2
According to this approximate computation, which would vary in detail from year to year, there is a total tax diversion from the Treasury of $52.
According to this approximate computation, which would vary in detail from year to year, there is a total tax diversion from the Treasury of $52.
Lundberg - The-Rich-and-the-Super-Rich-by-Ferdinand-Lundberg
But much of what they copy has no possible applicability to any tax situation that may arise because some sections are specially tailored to a single situation.
Sub-section 2 of Section 1240, which reads "such rights were included in the terms of the employment of such employee before the date of enactment of this title" made it applicable only to Mr.
Mayer, who alone had such particular terms before the passage of the bill.
Unless one can show one had a contract containing such provisions before the passage of the bill one cannot cite the section on one's tax return.
It should never be thought that the leaders of Congress do not know what they are doing.
Many such special sections exist in the tax laws. of benefit only to a single individual or estate (one-shotters) or of continual benefit to certain industries; and Stern discusses a number of them. To obtain such special tax sections for oneself one must, obviously, have a "friend at court," somebody who has the king's ear.
Many companies get such special tax laws, of benefit only to them; and otherwise illegal gains from mergers of various corporations or banks are covered either by one- shot or multiple-shot laws. Sometimes one company is able to squeeze itself into provisions especially tailored for another, but not often. 55
Low Estate Taxes
Not much will be said here about estate taxes other than to point out that entirely illusory rates are posted here as elsewhere. Many very rich men's estates pay little or no tax. The public supposition that the big estates are being dismantled by estate taxes, often repeated in newspapers, is entirely false.
According to the rate schedule in the law, estates exceeding $60,000 are now taxed from 3 per cent for the first $50,000 to 77 per cent for amounts over $10 million. Offhand, one might suppose that a man who left $100 million net would pay a tax of
$67,566,150. But no taxes like this are ever paid and, as we noted earlier, John D. Rockefeller Sr. and Jr. and Henry Ford I paid low estate taxes.
Some persons, below the top levels of wealth, do indeed pay full estate taxes. But this is because they have either through personal peculiarity or unusual moral standards refused to seek and follow the advice of an experienced tax lawyer. Usually it is a personal peculiarity that leads them in this direction, according to what lawyers say. They are unable to understand the steps outlined for them to take or fear they are in danger of losing something.
An anecdote of record about the late Somerset Maugham, the well-known and affluent writer, will illustrate the point. It was explained to Maugham that if he took certain steps to divest himself of nominal control over his assets for the benefit of his children, with whom he was not on good terms as such are generally understood, his estate under English law would almost entirely escape taxes.
"I won't do it," Maugham said as the situation was explained, "because I am too aware of what happened to King Lear. "
It is mainly, among the law-cognizant, persons with a strong feeling of alienation who do not avail themselves of the many profitable loopholes in the estate-tax law. Henry Ford, it appears, was one such, and only the last-minute recourse to the Ford Foundation saved control of the company for his family. Ford was obviously either a tenaciously grasping person, indifferent to his family, or simply could not understand the ins and outs of the law, which one assumes were thoroughly explained to him by able lawyers. We know he did not want the government to get his money.
Ford, of course, did not have the advantage of the marital deduction, which was passed the year after his death. Had it been in existence a half of about a billion dollars would have been, right off, tax free. As matters now stand, one half of the taxable value of all estates where there is a surviving spouse is tax exempt.
A $100 million net estate, instead of paying $67,566,150 under the posted rates, therefore seemingly pays only $32,566,150. This is quite a bit but it isn't anything like the posted 70 per cent; it is 32. 5 per cent.
Even this 32. 5 per cent is illusory under the various leveraging amendments to the estate-tax law and, to make a long story short, we may simply show in this table what the real against the posted rates are: 56
Gross Estate
(approximate)
$500,000-$1 million
$1-$2 million
$2-$3 million
$3-$5 million
$5-$10 million
$10-$20 million
$20 million and higher
Scheduled
Rates
(Per Cent)
29-33
33-38
38-42
42-49
49-61
61-69
69-77
Actual Average
Tax (1958)
(Per Cent)
15. 3
18. 2
19. 3
21. 2
23. 2
24. 4
15. 7
Percentage
of Discount
50 50 50+ 50+
50-60 60+
80+
One may obtain the actual rate for any year by averaging the actual payments in each bracket as reported by the Treasury Department. From year to year the actual rates vary slightly.
So, when one reads in a newspaper about high estate taxes one is reading something untrue. The maximum actual estate tax by percentage is about the same as the income tax on an individual $10,000-$20,000 income.
Similar low actual rates prevail on large incomes as shown by the Chase Manhattan Bank in 1960 in its bimonthly news letter, as follows:
Adjusted Gross
Income
Under $3,000
$ 10,000-$ 14,999
$ 20,000-$ 24,999
$50,000-$ 99,999
$200,000-$499,999
$1,000,000 and up
Scheduled Rates
(Per Cent)
20
25
36
55
80
87
Percentage
Actual Rates of
But a man with a family will not ordinarily pay anything even like the actual rates on a $100 million estate. For, being sensible and knowing that he must some day die, he has long before death begun transferring assets to his wife and children. Let us suppose he has two children.
He can transfer $100,000 a year to each of them at a gift-tax cost of $15,525 each or 15. 5 per cent, with the sums held in trust. In thirty years $9 million will have been transferred. He can make his own law firm trustees.
He can transfer an equal amount, at once or gradually, to his family-controlled foundation, entirely tax free up to 30 per cent of annual income.
He can increase his transfers at slightly higher gift-tax rates. Whatever he transfers brings the actual estate tax lower.
But he can do even better than this. He can transfer to members of his family, at extremely low gift-tax rates, properties of grossly understated value whose true value he alone knows. Such, let us say, would be mineral-bearing but unexploited lands, since privately surveyed and "proven. " If such land had been acquired at $100,000 it could be transferred for purely nominal taxes, and this big asset would be in the hands of his heirs long before his death. Times of downswings in the market, as during the Depression, are a good time to make corporate gifts. Overdepreciated real estate or foreign property, with a low book value but a high actual value, is another good thing to transfer by gift. The heirs can sell it at full value without paying any capital gains tax.
At no stage need he lose practical control over any of his properties, leaving aside his moral authority over his family. Many of those who do not avail themselves of these provisions apparently feel they have no moral authority over their heirs or believe their heirs will take these properties and leave them in the lurch, as Mr. Maugham publicly feared. While such a possibility, may exist in some families, even it can be guarded against by a knowledgeable tax lawyer.
The value of wives here is again outstanding, as in the case of the marital deduction in the upper brackets.
It might be asked what value it is to a man that half his estate escapes any taxes if his wife gets that money. But the first advantage is that she halves the tax. He must be interested in this feature because he could avoid all taxes by simply leaving all the money to the public in some form. As he usually doesn't do this, one must conclude that he is interested in preserving the fortune for some reason.
What he leaves to his wife can be left in a life trust, he naming the ultimate beneficiary but giving her the right to change this. By doing this he has clearly reduced the taxable amount by one half. His children ultimately take from the mother's estate, so at least two-thirds of the fortune is preserved. But much better than this can be done by means
(Per Cent)
Discount
19 5
20 20
23 35+	
38 33+
42 48
38 57. 5
of lifetime distributions in the form of trusts and by taking advantage of other provisions in the fine print of the law.
And through the use of trusts, assets can be kept intact for at least three generations. The dead man can assert his will for at least 100 years. If the final recipients, having full control over the property, now replace it in trust according to family doctrine, the holdings can be preserved in trust for another three generations. If it is a series of multiple trusts that have been established, the tax rates can be very, very low.
While the Constitution forbids the entailment of property as in England it is nevertheless practically possible to practice serial entailment, as Cleveland Amory reports many of the old Boston families have done. Serial entailment is achieved if the third-generation recipient, loyal to family teaching, replaces the property in trusts.
Estates, in fact, are not broken up by the tax laws; they grow larger through the generations, assuring the presence of an hereditary propertied class. This fact has many implications, one of which is that latecomers in the game of grabbing property face a shrunken hunting ground.
The whole point is this: Plenty of escape hatches exist in the estate-tax law for those who wish to avail themselves of them. Some, like Henry Ford, do not, and prefer to clutch nearly every last dime they own until the undertaker forces open their hands. For the heirs of such, the tax outlook is rather bleak, although by no means so hopeless as often reported. There is always the foundation escape hatch, and the foundation, all else failing, can give remunerative employment to members of the family, who become philanthropols or, somewhat paradoxically, philanthropist-politicians.
In summary, it should be noticed that the rich, who contrary to Ernest Hemingway are different in other respects than that they simply have more money, live in a specially favored tax preserve which could not have taken form without considerable elitist prompting. Congress alone would not have had the Kafka-esque imagination to devise this labyrinth of fiscal illusion. The public itself did not demand these tax laws.
