Thursday, January 19, 2012

How Mitt Romney & the 1% Evades Taxes

Not only does the top 1% have a lower tax rate than the rest of us...

...but they also dodge taxes more often than we do too!

Last year 50% of all American workers earned less than $27,000 a year when the poverty line for a family of four was $22,314...and most were taxed at the same rate (15%) as mega-millionaire Mitt Romney -- the same tax rate as those receiving unemployment compensation and Social Security benefits.

But even THAT was too much tax for the likes of Mitt Romney and his one-percenters.

According to a fascinating report on ABC's Nightline last Wednesday, the exotic Cayman Islands is a tax haven for 138 accounts of Bain Capital with over $130 million. Interestingly, these accounts lead to a post office box, number 908 (not an actual physical company). And Mitt Romney is just one in a long line of the super rich who use the Caribbean Islands as their "tax-free vaults". (Full article here)

Speaker of the House John Boehner: "We don't have a revenue problem, we have a spending problem."

Unlike the Swiss banks such as UBS (which IRS authorities have been investigating because America's top 1% has been committing tax fraud), secrecy in the Cayman Islands is tighter than the Holy Grail and Fort Knox combined - - no one can get any information on these accounts. But I doubt Mitt will give up more than he has to.

In an article at TooMuchOnLIne titled Law and Order 24/7, Except at Tax Time, they write "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.” (READ: GOP Claims Tax Evasion as 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 study documents, 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, under-report 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 Olson told 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 under-reported 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 politicians, bankers, and CEOs (like Mitt Romney) are going to evade taxes when tax rates for the rich are already historically low, we might as well jack up the tax rates much higher.

The problem is, all the Republicans want to lower the tax rates more...but just for the top 1%, while at the same time, cutting Medicare and Social Security for the rest of us.

ALSO READ: The "SWAG" Economy of the 1% and How the 1% bilks the 99%

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  1. Paul Krugman, New York Time - The Dubious Case For Privileging Capital Gains

    A recent IRS study showed that the primary source of capital gains income has shifted from stocks to “pass-through” entities (gains on assets sold by partnerships, S-corporations, and estates and trusts). In short: the low tax rate on capital gains is bad economics, even ignoring who it benefits.

  2. Romney is estimated to be worth as much as $264 million. If he had earned all that cash from salaried work, he would likely be in the top federal tax bracket of 35 percent. But because private equity partners and hedge fund managers make most of their money from carried interest — a cut of profits off investments that are taxed at the lower 15 percent capital gains rate — the Romney household likely pays a lower overall tax rate than ALL middle class American families.

  3. Jared Bernstein regarding low captial gains tax rates: "I’m more convinced than ever that all this favorable treatment just needlessly loses scads of revenue and redistributes income upwards."

  4. Same story here in the UK.

    Corporation tax was cut in the late 1990s leading to a decline in revenues from 2001 to 2005 (So much for the Laffer curve). This affected the government's financial problems.

    Our equivalent of the IRS, Her Majesty's Revenue and Customs, have had investigative staff cut and replaced with bosses who wine and dine with tax evading companies. The head of the HMRC, Hartnett, is about to take early retirement after parliament finally woke up to the scandal: Goldman Sachs let off interest payments on eight years of non payment of tax, Vodafone paying less than £2 billion when most serious economists claim the figure was nearer £6bn and so on.
    Plus London is a centre for tax evasion/avoidance, in fact it feeds of its reputation

    Meanwhile, the HMRC sent me the wrong tax codes today, meaning that I will be taxed at plus 20% despite working part time and barely having a taxable income.