employees to act like gamblers at a casino — and let them collect their winnings while the roulette wheel was still spinning.
“Compensation was flawed top to bottom,” said Lucian A. Bebchuk, a professor at Harvard Law School and an expert on compensation. “The whole organization was responding to distorted incentives.”
To better understand this, we have to examine excessive executive pay and capital gains taxes at work. Corporate CEOs (and other senior executives, whether they work for a large manufacturing firm or are financial wizards in the banking, insurance, and hedge fund industries) negotiate their pay in various and nefarious ways (salary + stock + bonus + terms).
CEO Executive Pay and Capital Gains Taxes
(If this subject matter is too "dry" for you, just skip this section and go
further down to "Hedge Funds Managers - The Biggest Winners")
Stock compensation packages are usually paid to CEOs and other senior board members from a bonus pool (maybe with preferred Series A stock, post-funded and un-vested). If the company is ever acquired or liquidated, the preferred stock holders will get paid first.
A stock option is an option to purchase stock for some fixed price (the "strike price"). The strike price is driven by the Fair Market Value (FMV) of the common stock, set by the Board of Directors, usually based on an external "409A" evaluation of the company.
The common stock price is usually a fraction of the preferred price, at least in the early stages. To actually own the stock, corporate executives exercise the option (as they vest), and write a check to the company for the total strike price.
For example, they may receive 100,000 shares in the form of an option, with a $0.10/share strike price and a 4 year vest. At one year, they could write a check for $2,500 to purchase their vested 25,000 shares. At that point, they would be an official stock holder with 25,000 shares and 75,000 un-vested options.
Owning the stock has a potentially significant tax advantage: it starts the timer for long-term capital gains. Any capital asset held for more than a year is taxed a low, long-term capital gains rate (currently 15% percent, maximum).
Continuing the above example, let's say the company is acquired after another year for $10/share. Their 25,000 shares are now worth $250,000 and they only have to pay long-term capital gains tax of 15% when they sell.
To liquidate their remaining vested options (e.g. exercise and sell) will likely incur steep regular income or short-term cap gain tax rates. Most common option holders exercise as soon as they vest to get the long-term timer going, but if they're: (a) bullish on the company and (b) have the money. However, doing this has it's own tax issues (AMT); and consult a tax professional for advice.
In the old days, companies would sometimes set up a loan to the employee to cover the amount of the stock they were purchasing. That loan could be repaid later (when the company was successful) or forgiven by the company. Those structures are rare today; even though they can be perfectly legal, they attract the attention of regulators and auditors.
In recent years, companies may provide an early exercise clause to provide option recipients some tax advantages. This clause allows them to exercise all of their stock (un-vested) up front, as long as they agree to let the company buy back the un-vested portion if they should leave.
Another factor is the "cap table" (capitalization table). Companies allocate a pool of stock (usually called the Incentive Stock Option pool, or ISO pool) to grant to employees. The pool size is set during the funding negotiations with the founders and investors. What's really going on when a company is figuring out stock offers is not so much figuring out a percentage of the company, but a percentage of the ISO pool.
Hedge Funds Managers - The Biggest Winners
Private investment companies, organized as hedge funds or private equity firms, have recently grown into major economic forces in the U.S. economy. They mobilize capital, and often leverage it with borrowed funds, in order to accumulate a tremendous amount of assets under their management.
Hedge funds are big players in the large corporate take-over activity that is in the trillions of dollars¸ and they are also responsible for a significant share of trading volume on the major stock exchanges and in some over-the-counter derivatives markets.
These private pools of capital are unregulated, or exempt from Securities and Exchange Commission (SEC) regulation, under both the Investment Advisors Act and the Investment Company Act.
In addition to being unregulated, these financial institutions also reap substantial benefits from special tax provisions. The professional fund managers of these hedge funds and private equity firms are allowed to treat a substantial portion of their compensation as capital gains, meaning they are most likely taxed at 15% rather than the 35% rate that applies to ordinary income such as wages and salary.
Example: A $100 million fund earning 20% would pay its fund manager $2 million for overhead and $4 million in carry (known as “two and twenty”). The carry portion of their compensation is treated under the tax code as capital gains for the fund manager and is taxable at the much lower capital gains tax rate of 15%.
Fund managers pay at pension funds, trusts, and endowments are all treated as ordinary income. Only hedge funds and private equity firms are organized as limited liability partnerships and are already treated favorably for tax and liability purposes. The result is a distortion in the compensation and after-tax income between these super rich hedge fund managers and millions of others in the workforce.
Alpha Magazine reports the compensation for hedge fund managers each year. The top earner for 2006 received $1.7 billion, the second highest received $1.4 billion, and the third $1.3 billion. That adds to $4.4 billion for three people. rather than paying $3.6 million in taxes as regular income, they only paid $1.4 million in capital gains taxes.
Not only because of their high salaries do these rich individuals have no need of tax breaks, the hedge fund and private equity industries have demonstrated time and again that they are not exemplary economic citizens who deserve privileged tax treatment. While most fund managers are probably law-abiding investment advisors, there are innumerable examples of wrong doing. The major types of failures and illegal activities include insider trading, IPO manipulation, embezzlement, and defrauding mutual fund investors.