All deductions and exemptions available to rank-and-file taxpayers in trifling amounts, as we have seen, have far greater weight when applied to the receivers of big incomes from property and its manipulation. Deductions for wives, children, general dependents, education, medicine and social investment have an in-pocket value up to the maximum of the tax rates for the rich. Beyond this are all the special tax dispensations provided especially for big property holders: accelerated depreciation, depletion allowances, expense accounts, low-tax capital gains, specially tailored exemptions, mortgage and interest leverages, tax-exempt bonds, multiple trust funds, light estate taxes, family partnerships, low-tax lump sum settlements of a large variety of fictitious capital gains, etc.
It is very evident that, as government expense has gone up attendant upon fighting corporately profitable wars, the rich have decided to play very little part in defraying it.
Results such as those depicted could have been attained only as the consequence of much elitist work, thought and conniving. Can anyone believe the results are accidental? Or that they are remotely equitable?
Taxpayer Terrorization
While the tax rates gouge the general populace, the Internal Revenue Service in recent years, by all accounts, has been conducting a highhanded reign of terror against small delinquent taxpayers, often confused by the crazy-quilt tax forms. "Tax disputes more than any other have given many harassed citizens a glimpse of the other face of Uncle Sam when he scowls," writes Washington political columnist Jack Anderson. The face
of Uncle Sam that many citizens now see closely resembles the skinflint depicted by hostile foreign cartoonists.
While making advantageous settlements with delinquent large taxpayers, says Anderson, "the government was relentlessly pursuing a host of small tax debtors, poor but loyal Americans, many of whom were in debt for reasons beyond their control. Uncle Sam garnisheed their wages, seized their property, confiscated their bank accounts, and deprived them of their jobs, stripping them of almost everything they possessed except the mere clothes on their backs. . . . More than one hard-pressed taxpayer has found himself in trouble because of a trivial or unintentional error in an old return, the failure of an employer to withhold the correct tax, or a personal tragedy that cleaned him out of the money he set aside for Uncle Sam. The files at Internal Revenue are stuffed with complaints from taxpayers who say they have been hounded, bullied, and browbeaten by collectors whose methods would put a loan shark to shame. Many a widow's last mite has been snatched from her. Men have been stripped of their livelihood and, along with it, their only means of paying the government. "
A committee of twenty-two tax lawyers and accountants appointed by Chairman Wilbur Mills of the House Ways and Means Committee found many acts of "overzealousness" by tax agents that infringed "the vital rights and dignities of individuals. " 57
If a taxpayer subjected to arbitrary Internal Revenue rulings is affluent enough to be able to hire a lawyer he on the average, in appeals, has 85 per cent of the tax assessments sharply reduced or eliminated.
"Only a small percentage of individuals whose deductions are disallowed, whether right or wrong, do use existing systems to challenge IRS auditors," writes William Surface. "Why not? 'The small taxpayer's first and usually last impulse is to quit,' says Senator Warren Magnuson of Washington. 'Just throw in the towel, pay the deficiency, no matter how unjust he believes it is, rather than face the tiers of faceless bureaucracy. The small taxpayer is faced with staggering disadvantages in his dealings with the Federal Government in comparison with large, corporate taxpayers. '"
The bigger taxpayers proceed otherwise. About 10 per cent of those assessed additional taxes request an "informal conference" with the auditor's supervisor, and about half of those who do this win some concession. In 1965 a total of 26,301 corporations and individuals who were assessed additional taxes, or 1 per cent, appealed their cases to the Appellate Division, an autonomous body. No less than 85 per cent of the cases so appealed each year have their cases settled for about $200 million a year less than what IRS originally assessed. Beyond this there is the Tax Court, where an average of 8,500 appeals from IRS rulings are heard each year. "Four out of five cases that reach Tax Court are settled without trial for only 31 per cent of the amount that Internal Revenue had initially demanded. " 58
On this showing, IRS is clearly overzealous in many cases, and most people readily knuckle under in fear of being suddenly confronted, apparently, by an unbenign Uncle Sam. Anderson, Surface and various congressmen blame it on petty bureaucrats in IRS, with which judgment I emphatically disagree. IRS people are civil service employees, all of them small people. They only follow instructions from higher up. They act only in response to orders passed down along a chain of command from the White House and the Secretary of the Treasury. When they get very tough and arbitrary it is because they feel their jobs are in jeopardy if they do not make a good showing.
It is true that underlings in all large organizations, governmental and corporate, often tend to be overzealous in carrying out very mild orders, thus giving the organization
eventually a bad name. Mild orders from on high tend to gain strength as they are passed down, and at their point of final execution are often brutal.
At times, with the approval of higher-ups, the Internal Revenue Service acts illegally. The Commissioner of Internal Revenue has admitted that for seven years, from July, 1958, to July, 1965, agents had made "improper" or questionable" use of electronic eavesdropping devices on 281 occasions. The information was elicited by the Senate judiciary Committee. One senator charged that electronic devices were used "during routine investigations of ordinary taxpayers"; the charge was denied. Planting of such devices by means of trespass, the Supreme Court ruled in 1961, is unconstitutional (illegal), violates the prohibition against unreasonable search and seizure, invalidating evidence so obtained. 59
Whereas the Bourbons, drunk with power, proceeded forcibly against the peasants en masse to collect unfair taxes, in modern states, including the United States, the full force of sovereignty is brought to bear against single individuals. Intimidated in advance by any sort of authority, the ordinary citizen here is in no position, even under constitutional government, to invoke his rights. He does what many intimidated innocent people do in the courts: He pleads guilty to a lesser charge.
General Remarks
What has been put down so far represents only part of the story of shoving the tax burden onto the patriotic labor force by the finpols and corp-pols with the consent of the pubpols, who in turn thoughtfully misapply (OverKill) at least 30 per cent of the tax money they do take in. This percentage of profitable misappropriation, largely on the excuse of "defense," more recently of "welfare," is put very conservatively; a thorough direct examination of what is obtained by the expenditures would probably show a larger percentage.
A careful comparison of the fiscal situations in the United States and eighteenth- century France, which was under candid autocratic rule, shows that the American populace is being short-changed far more efficiently than was the French populace under Bourbon rule. Indeed, the American process is more effective because most of the people are not even aware they are being trimmed under the twin banners of anti- Communism and anti-Poverty; most rank and file citizens would be the first to deny it vehemently while bursting into strains of Yankee Doodle. The French were fully aware of the process because many of their taxes were collected by force, often after pitched battles between the peasants and the troops. The American process of making the labor force shoulder most of the tax burden takes place in much subtler ways, behind the formidable barriers of deceptive language, high-flown ideology, simple arithmetic and the full panoply of sovereignty arrayed against isolated individuals.
In this atmosphere the withholding tax, levying on earned income before received, was nothing short of a pubpolic political inspiration.
The General Results
What is not paid by the higher-ups must be paid by the rank-and-file. The government, despite all the tax loopholes, is never deprived of whatever revenue it says it needs, even for waging fierce undeclared wars of its own bureaucratic making. What revenue the government decides not to take from the influential finpols it must take from the poor and needy over which the pubpols weep and wail like the Walrus and the Carpenter did over the happy trusting oysters they had eaten.
Stern has reported various shrinkages in the tax base and the attendant cost to the Treasury (which cost must be made up by the patriotic rank and file). 60
Here these various shrinkages and costs are presented somewhat differently: first, those shrinkages and costs of advantage solely to the wealthy; secondly, those shrinkages and costs participated in and preponderantly of advantage to the wealthy; and, thirdly, those shrinkages and costs generally of advantage only to rank-and-filers.
Lump-Sum Tax Evasions of the Wealthy Only
Shrinkage of Cost to
dollars)
Lump-Sum Tax Evasions in Which the Wealthy
Participate with the Less Wealthy Middle Classes
Shrinkage of Cost to
Tax Base Treasury
(billion dollars) (billion
Extra exemptions for the aged and
blind (most of these deductions per
centagewise and in totality must go
to those few with substantial income
--the higher the income the greater
the deduction)
Nontaxable income from social secur-
ity, unemployment and veterans'
benefits, etc. (except for unemploy
ment benefits, the wealthy partici-
pate to some extent)
$ 3. 2
11. 9
$ . 9
3. 6
2. 0 11. 9
5. 0 $23. 4
Cost to
Tax Base Treasury
(billion dollars) (billion dollars)
Depletion deductions
intangible oil and gas
drilling deductions
Excessive expense account
Deductions
Real estate depreciation
Dividend credits
Capital gains deductions
Estate tax evasions
Interest on tax-free bonds
Undistributed corporate profit* 25. 6 (1965)	12. 8 (est. )
Totals $49. 8 $22. 1
*Stern does not include this significant item.
The wealthier class of taxpayers, in brief, fails to pay $22. 1 billion of taxes which it might properly pay. Nor is this all, because it participates in tax loopholes available to others.
Rent equivalent (deducted mortgage
interest, etc. ) on owned homes
(greatest advantage to wealthy as
residents and as real estate opera-
tors) 6. 5
Itemized deductions (most profitably
used by wealthy) 43. 0
Income-splitting for married people
(of most percentage and dollar
value for wealthy persons)
Totals $64. 6
Lump-Sum Tax Dodges in Which the Wealthy
Probably Have Little Participation
Shrinkage of
$ 3. 7
$ 1. 5 . 5 . 3
. 2
6. 0 12. 5 2. 0
. 5 2. 4 2. 9 1. 0
dollars)
Tax Base Treasury
(billion dollars) (billion
Fringe benefits (some participation by
well-paid executives)
Interest on life insurance savings
Sick pay and dividend exclusions
(some participation by wealthy)
Standard deduction
Unreported dividends and interest
(mostly small people)
Totals
$ 9. 0 $3. 0
1. 5 . 4
. 9 . 3 12. 0 2. 6
3. 7 . 9
$27. 1 $7.
2
According to this approximate computation, which would vary in detail from year to year, there is a total tax diversion from the Treasury of $52. 7 billion a year. This diversion must be compensated for, with national budgets now rising above $100 billion, and it is compensated for at the expense of the smaller taxpayers, who pay more than $20 billion of corporate and other taxes in price and also pay most of income and excise taxes. The rates on the lower incomes are far higher than they would be if an equitable system of taxation existed.
While the less pecunious classes are able to evade most of $7. 2 billion (for which they nevertheless pay elsewhere), the more affluent classes (with the wealthy participating by individual proportions most extensively) evades paying $23. 4 billion (for which most of their members pay elsewhere). The wealthiest class as a whole evades directly a total of $22. 1 billion, which it unloads on the impecunious and less pecunious classes.
What the extent of its participation is in the evasion of $23. 4 by the middle group can only be surmised. If we estimate the participation at only $5 billion then we find the wealthiest have evaded $27. 1 billion of taxes in addition to whatever they have merely generally pushed over on the lower orders.
If anyone believes there is suggested here too high a figure of what is really owed in taxes by the wealthy, it should be recalled that the upper 10 per cent of the population owns all of the nation's productive private property while 1 per cent of the population owns more than 70 per cent of it. Such being the case one would not reasonably expect that a single employed person who is paid $1,000 in a year--about $20 a week--would be obliged to pay a tax of $12. Nor would one expect that a married man with a salary of $4,000 would be obliged to pay a tax of $350, a month's pay. But so they had to do in 1966 if they took the standard deductions.
To shift the scene a bit, it may be recalled that national elections now require the spending by the political parties of more than $100 million. This is without considering the many costly local elections in off years or parallel with the national elections. The rising figures, often cited, are considered stupendous. These campaign funds are supplied by the wealthy and the propertied who, it should be clear, get a manyfold return on what they pay for. As the political parties (in default of effective popular participation) are to all practical purposes theirs, they obtain preferential treatment from government. So it has been all down through history. The United States is not an exceptional case. It is a typical historical case, contrary to what the Fourth of July orators would have one believe, except that the people have been subdued through their own ineptitude.
People in the Tax Net
In 1940 there were filed 14,598,000 individual income tax returns. In 1961 61,068,000 were filed. The greatest increase took place in 1944 under the wartime tax laws; in 1945 the total stood at 49,751,000. 61
Having brought this great additional throng into the tax net under the income tax, originally an upper-class tax, does anyone believe the pubpols will ever remove the net?
By far most of these taxes are withheld from salaries and wages, earned income. In 1962 there was withheld $47. 583 billion compared with $15. 317 billion not withheld; in 1963 it was $51. 839 billion against $15. 205 billion. 62 The income tax has been transformed largely into a permanent wage tax, a Gargantuan political joke on the workers.
One often hears of tax-cheats, individuals and organizations, that are proceeded against unceremoniously by the government. As this chapter should make blindingly clear, however, the greatest tax cheat (perhaps in all history) is the United States government itself, which by means of the federal tax code stupendously cheats the vast majority of its trusting citizens on behalf of its political pets. Not only does the government do this but its prime beneficiaries daily boast to a bemused world that in the United States everyone enjoys full equality under the law. The government, of course (to give it its due), is staffed by the weird people put into office by an idiotic electorate, which is fittingly hoist by its own petard. The boobs are overwhelmed by boobs of their own choice!
The Chances of Reform
What are the chances of reforming the tax laws?
Here it must suffice to say that most experts see little prospect of reform. At most there will be further deceptive rearranging and ideological tinkering. And even if taxes were fairly apportioned, past gains would remain in the hands of the advantaged.
A colossal historical inequity like the American tax structure, a mechanism subtly fastened on a people with a view to extracting from them the produce of their labors not necessary for subsistence, is never removed by means of elections or the passage of laws. At least, it never has been thus far in history. The beneficiaries, having gone to a great deal of trouble and expense to devise and maintain this structure, are not going to stand idly by and see it dismantled. They will use every considerable power at their command to defeat all substantial reforms.
In history fantastic, capricious and arbitrary structures such as this have vanished only in some sort of climactic explosion--revolution, conquest or collapse. A far less onerous tax structure in the early American colonies was terminated not by reform but by revolution and war.
These remarks, needless to say, are purely descriptive, intended to bring out the very serious purpose underlying these laws. This earnest purpose, which is to run a vast society in a certain way for certain hereditary beneficiaries and their retainers and emulators, cannot be lightly pushed to one side, particularly when it is well wrapped in the accepted ideology of freedom. Anyone who proposed such action at this time, indeed, would be very foolish, as the populace is hardly aware-and shows no signs of wishing to be aware--that it is fastened in a straitjacket only slightly less tight than in many other ideologically unhallowed societies that could be mentioned.
Anyone who doubts that this is so may set about the task of tax reform. If he succeeds, these concluding observations will have been set at naught. And whether he fails or succeeds he will get a sound political education. 63
(Note: The reader should not suppose that this chapter is a full treatment of the tax situation. It touches only the highlights and allots no space at all to many publicly costly ludicrous oddities such as the decision allowing Kathleen Winsor to pay 25 per cent capital gains taxes for the sale of her book Forever Amber because under a tax-court ruling she was not a professional writer and had written the book "primarily because she enjoyed the research and writing which went into its composition. . . . " The interested reader should refer to sources cited and pick up enlarged bibliographies from them. He will soon see that everything in this chapter is written in a spirit of understatement.
As to the cause of it all, the socialist will murmur "capitalism. " Yet the American tax structure has no intrinsic relationship to capitalism and can, indeed, be shown as functionally inimical to it. Other capitalist countries such as England, Western Germany or Japan do not have similar tax structures. The source of the tax structure is clearly the popular electoral system and an inept electorate, which places in office smoothtalking men of a disposition to trade tax and other favors in return for personal emoluments. This the legislators do, in stages and by bits and pieces, resulting in an increasingly peculiar tax structure that may be subtly undermining the capitalist system itself.
Capitalists clearly would be paragons of unusual virtue if they did not, for inner competitive reasons, take full advantage of the fact that a politically inept public had placed into strategic offices men who are deviously accommodating on a quid pro quo basis. If capitalists--and a gullible public--were faced by a preponderance of true public men in office they would hardly seek to have written into the laws these various tax monstrosities. But the kind of electorate one finds in the existing political system is unable to insure the presence in office of a preponderance of true public men. Instead the electorate gives us people of the stripe of Senator Thomas Dodd, Congressman Adam Clayton Powell, Bobby Baker, the late Senator Robert Kerr, Judson Morhouse, Senator Everett Dirksen et al. The basic causes obviously lie out in the broad electorate. )
The over-riding problem in the United States is not economic. It is political.
Ten
PHILANTHROPIC VISTAS:
THE TAX-EXEMPT
FOUNDA TIONS
Wealthy men and women today are almost all freely labeled by the public prints as philanthropists. In such mindless parroting the word has acquired the operationally extended meaning of "wealthy person"; and "wealthy person" means, reciprocally, "philanthropist. " As hardly anybody in society is more welcome than a philanthropist, it follows that nobody is more welcome in all his beneficence than a wealthy man. By American propagandic decree the wealthy man thus has strangely been transmogrified into the quintessential cream of humanity. Simple people, the majority, accept him without reservation in this guise.
It is, furthermore, extremely rare to find the public prints, particularly the corporate press, labeling anyone other than a wealthy person as a philanthropist. Journalists now appear to make a subtle distinction between philanthropists as merely rich persons and
humanitarians as functional benefactors without money: Jane Addams, Lillian Wald, Jacob Riis, Clara Barton, Florence Nightingale.