Defending this tax break are highly paid lobbyists such as Douglas Lowenstein and Grover Norquist who loudly and repeatedly make the claim that taxing hedge fund managers like everyone else will harm the average working family. They claim that taxing hedge funds like normal income will harm pension fund returns. This is wrong on two levels. First, the tax change would apply to hedge fund managers and not investors (many pension funds invest in hedge funds). Second, pension funds do not pay taxes.
These lobbyists also claim that it would increase the cost of consumer goods and services because so many stores and chain restaurants are owned by private equity firms and hedge funds. This, too, is preposterous because, again, the tax does not apply to the investors or owners of those businesses but only the investment advisors who manage the funds of those investors.
HedgeFund.net estimates what is called “assets under advisement” to be $2.4 trillion for 2006. If investment managers received the industry standard 20% (“two and twenty”) then their remuneration treated as “carry” was $63 billion for 2006 At the current 15% capital gains tax rate, the taxable amount would result in $4.75 billion in tax payments; at the top rate (35%) on ordinary income, it would sum to $11.05 billion. The loss to the U.S. Treasury, therefore, amounts to at least $6.3 billion a year.
Congress needs to update the nation’s tax laws dealing with private pools of capital. The current law is generating inefficiencies and great inequality by granting tax breaks to individuals who do not need and do not deserve such favors. If the amount of tax revenue lost to private equity firm managers is equivalent to that lost with hedge funds, then the combined amount would be $12.6 billion. This forgone revenue stream could, for example, fully fund the five-year, $35 billion expansion of SCHIP, the public health insurance program for low-income children.
And guess what? Today in 2011 the Republicans want to lower the capital gains taxes to 0%
But Congress won't, because the tax "debate" is really a fraud that's been perpetrated on the American public by their elected leaders in Congress for the past 90 years. They won't change the tax code because they personally benefit from the tax laws as they are written, as do their major campaign donors and their political backers. It's corrupt, it's a scam, and it's fraud...no matter how anyone else might perceive it to be, or attempt to explain it away.
But the three biggest contributing factors to the current recession/depression are:
- the banks, because of the 1999 Republican sponsored Gramm-Leach-Bliley Act deregulating financial institutions, allowing for the derivative markets and the housing crash.
- the Bush Tax Cuts in 2001 and 2003, depriving our treasury of much needed revenue to run the county, causing severe budget shortfalls and more layoffs. Corporations and the uber-wealthy have not been paying their fair share of taxes for decades!
- A flawed budget favoring defense spending to enrich corporations. America needs The People's Budget after we raise taxes on large corporations and the uber-rich.
The Bush Tax Cut Years - The video below uses the soundtrack of "Money" from the English progressive rock band Pink Floyd, which is from their 1973 album The Dark Side of the Moon. Written by bassist Roger Waters. All video editing was done by yours truly, Bud Meyers. (Click on the arrow below to PLAY or watch it at YouTube)
I repeat: The current "tax debate" (and now, the "debt crisis") was a deceptive fraud and hoax that's been perpetrated on the American public (on both Democratic voters and Republican voters) by their elected leaders in Congress ( by both Democratic leaders and Republican leaders) for the past 90 years.
And the Bush tax cuts was also a fraud, meant only to benefit the wealthiest individuals and the biggest corporations (which it did) - - and with two wars, the tax cuts were at the greatest expense to the average working Americans. The two un-funded wars had only profited the defense industry and had enabled their CEOs to walk away with multi-million-dollar salaries, but only paying a 15% capital gains tax.
And guess what? Today in 2011 the Republicans want to lower the capital gains taxes to 0%
Executive Pay - Executive compensation at financial firms and other corporations began to soar in the 1990s. When the bottom dropped out of the economy in recent years, large pay packages became the focus of public fury — particularly when they were going to executives of companies receiving taxpayer funds.
On Wall Street Bonuses, Not Profits, Were Real - A Bonus Bonanza for Wall Street as much of this decade represented a new Gilded Age. Salaries were merely play money — a pittance compared to bonuses.
Tackling Income Inequality - The Occupy Wall Street protesters have focused attention on rising income inequality in the United States, and they are right to do so.
Tax breaks for billionaires - Loopholes cost billions in tax revenue. This policy memo focuses on the privileged tax treatment given to hedge fund managers that results in a conservative estimate of over $6 billion in forgone tax revenue.
Tax Rates during the Fabulous Fifties - Did Rupert Murdoch and his commentators at Fox News think we were all a bunch of communists during the 1950s when we used to tax the rich, the banks, and large corporations? Why is it that now in 2011 they call this "punishing job creators for their success"?
Historical Tax Rates on the Rich (1862 to 2011) - Under Republican President George W. Bush was the very first time ever (in all of U.S. history) did the United States ever engage in a major war without ever raising taxes. Just the opposite was true...taxes were drastically reduced.