Oddly at variance with the common perspective of the wealthy person as an overreacher of others in competition for worldly goods and power, the prevalent one is quite in harmony with the Alice-in-Wonderland treatment of contemporary affairs in public prints. As it is practiced on the American scene it is a variant of Orwellian "New- Speak," in which war means peace, peace means war, and liberation means enslavement. For the United States as much as Soviet Russia has its own "New-Speak" in which "defense against Communism" means "invasion of Vietnam" (or the Dominican Republic), Defense means attack. Patriotism means doing physical injury to someone. Inflation means prosperity. Bigness means greatness. And wealth means philanthropy. According to the public prints all is not as one might simple-mindedly suppose in the realm of wealth; contrary to reasonable supposition and statistical fact the wealthy are not endeavoring to increase their wealth but are feverishly endeavoring to give it away for good works.
The basic misinformation sedulously conveyed is this: Whatever the people's government is not taking away from the wealthy in huge tax bites is being given away to the lame, the halt, the blind, the needy, and the worthy with a lavish hand. Therefore, it seems, one should forget about the wealthy; they are not a serious factor of power in the social situation.
Instead of the wealthy, who are measurable and palpable, we are assured by approved savants that what is really involved in the social situation is something elusively unmeasurable and impalpable, discernible only to rarely subtle minds, masters of arcane and delicate methodology. These minds, more and more of late eschewing the troublesome concrete in favor of the pleasantly abstract, limn for us The Power Structure, The Establishment, The Power Brokers, and The Power Elite who face, not the poor, the exploited or the unpropertied, but The Disadvantaged, The Culturally Deprived, The Under-Privileged, The Unfortunate and The Lower Socio-Economic Strata. (All these Disadvantaged may escape their plight by climbing the golden staircase of Upward Mobility. ) Taboo entirely in the cleansed new social metaphysics are such coarse and unmannerly terms, worthy only of unwashed boors and churls, as Class and Caste, with their connotations of past and present turbulence. Very much favored is Strata, a cool and cleanly word. People are people, it seems--all pretty much the same according to democratic dogma but found in different Strata, some merely flying by choice or temperament at lower altitudes than others. And in the emerging new social metaphysics or rhetorical whitewash there are few Unemployed. In their place we have the Disemployed, even the Involuntary Leisured. There are, too, Senior Citizens in place of Old People. Persons unable to detect the difference are obviously deficient in understanding--cannot tell the difference between a war and a massive overseas police action.
"Class" is a particularly troublesome word; for one can, unless one is very careful, slip and slide on into "class warfare. " But in the elegant variance of the aseptic new terminology one can hardly make the mistake of saying "power-structure warfare," "power-elite warfare" or "lower socio-economic strata warfare. " The fashionable new terminology protects against such deplorable gaucheries. Yet the basic phenomena remain in all their harshness.
Puzzles of Philanthropy
As we are not engaged here in an embroidery upon journalistic fantasies we are confronted by a number of puzzles. To what extent are the wealthy giving their money away for good works if they are giving it away at all? This is somewhat similar to the
question faced in the last chapter: To what extent are the wealthy being taxed out of existence? And, if they are not giving wealth away, what is it that they are really doing with their numerous foundations?
As many persons are involved in all this so-called philanthropy one must not, heeding the caveats of methodological vigilantes of the Establishment, impute motivations without warrant, although the very term philanthropy (to which the Establishment methodologists oddly do not object) does already unwarrantably impute motivations. What the individual motivations are of those thousands who now transfer money to foundations one cannot say one really knows. 1 But one can trace certain indubitable nonphilanthropic effects of such activities.
The first of these is the public relations effect. The founder may have been publicly disliked, like John D. Rockefeller I, or not very well liked, like Andrew Carnegie. But the forming of foundations had the effect of altering opinion in an unsophisticated population, turning the supposed bad guy into a supposed good guy.
Just how far down in public esteem a wealthy man may sink can be seen from the following acerb vignette of John D. Rockefeller I by Ida Tarbell, writing in the widely circulated McClure's Magazine in 1905:
No candid study of his career can lead to other conclusion than that he is a victim of perhaps the ugliest . . . of all passions, that for money, money as an end. . . .
It is not a pleasant picture . . . this money-maniac secretly, patiently, eternally plotting how he may add to his wealth. Nor is the man himself pleasanter to look upon . . . portraits show . . . craftiness, cruelty, something indefinably repulsive.
Hypocrite, intriguer, freak of nature, it is not for us to say. The great public does not deal in nice psychological distinctions. . . . it says this man has for forty years lent all the power of his great ability to perpetuating and elaborating a system of illegal and unjust discrimination by common carriers. He has done this in the face of moral sentiment, in the face of loudly expressed public opinion, in the face of the law, in the face of the havoc his operations caused. . . . He has fought to prevent every attempt to regulate the wrong the system wrought, and . . . turned his craft and skill to finding secret and devious ways of securing the privileges he desired. . . .
He has turned commerce from a peaceful pursuit to war, and honeycombed it with cruel and corrupt practise; turned competition from honorable emulation to cut-throat struggle. And the man who deliberately and presently does these things calls his great organization a benefaction, and points to his church-going and charities as proof of his righteousness. To the man of straight-forward nature the two will not tally. This, he says, is supreme wrong-doing cloaked by religion. There is but one name for it-- hypocrisy.
To have blotted out of popular consciousness largely by foundational activity this once prevalent estimate has been a notable achievement in public relations engineering.
Another effect is the tax-saving benefit. Nearly all of the American foundations have come into view since the enactment of the income tax and estate tax laws: The foundations are completely exempt not only with respect to income taxes but also capital gains taxes. One does not know in each case that the founder sought to escape taxes, but common reason would indicate it. Many standard tax-advisory services explicitly point to these factors as attractive features of foundations. 2
A third effect is the corporate-control effect. Corporate control, which would otherwise be undermined by the tax laws, is preserved to perpetuity by many foundations, permitting the hereditary transmission, tax free, of vast corporate power.
A fourth effect is that the foundations extend the power of their founders very prominently into the cultural areas of education (and propaganda), science, the arts and social relations. While much that is done in these areas under foundation auspices meets judicious critical approval, it is a fact that these dispensations inevitably take the form of patronage, bestowed on approved projects, withheld from disapproved projects. Recipients of the money must be ideologically acceptable to the donors.
There is a positive record showing that by these means purely corporate elements are able to influence research and many university policies, particularly in selection of personnel. While the foundations are staunch supporters of the physical sciences, the findings of which have many profit-making applications in the corporate sphere, among the social disciplines their influence is to foster a prevailing scholastic formalism. By reason of the institutional controls that have been established, the social disciplines are largely empty or self-servingly propagandistic, as careful analyses have disclosed. 3
Whether or not these various effects were sought by the foundation creators, they are present, and the realistic observer must suppose they were what the realistic founders had in mind. (We must be particularly impressed by the frank analyses of their tax advisers. ) Via the foundations they get more mileage out of their dollars--and retain more dollars.
The Foundation Panorama
There are now so many tax-exempt foundations in the country that the number cannot be precisely ascertained.
The Foundation Directory, 1964, published by the Russell Sage Foundation, lists 15,000 foundations but says the number is increasing heavily year by year. 4 In this figure it challenges the total of 45,124 given by Representative Wright Patman, chairman of the Select Committee on Small Business of the House of Representatives. Patman's figure, the Directory holds, included civic, educational, welfare and religious organizations as well as pure foundations. 5 But the Patman investigation of the foundations in the early
1960's is the most complete available and will be cited throughout this chapter. It was focused, moreover, on the 534 largest foundations (within the Russell Sage meaning of the term) with total book-value assets exceeding $10 billion at the end of 1960.
As of early 1967, a total of 6,803 foundations in the United States had total assets of $20. 3 billion by market values (as distinct from book values), an increase of almost $6 billion in three years, according to the foundation-supported Foundation Library Center of New York, as reported in the New York Times, April 4, 1967 (32:3-4). These were record high figures, a measure of lush prosperity in Foundationland.
Total foundation assets in the period 1960-63, according to the Foundation Directory, were $14,510,765,000; so it is evident that Patman's inquiry covered most of the field. 6 Of these, $8. 161 billion were concentrated in New York; Pennsylvania came next with $853 million; then Michigan with $752. 9 million; and Texas with $744 million. New York is far in the lead here as in all other aspects of finance.
Prior to 1910 there were only eighteen American foundations, with just one exceeding $10 million. (Until 1913 there were no income taxes, until 1916 no estate taxes. ) In the next decade 76 were launched, in the 1920's 173, in the 1930's 288, in the 1940's 1,638 and in the 1950's 2,839. Of 5,050 leading foundations, 32 per cent were launched in the 1940's and 56 per cent in the 1950's. 7 In their magnitude and pervasiveness, then, the foundations are something recent, a new thing. They are plainly a reflex to the tax laws which give them exemption.
The Foundation. Directory sets forth thirteen foundations with $100 million or more in assets. ' But this listing, although impressive, is misleading because some interests have established many foundations, and small foundations in their various ways are themselves significant. Patman more revealingly shows them by groups.
The thirteen leaders according to the Foundation Directory are: Source
Ford Foundation
Rockefeller Foundation
Duke Endowment
John A. Hartford Foundation
W.
It should never be thought that the leaders of Congress do not know what they are doing.
Many such special sections exist in the tax laws. of benefit only to a single individual or estate (one-shotters) or of continual benefit to certain industries; and Stern discusses a number of them. To obtain such special tax sections for oneself one must, obviously, have a "friend at court," somebody who has the king's ear.
Many companies get such special tax laws, of benefit only to them; and otherwise illegal gains from mergers of various corporations or banks are covered either by one- shot or multiple-shot laws. Sometimes one company is able to squeeze itself into provisions especially tailored for another, but not often. 55
Low Estate Taxes
Not much will be said here about estate taxes other than to point out that entirely illusory rates are posted here as elsewhere. Many very rich men's estates pay little or no tax. The public supposition that the big estates are being dismantled by estate taxes, often repeated in newspapers, is entirely false.
According to the rate schedule in the law, estates exceeding $60,000 are now taxed from 3 per cent for the first $50,000 to 77 per cent for amounts over $10 million. Offhand, one might suppose that a man who left $100 million net would pay a tax of
$67,566,150. But no taxes like this are ever paid and, as we noted earlier, John D. Rockefeller Sr. and Jr. and Henry Ford I paid low estate taxes.
Some persons, below the top levels of wealth, do indeed pay full estate taxes. But this is because they have either through personal peculiarity or unusual moral standards refused to seek and follow the advice of an experienced tax lawyer. Usually it is a personal peculiarity that leads them in this direction, according to what lawyers say. They are unable to understand the steps outlined for them to take or fear they are in danger of losing something.
An anecdote of record about the late Somerset Maugham, the well-known and affluent writer, will illustrate the point. It was explained to Maugham that if he took certain steps to divest himself of nominal control over his assets for the benefit of his children, with whom he was not on good terms as such are generally understood, his estate under English law would almost entirely escape taxes.
"I won't do it," Maugham said as the situation was explained, "because I am too aware of what happened to King Lear. "
It is mainly, among the law-cognizant, persons with a strong feeling of alienation who do not avail themselves of the many profitable loopholes in the estate-tax law. Henry Ford, it appears, was one such, and only the last-minute recourse to the Ford Foundation saved control of the company for his family. Ford was obviously either a tenaciously grasping person, indifferent to his family, or simply could not understand the ins and outs of the law, which one assumes were thoroughly explained to him by able lawyers. We know he did not want the government to get his money.
Ford, of course, did not have the advantage of the marital deduction, which was passed the year after his death. Had it been in existence a half of about a billion dollars would have been, right off, tax free. As matters now stand, one half of the taxable value of all estates where there is a surviving spouse is tax exempt.
A $100 million net estate, instead of paying $67,566,150 under the posted rates, therefore seemingly pays only $32,566,150. This is quite a bit but it isn't anything like the posted 70 per cent; it is 32. 5 per cent.
Even this 32. 5 per cent is illusory under the various leveraging amendments to the estate-tax law and, to make a long story short, we may simply show in this table what the real against the posted rates are: 56
Gross Estate
(approximate)
$500,000-$1 million
$1-$2 million
$2-$3 million
$3-$5 million
$5-$10 million
$10-$20 million
$20 million and higher
Scheduled
Rates
(Per Cent)
29-33
33-38
38-42
42-49
49-61
61-69
69-77
Actual Average
Tax (1958)
(Per Cent)
15. 3
18. 2
19. 3
21. 2
23. 2
24. 4
15. 7
Percentage
of Discount
50 50 50+ 50+
50-60 60+
80+
One may obtain the actual rate for any year by averaging the actual payments in each bracket as reported by the Treasury Department. From year to year the actual rates vary slightly.
So, when one reads in a newspaper about high estate taxes one is reading something untrue. The maximum actual estate tax by percentage is about the same as the income tax on an individual $10,000-$20,000 income.
Similar low actual rates prevail on large incomes as shown by the Chase Manhattan Bank in 1960 in its bimonthly news letter, as follows:
Adjusted Gross
Income
Under $3,000
$ 10,000-$ 14,999
$ 20,000-$ 24,999
$50,000-$ 99,999
$200,000-$499,999
$1,000,000 and up
Scheduled Rates
(Per Cent)
20
25
36
55
80
87
Percentage
Actual Rates of
But a man with a family will not ordinarily pay anything even like the actual rates on a $100 million estate. For, being sensible and knowing that he must some day die, he has long before death begun transferring assets to his wife and children. Let us suppose he has two children.
He can transfer $100,000 a year to each of them at a gift-tax cost of $15,525 each or 15. 5 per cent, with the sums held in trust. In thirty years $9 million will have been transferred. He can make his own law firm trustees.
He can transfer an equal amount, at once or gradually, to his family-controlled foundation, entirely tax free up to 30 per cent of annual income.
He can increase his transfers at slightly higher gift-tax rates. Whatever he transfers brings the actual estate tax lower.
But he can do even better than this. He can transfer to members of his family, at extremely low gift-tax rates, properties of grossly understated value whose true value he alone knows. Such, let us say, would be mineral-bearing but unexploited lands, since privately surveyed and "proven. " If such land had been acquired at $100,000 it could be transferred for purely nominal taxes, and this big asset would be in the hands of his heirs long before his death. Times of downswings in the market, as during the Depression, are a good time to make corporate gifts. Overdepreciated real estate or foreign property, with a low book value but a high actual value, is another good thing to transfer by gift. The heirs can sell it at full value without paying any capital gains tax.
At no stage need he lose practical control over any of his properties, leaving aside his moral authority over his family. Many of those who do not avail themselves of these provisions apparently feel they have no moral authority over their heirs or believe their heirs will take these properties and leave them in the lurch, as Mr. Maugham publicly feared. While such a possibility, may exist in some families, even it can be guarded against by a knowledgeable tax lawyer.
The value of wives here is again outstanding, as in the case of the marital deduction in the upper brackets.
It might be asked what value it is to a man that half his estate escapes any taxes if his wife gets that money. But the first advantage is that she halves the tax. He must be interested in this feature because he could avoid all taxes by simply leaving all the money to the public in some form. As he usually doesn't do this, one must conclude that he is interested in preserving the fortune for some reason.
What he leaves to his wife can be left in a life trust, he naming the ultimate beneficiary but giving her the right to change this. By doing this he has clearly reduced the taxable amount by one half. His children ultimately take from the mother's estate, so at least two-thirds of the fortune is preserved. But much better than this can be done by means
(Per Cent)
Discount
19 5
20 20
23 35+	
38 33+
42 48
38 57. 5
of lifetime distributions in the form of trusts and by taking advantage of other provisions in the fine print of the law.
And through the use of trusts, assets can be kept intact for at least three generations. The dead man can assert his will for at least 100 years. If the final recipients, having full control over the property, now replace it in trust according to family doctrine, the holdings can be preserved in trust for another three generations. If it is a series of multiple trusts that have been established, the tax rates can be very, very low.
While the Constitution forbids the entailment of property as in England it is nevertheless practically possible to practice serial entailment, as Cleveland Amory reports many of the old Boston families have done. Serial entailment is achieved if the third-generation recipient, loyal to family teaching, replaces the property in trusts.
Estates, in fact, are not broken up by the tax laws; they grow larger through the generations, assuring the presence of an hereditary propertied class. This fact has many implications, one of which is that latecomers in the game of grabbing property face a shrunken hunting ground.
The whole point is this: Plenty of escape hatches exist in the estate-tax law for those who wish to avail themselves of them. Some, like Henry Ford, do not, and prefer to clutch nearly every last dime they own until the undertaker forces open their hands. For the heirs of such, the tax outlook is rather bleak, although by no means so hopeless as often reported. There is always the foundation escape hatch, and the foundation, all else failing, can give remunerative employment to members of the family, who become philanthropols or, somewhat paradoxically, philanthropist-politicians.
In summary, it should be noticed that the rich, who contrary to Ernest Hemingway are different in other respects than that they simply have more money, live in a specially favored tax preserve which could not have taken form without considerable elitist prompting. Congress alone would not have had the Kafka-esque imagination to devise this labyrinth of fiscal illusion. The public itself did not demand these tax laws.
All deductions and exemptions available to rank-and-file taxpayers in trifling amounts, as we have seen, have far greater weight when applied to the receivers of big incomes from property and its manipulation. Deductions for wives, children, general dependents, education, medicine and social investment have an in-pocket value up to the maximum of the tax rates for the rich. Beyond this are all the special tax dispensations provided especially for big property holders: accelerated depreciation, depletion allowances, expense accounts, low-tax capital gains, specially tailored exemptions, mortgage and interest leverages, tax-exempt bonds, multiple trust funds, light estate taxes, family partnerships, low-tax lump sum settlements of a large variety of fictitious capital gains, etc.
It is very evident that, as government expense has gone up attendant upon fighting corporately profitable wars, the rich have decided to play very little part in defraying it.
Results such as those depicted could have been attained only as the consequence of much elitist work, thought and conniving. Can anyone believe the results are accidental? Or that they are remotely equitable?
Taxpayer Terrorization
While the tax rates gouge the general populace, the Internal Revenue Service in recent years, by all accounts, has been conducting a highhanded reign of terror against small delinquent taxpayers, often confused by the crazy-quilt tax forms. "Tax disputes more than any other have given many harassed citizens a glimpse of the other face of Uncle Sam when he scowls," writes Washington political columnist Jack Anderson. The face
of Uncle Sam that many citizens now see closely resembles the skinflint depicted by hostile foreign cartoonists.
While making advantageous settlements with delinquent large taxpayers, says Anderson, "the government was relentlessly pursuing a host of small tax debtors, poor but loyal Americans, many of whom were in debt for reasons beyond their control. Uncle Sam garnisheed their wages, seized their property, confiscated their bank accounts, and deprived them of their jobs, stripping them of almost everything they possessed except the mere clothes on their backs. . . . More than one hard-pressed taxpayer has found himself in trouble because of a trivial or unintentional error in an old return, the failure of an employer to withhold the correct tax, or a personal tragedy that cleaned him out of the money he set aside for Uncle Sam. The files at Internal Revenue are stuffed with complaints from taxpayers who say they have been hounded, bullied, and browbeaten by collectors whose methods would put a loan shark to shame. Many a widow's last mite has been snatched from her. Men have been stripped of their livelihood and, along with it, their only means of paying the government. "
A committee of twenty-two tax lawyers and accountants appointed by Chairman Wilbur Mills of the House Ways and Means Committee found many acts of "overzealousness" by tax agents that infringed "the vital rights and dignities of individuals. " 57
If a taxpayer subjected to arbitrary Internal Revenue rulings is affluent enough to be able to hire a lawyer he on the average, in appeals, has 85 per cent of the tax assessments sharply reduced or eliminated.
"Only a small percentage of individuals whose deductions are disallowed, whether right or wrong, do use existing systems to challenge IRS auditors," writes William Surface. "Why not? 'The small taxpayer's first and usually last impulse is to quit,' says Senator Warren Magnuson of Washington. 'Just throw in the towel, pay the deficiency, no matter how unjust he believes it is, rather than face the tiers of faceless bureaucracy. The small taxpayer is faced with staggering disadvantages in his dealings with the Federal Government in comparison with large, corporate taxpayers. '"
The bigger taxpayers proceed otherwise. About 10 per cent of those assessed additional taxes request an "informal conference" with the auditor's supervisor, and about half of those who do this win some concession. In 1965 a total of 26,301 corporations and individuals who were assessed additional taxes, or 1 per cent, appealed their cases to the Appellate Division, an autonomous body. No less than 85 per cent of the cases so appealed each year have their cases settled for about $200 million a year less than what IRS originally assessed. Beyond this there is the Tax Court, where an average of 8,500 appeals from IRS rulings are heard each year. "Four out of five cases that reach Tax Court are settled without trial for only 31 per cent of the amount that Internal Revenue had initially demanded. " 58
On this showing, IRS is clearly overzealous in many cases, and most people readily knuckle under in fear of being suddenly confronted, apparently, by an unbenign Uncle Sam. Anderson, Surface and various congressmen blame it on petty bureaucrats in IRS, with which judgment I emphatically disagree. IRS people are civil service employees, all of them small people. They only follow instructions from higher up. They act only in response to orders passed down along a chain of command from the White House and the Secretary of the Treasury. When they get very tough and arbitrary it is because they feel their jobs are in jeopardy if they do not make a good showing.
It is true that underlings in all large organizations, governmental and corporate, often tend to be overzealous in carrying out very mild orders, thus giving the organization
eventually a bad name. Mild orders from on high tend to gain strength as they are passed down, and at their point of final execution are often brutal.
At times, with the approval of higher-ups, the Internal Revenue Service acts illegally. The Commissioner of Internal Revenue has admitted that for seven years, from July, 1958, to July, 1965, agents had made "improper" or questionable" use of electronic eavesdropping devices on 281 occasions. The information was elicited by the Senate judiciary Committee. One senator charged that electronic devices were used "during routine investigations of ordinary taxpayers"; the charge was denied. Planting of such devices by means of trespass, the Supreme Court ruled in 1961, is unconstitutional (illegal), violates the prohibition against unreasonable search and seizure, invalidating evidence so obtained. 59
Whereas the Bourbons, drunk with power, proceeded forcibly against the peasants en masse to collect unfair taxes, in modern states, including the United States, the full force of sovereignty is brought to bear against single individuals. Intimidated in advance by any sort of authority, the ordinary citizen here is in no position, even under constitutional government, to invoke his rights. He does what many intimidated innocent people do in the courts: He pleads guilty to a lesser charge.
General Remarks
What has been put down so far represents only part of the story of shoving the tax burden onto the patriotic labor force by the finpols and corp-pols with the consent of the pubpols, who in turn thoughtfully misapply (OverKill) at least 30 per cent of the tax money they do take in. This percentage of profitable misappropriation, largely on the excuse of "defense," more recently of "welfare," is put very conservatively; a thorough direct examination of what is obtained by the expenditures would probably show a larger percentage.
A careful comparison of the fiscal situations in the United States and eighteenth- century France, which was under candid autocratic rule, shows that the American populace is being short-changed far more efficiently than was the French populace under Bourbon rule. Indeed, the American process is more effective because most of the people are not even aware they are being trimmed under the twin banners of anti- Communism and anti-Poverty; most rank and file citizens would be the first to deny it vehemently while bursting into strains of Yankee Doodle. The French were fully aware of the process because many of their taxes were collected by force, often after pitched battles between the peasants and the troops. The American process of making the labor force shoulder most of the tax burden takes place in much subtler ways, behind the formidable barriers of deceptive language, high-flown ideology, simple arithmetic and the full panoply of sovereignty arrayed against isolated individuals.
In this atmosphere the withholding tax, levying on earned income before received, was nothing short of a pubpolic political inspiration.
The General Results
What is not paid by the higher-ups must be paid by the rank-and-file. The government, despite all the tax loopholes, is never deprived of whatever revenue it says it needs, even for waging fierce undeclared wars of its own bureaucratic making. What revenue the government decides not to take from the influential finpols it must take from the poor and needy over which the pubpols weep and wail like the Walrus and the Carpenter did over the happy trusting oysters they had eaten.
Stern has reported various shrinkages in the tax base and the attendant cost to the Treasury (which cost must be made up by the patriotic rank and file). 60
Here these various shrinkages and costs are presented somewhat differently: first, those shrinkages and costs of advantage solely to the wealthy; secondly, those shrinkages and costs participated in and preponderantly of advantage to the wealthy; and, thirdly, those shrinkages and costs generally of advantage only to rank-and-filers.
Lump-Sum Tax Evasions of the Wealthy Only
Shrinkage of Cost to
dollars)
Lump-Sum Tax Evasions in Which the Wealthy
Participate with the Less Wealthy Middle Classes
Shrinkage of Cost to
Tax Base Treasury
(billion dollars) (billion
Extra exemptions for the aged and
blind (most of these deductions per
centagewise and in totality must go
to those few with substantial income
--the higher the income the greater
the deduction)
Nontaxable income from social secur-
ity, unemployment and veterans'
benefits, etc. (except for unemploy
ment benefits, the wealthy partici-
pate to some extent)
$ 3. 2
11. 9
$ . 9
3. 6
2. 0 11. 9
5. 0 $23. 4
Cost to
Tax Base Treasury
(billion dollars) (billion dollars)
Depletion deductions
intangible oil and gas
drilling deductions
Excessive expense account
Deductions
Real estate depreciation
Dividend credits
Capital gains deductions
Estate tax evasions
Interest on tax-free bonds
Undistributed corporate profit* 25. 6 (1965)	12. 8 (est. )
Totals $49. 8 $22. 1
*Stern does not include this significant item.
The wealthier class of taxpayers, in brief, fails to pay $22. 1 billion of taxes which it might properly pay. Nor is this all, because it participates in tax loopholes available to others.
Rent equivalent (deducted mortgage
interest, etc. ) on owned homes
(greatest advantage to wealthy as
residents and as real estate opera-
tors) 6. 5
Itemized deductions (most profitably
used by wealthy) 43. 0
Income-splitting for married people
(of most percentage and dollar
value for wealthy persons)
Totals $64. 6
Lump-Sum Tax Dodges in Which the Wealthy
Probably Have Little Participation
Shrinkage of
$ 3. 7
$ 1. 5 . 5 . 3
. 2
6. 0 12. 5 2. 0
. 5 2. 4 2. 9 1. 0
dollars)
Tax Base Treasury
(billion dollars) (billion
Fringe benefits (some participation by
well-paid executives)
Interest on life insurance savings
Sick pay and dividend exclusions
(some participation by wealthy)
Standard deduction
Unreported dividends and interest
(mostly small people)
Totals
$ 9. 0 $3. 0
1. 5 . 4
. 9 . 3 12. 0 2. 6
3. 7 . 9
$27. 1 $7.
2
According to this approximate computation, which would vary in detail from year to year, there is a total tax diversion from the Treasury of $52. 7 billion a year. This diversion must be compensated for, with national budgets now rising above $100 billion, and it is compensated for at the expense of the smaller taxpayers, who pay more than $20 billion of corporate and other taxes in price and also pay most of income and excise taxes. The rates on the lower incomes are far higher than they would be if an equitable system of taxation existed.
While the less pecunious classes are able to evade most of $7. 2 billion (for which they nevertheless pay elsewhere), the more affluent classes (with the wealthy participating by individual proportions most extensively) evades paying $23. 4 billion (for which most of their members pay elsewhere). The wealthiest class as a whole evades directly a total of $22. 1 billion, which it unloads on the impecunious and less pecunious classes.
What the extent of its participation is in the evasion of $23. 4 by the middle group can only be surmised. If we estimate the participation at only $5 billion then we find the wealthiest have evaded $27. 1 billion of taxes in addition to whatever they have merely generally pushed over on the lower orders.
If anyone believes there is suggested here too high a figure of what is really owed in taxes by the wealthy, it should be recalled that the upper 10 per cent of the population owns all of the nation's productive private property while 1 per cent of the population owns more than 70 per cent of it. Such being the case one would not reasonably expect that a single employed person who is paid $1,000 in a year--about $20 a week--would be obliged to pay a tax of $12. Nor would one expect that a married man with a salary of $4,000 would be obliged to pay a tax of $350, a month's pay. But so they had to do in 1966 if they took the standard deductions.
To shift the scene a bit, it may be recalled that national elections now require the spending by the political parties of more than $100 million. This is without considering the many costly local elections in off years or parallel with the national elections. The rising figures, often cited, are considered stupendous. These campaign funds are supplied by the wealthy and the propertied who, it should be clear, get a manyfold return on what they pay for. As the political parties (in default of effective popular participation) are to all practical purposes theirs, they obtain preferential treatment from government. So it has been all down through history. The United States is not an exceptional case. It is a typical historical case, contrary to what the Fourth of July orators would have one believe, except that the people have been subdued through their own ineptitude.
People in the Tax Net
In 1940 there were filed 14,598,000 individual income tax returns. In 1961 61,068,000 were filed. The greatest increase took place in 1944 under the wartime tax laws; in 1945 the total stood at 49,751,000. 61
Having brought this great additional throng into the tax net under the income tax, originally an upper-class tax, does anyone believe the pubpols will ever remove the net?
By far most of these taxes are withheld from salaries and wages, earned income. In 1962 there was withheld $47. 583 billion compared with $15. 317 billion not withheld; in 1963 it was $51. 839 billion against $15. 205 billion. 62 The income tax has been transformed largely into a permanent wage tax, a Gargantuan political joke on the workers.
One often hears of tax-cheats, individuals and organizations, that are proceeded against unceremoniously by the government. As this chapter should make blindingly clear, however, the greatest tax cheat (perhaps in all history) is the United States government itself, which by means of the federal tax code stupendously cheats the vast majority of its trusting citizens on behalf of its political pets. Not only does the government do this but its prime beneficiaries daily boast to a bemused world that in the United States everyone enjoys full equality under the law. The government, of course (to give it its due), is staffed by the weird people put into office by an idiotic electorate, which is fittingly hoist by its own petard. The boobs are overwhelmed by boobs of their own choice!
The Chances of Reform
What are the chances of reforming the tax laws?
Here it must suffice to say that most experts see little prospect of reform. At most there will be further deceptive rearranging and ideological tinkering. And even if taxes were fairly apportioned, past gains would remain in the hands of the advantaged.
A colossal historical inequity like the American tax structure, a mechanism subtly fastened on a people with a view to extracting from them the produce of their labors not necessary for subsistence, is never removed by means of elections or the passage of laws. At least, it never has been thus far in history. The beneficiaries, having gone to a great deal of trouble and expense to devise and maintain this structure, are not going to stand idly by and see it dismantled. They will use every considerable power at their command to defeat all substantial reforms.
In history fantastic, capricious and arbitrary structures such as this have vanished only in some sort of climactic explosion--revolution, conquest or collapse. A far less onerous tax structure in the early American colonies was terminated not by reform but by revolution and war.
These remarks, needless to say, are purely descriptive, intended to bring out the very serious purpose underlying these laws. This earnest purpose, which is to run a vast society in a certain way for certain hereditary beneficiaries and their retainers and emulators, cannot be lightly pushed to one side, particularly when it is well wrapped in the accepted ideology of freedom. Anyone who proposed such action at this time, indeed, would be very foolish, as the populace is hardly aware-and shows no signs of wishing to be aware--that it is fastened in a straitjacket only slightly less tight than in many other ideologically unhallowed societies that could be mentioned.
Anyone who doubts that this is so may set about the task of tax reform. If he succeeds, these concluding observations will have been set at naught. And whether he fails or succeeds he will get a sound political education. 63
(Note: The reader should not suppose that this chapter is a full treatment of the tax situation. It touches only the highlights and allots no space at all to many publicly costly ludicrous oddities such as the decision allowing Kathleen Winsor to pay 25 per cent capital gains taxes for the sale of her book Forever Amber because under a tax-court ruling she was not a professional writer and had written the book "primarily because she enjoyed the research and writing which went into its composition. . . . " The interested reader should refer to sources cited and pick up enlarged bibliographies from them. He will soon see that everything in this chapter is written in a spirit of understatement.
As to the cause of it all, the socialist will murmur "capitalism. " Yet the American tax structure has no intrinsic relationship to capitalism and can, indeed, be shown as functionally inimical to it. Other capitalist countries such as England, Western Germany or Japan do not have similar tax structures. The source of the tax structure is clearly the popular electoral system and an inept electorate, which places in office smoothtalking men of a disposition to trade tax and other favors in return for personal emoluments. This the legislators do, in stages and by bits and pieces, resulting in an increasingly peculiar tax structure that may be subtly undermining the capitalist system itself.
Capitalists clearly would be paragons of unusual virtue if they did not, for inner competitive reasons, take full advantage of the fact that a politically inept public had placed into strategic offices men who are deviously accommodating on a quid pro quo basis. If capitalists--and a gullible public--were faced by a preponderance of true public men in office they would hardly seek to have written into the laws these various tax monstrosities. But the kind of electorate one finds in the existing political system is unable to insure the presence in office of a preponderance of true public men. Instead the electorate gives us people of the stripe of Senator Thomas Dodd, Congressman Adam Clayton Powell, Bobby Baker, the late Senator Robert Kerr, Judson Morhouse, Senator Everett Dirksen et al. The basic causes obviously lie out in the broad electorate. )
The over-riding problem in the United States is not economic. It is political.
Ten
PHILANTHROPIC VISTAS:
THE TAX-EXEMPT
FOUNDA TIONS
Wealthy men and women today are almost all freely labeled by the public prints as philanthropists. In such mindless parroting the word has acquired the operationally extended meaning of "wealthy person"; and "wealthy person" means, reciprocally, "philanthropist. " As hardly anybody in society is more welcome than a philanthropist, it follows that nobody is more welcome in all his beneficence than a wealthy man. By American propagandic decree the wealthy man thus has strangely been transmogrified into the quintessential cream of humanity. Simple people, the majority, accept him without reservation in this guise.
It is, furthermore, extremely rare to find the public prints, particularly the corporate press, labeling anyone other than a wealthy person as a philanthropist. Journalists now appear to make a subtle distinction between philanthropists as merely rich persons and
humanitarians as functional benefactors without money: Jane Addams, Lillian Wald, Jacob Riis, Clara Barton, Florence Nightingale.
Oddly at variance with the common perspective of the wealthy person as an overreacher of others in competition for worldly goods and power, the prevalent one is quite in harmony with the Alice-in-Wonderland treatment of contemporary affairs in public prints. As it is practiced on the American scene it is a variant of Orwellian "New- Speak," in which war means peace, peace means war, and liberation means enslavement. For the United States as much as Soviet Russia has its own "New-Speak" in which "defense against Communism" means "invasion of Vietnam" (or the Dominican Republic), Defense means attack. Patriotism means doing physical injury to someone. Inflation means prosperity. Bigness means greatness. And wealth means philanthropy. According to the public prints all is not as one might simple-mindedly suppose in the realm of wealth; contrary to reasonable supposition and statistical fact the wealthy are not endeavoring to increase their wealth but are feverishly endeavoring to give it away for good works.
The basic misinformation sedulously conveyed is this: Whatever the people's government is not taking away from the wealthy in huge tax bites is being given away to the lame, the halt, the blind, the needy, and the worthy with a lavish hand. Therefore, it seems, one should forget about the wealthy; they are not a serious factor of power in the social situation.
Instead of the wealthy, who are measurable and palpable, we are assured by approved savants that what is really involved in the social situation is something elusively unmeasurable and impalpable, discernible only to rarely subtle minds, masters of arcane and delicate methodology. These minds, more and more of late eschewing the troublesome concrete in favor of the pleasantly abstract, limn for us The Power Structure, The Establishment, The Power Brokers, and The Power Elite who face, not the poor, the exploited or the unpropertied, but The Disadvantaged, The Culturally Deprived, The Under-Privileged, The Unfortunate and The Lower Socio-Economic Strata. (All these Disadvantaged may escape their plight by climbing the golden staircase of Upward Mobility. ) Taboo entirely in the cleansed new social metaphysics are such coarse and unmannerly terms, worthy only of unwashed boors and churls, as Class and Caste, with their connotations of past and present turbulence. Very much favored is Strata, a cool and cleanly word. People are people, it seems--all pretty much the same according to democratic dogma but found in different Strata, some merely flying by choice or temperament at lower altitudes than others. And in the emerging new social metaphysics or rhetorical whitewash there are few Unemployed. In their place we have the Disemployed, even the Involuntary Leisured. There are, too, Senior Citizens in place of Old People. Persons unable to detect the difference are obviously deficient in understanding--cannot tell the difference between a war and a massive overseas police action.
"Class" is a particularly troublesome word; for one can, unless one is very careful, slip and slide on into "class warfare. " But in the elegant variance of the aseptic new terminology one can hardly make the mistake of saying "power-structure warfare," "power-elite warfare" or "lower socio-economic strata warfare. " The fashionable new terminology protects against such deplorable gaucheries. Yet the basic phenomena remain in all their harshness.
Puzzles of Philanthropy
As we are not engaged here in an embroidery upon journalistic fantasies we are confronted by a number of puzzles. To what extent are the wealthy giving their money away for good works if they are giving it away at all? This is somewhat similar to the
question faced in the last chapter: To what extent are the wealthy being taxed out of existence? And, if they are not giving wealth away, what is it that they are really doing with their numerous foundations?
As many persons are involved in all this so-called philanthropy one must not, heeding the caveats of methodological vigilantes of the Establishment, impute motivations without warrant, although the very term philanthropy (to which the Establishment methodologists oddly do not object) does already unwarrantably impute motivations. What the individual motivations are of those thousands who now transfer money to foundations one cannot say one really knows. 1 But one can trace certain indubitable nonphilanthropic effects of such activities.
The first of these is the public relations effect. The founder may have been publicly disliked, like John D. Rockefeller I, or not very well liked, like Andrew Carnegie. But the forming of foundations had the effect of altering opinion in an unsophisticated population, turning the supposed bad guy into a supposed good guy.
Just how far down in public esteem a wealthy man may sink can be seen from the following acerb vignette of John D. Rockefeller I by Ida Tarbell, writing in the widely circulated McClure's Magazine in 1905:
No candid study of his career can lead to other conclusion than that he is a victim of perhaps the ugliest . . . of all passions, that for money, money as an end. . . .
It is not a pleasant picture . . . this money-maniac secretly, patiently, eternally plotting how he may add to his wealth. Nor is the man himself pleasanter to look upon . . . portraits show . . . craftiness, cruelty, something indefinably repulsive.
Hypocrite, intriguer, freak of nature, it is not for us to say. The great public does not deal in nice psychological distinctions. . . . it says this man has for forty years lent all the power of his great ability to perpetuating and elaborating a system of illegal and unjust discrimination by common carriers. He has done this in the face of moral sentiment, in the face of loudly expressed public opinion, in the face of the law, in the face of the havoc his operations caused. . . . He has fought to prevent every attempt to regulate the wrong the system wrought, and . . . turned his craft and skill to finding secret and devious ways of securing the privileges he desired. . . .
He has turned commerce from a peaceful pursuit to war, and honeycombed it with cruel and corrupt practise; turned competition from honorable emulation to cut-throat struggle. And the man who deliberately and presently does these things calls his great organization a benefaction, and points to his church-going and charities as proof of his righteousness. To the man of straight-forward nature the two will not tally. This, he says, is supreme wrong-doing cloaked by religion. There is but one name for it-- hypocrisy.
To have blotted out of popular consciousness largely by foundational activity this once prevalent estimate has been a notable achievement in public relations engineering.
Another effect is the tax-saving benefit. Nearly all of the American foundations have come into view since the enactment of the income tax and estate tax laws: The foundations are completely exempt not only with respect to income taxes but also capital gains taxes. One does not know in each case that the founder sought to escape taxes, but common reason would indicate it. Many standard tax-advisory services explicitly point to these factors as attractive features of foundations. 2
A third effect is the corporate-control effect. Corporate control, which would otherwise be undermined by the tax laws, is preserved to perpetuity by many foundations, permitting the hereditary transmission, tax free, of vast corporate power.
A fourth effect is that the foundations extend the power of their founders very prominently into the cultural areas of education (and propaganda), science, the arts and social relations. While much that is done in these areas under foundation auspices meets judicious critical approval, it is a fact that these dispensations inevitably take the form of patronage, bestowed on approved projects, withheld from disapproved projects. Recipients of the money must be ideologically acceptable to the donors.
There is a positive record showing that by these means purely corporate elements are able to influence research and many university policies, particularly in selection of personnel. While the foundations are staunch supporters of the physical sciences, the findings of which have many profit-making applications in the corporate sphere, among the social disciplines their influence is to foster a prevailing scholastic formalism. By reason of the institutional controls that have been established, the social disciplines are largely empty or self-servingly propagandistic, as careful analyses have disclosed. 3
Whether or not these various effects were sought by the foundation creators, they are present, and the realistic observer must suppose they were what the realistic founders had in mind. (We must be particularly impressed by the frank analyses of their tax advisers. ) Via the foundations they get more mileage out of their dollars--and retain more dollars.
The Foundation Panorama
There are now so many tax-exempt foundations in the country that the number cannot be precisely ascertained.
The Foundation Directory, 1964, published by the Russell Sage Foundation, lists 15,000 foundations but says the number is increasing heavily year by year. 4 In this figure it challenges the total of 45,124 given by Representative Wright Patman, chairman of the Select Committee on Small Business of the House of Representatives. Patman's figure, the Directory holds, included civic, educational, welfare and religious organizations as well as pure foundations. 5 But the Patman investigation of the foundations in the early
1960's is the most complete available and will be cited throughout this chapter. It was focused, moreover, on the 534 largest foundations (within the Russell Sage meaning of the term) with total book-value assets exceeding $10 billion at the end of 1960.
As of early 1967, a total of 6,803 foundations in the United States had total assets of $20. 3 billion by market values (as distinct from book values), an increase of almost $6 billion in three years, according to the foundation-supported Foundation Library Center of New York, as reported in the New York Times, April 4, 1967 (32:3-4). These were record high figures, a measure of lush prosperity in Foundationland.
Total foundation assets in the period 1960-63, according to the Foundation Directory, were $14,510,765,000; so it is evident that Patman's inquiry covered most of the field. 6 Of these, $8. 161 billion were concentrated in New York; Pennsylvania came next with $853 million; then Michigan with $752. 9 million; and Texas with $744 million. New York is far in the lead here as in all other aspects of finance.
Prior to 1910 there were only eighteen American foundations, with just one exceeding $10 million. (Until 1913 there were no income taxes, until 1916 no estate taxes. ) In the next decade 76 were launched, in the 1920's 173, in the 1930's 288, in the 1940's 1,638 and in the 1950's 2,839. Of 5,050 leading foundations, 32 per cent were launched in the 1940's and 56 per cent in the 1950's. 7 In their magnitude and pervasiveness, then, the foundations are something recent, a new thing. They are plainly a reflex to the tax laws which give them exemption.
The Foundation. Directory sets forth thirteen foundations with $100 million or more in assets. ' But this listing, although impressive, is misleading because some interests have established many foundations, and small foundations in their various ways are themselves significant. Patman more revealingly shows them by groups.
The thirteen leaders according to the Foundation Directory are: Source
Ford Foundation
Rockefeller Foundation
Duke Endowment
John A. Hartford Foundation
W.
