These seem like rather
substantial
rates.
Lundberg - The-Rich-and-the-Super-Rich-by-Ferdinand-Lundberg
If all these and many more taxes did not come out of the price of the bread, there would be no gain for anyone along the line of
production. So it is the buyer of the bread as of other articles and services who pays the taxes.
How to Get Rich by Not Paying Taxes
By way of introducing an always sharp exposition Philip M. Stern points out that in 1959 five persons with incomes of more than $5 million each, when the public supposed such incomes paid 90 per cent tax, paid no federal tax at all. One with an income of $20 million paid no tax. Another with an annual income of nearly 82 million had paid no tax at all since 1949. In 1961, seventeen persons with incomes of $1 million or more and thirty-five others with incomes of $500,000 or more paid no taxes whatever. In 1960 a New York real estate corporation with $5 million of income paid no taxes but showed, instead, a bookkeeping loss of $1,750,000. And various persons with huge investments in tax-free bonds regularly pay no tax whatever on their aggregate incomes. Not only is this sort of thing continuing, year after year, but the number of tax-free big incomes is multiplying like the proverbial rabbits.
The United States, very evidently, has gone a long way toward aping prerevolutionary France, where court-favorites were given complete tax exemption. Corporations, like noble French estates, are not taxed.
Techniques of Government
In order to bring about these results, politicians have drawn lessons from history and developed techniques for treating their demoralized constituents more as adversaries, to be manipulated, than as a consenting public. And they use the very strivings, selfishness and divisiveness among people to bend them to their own dubious purposes.
When Jack Dempsey was the world's heavyweight boxing champion he went on an exhibition tour of the hinterland. As a feature, a goodly sum was offered to any man who could stay in the ring for three rounds with him. In a certain region of the Tennessee hills the champion was challenged by the local strong man, who had beaten men for miles around in boxing and wrestling and who could bend iron bars with his bare hands. A large local crowd turned out at the arena to see the outside smart-aleck get a dose of real country medicine.
"Look out for this fellow, Jack. He's awfully strong and could hurt you," said one of his handlers to the champion as they watched the strong man jump into the ring.
"Watch him walk into my right," said the champion coolly, according to newspaper men who reported the event.
Need one continue?
As they squared off, the champion flatfooted, the strong man suddenly rushed. The champion's left glove flicked stingingly into his face and was instantly followed by a powerful right cross to the jaw. The strong man, without ever having landed a blow, sank unconscious to the floor. The audience sat bewildered. They had just seen a champion against a novice.
Dempsey figures in this story as the politician, the controlling element, and the strong man symbolizes the people. The governmental method used by Dempsey was that of letting them come to you and then belting them.
This method alone does not work with large groups. With them it is necessary to play either on their inherent divisiveness or to divide them arbitrarily in order to rule. This Napoleonic method is well exemplified in the tax laws, which divide and subdivide the populace into many bits and shreds. It is Napoleonic because the general strategy of the little Corsican was to strike successively each section of divided forces with his full, massed force.
Government uses these methods, it should be noticed, when the public is reluctant or unwilling. Apart from taxation, it is used to good effect in conscription. Let us briefly examine it there in order better to understand the tax outcome, which otherwise, in the absence of a hostile conquering force, is inexplicable.
Most men are instinctively reluctant to serve in the armed forces, where one may be killed or maimed. We know this because, if they were not, all they would have to do is to join at any of the many recruiting stations scattered around. Most of them must be ordered to serve.
If, as in World War II, the government wants some thirteen million men it is obviously difficult to order them forward all at once, risking the political ire of such a multitude. Again, government at no time possesses the manpower to force thirteen million to obey. The FBI, resourceful though it is, could hardly cope with this situation.
The government here brings into play two tactics--Dempsey's lethal punch and the doctrine of divide-and-rule.
First the government divides the manpower into classes--by ages and by marital and parental status. It then summons first those who are politically and psychologically weakest, the single youths aged eighteen to twenty-one who don't even have the vote. Excepting the few true-blue patriots and excitement-hunters who rush to the recruiting offices, all others, thankfully feeling they have been excused from danger, cheer in approval and tell the bewildered youngsters they are only doing their patriotic duty; older men and women hurry off, like often-criticized Germans, to better-paying jobs in munitions plants. Next to be summoned are single men aged twenty-one to twenty-five, while married men approvingly urge the victims on. For the government gets much assistance from that part of the populace it is not at the moment corralling. Any of those who have shown strong signs of not wishing to go are shouted down by their fellow men, shamed. Some who have watched and cheered the process meanwhile have rushed off to get married to the first unattached female they could find; for the government, it seems, has a soft spot in its heart for married men--whom it is not calling.
But now, with a considerable force in training under arms, the government has enough men to deal handily with any late-showing dawdlers. Moreover, the men under arms feel scant sympathy for those who have not been called. The conscript army would, in fact, relish an order to go and get them at bayonet point. As in a wrestling match, the weight has been shifted. Where at first the forward-thrust of weight was with those not called, who chivvied the tender youths into service, this weight has now shifted to the youths under arms who now regard others as slackers and are ready to kill on command. The slackers are summoned--first the battle-shy married men and then those stalwarts with children up to a dozen and beyond.
On the battle line, finally, one finds single men eighteen to forty-five and married men with a dozen or more children--men wearing glasses, with fallen arches, flat feet, no teeth and leaky hearts. As the rule was finally explicated by the soldiers themselves in World War II, "if you can walk, you're in. " They are now all, as the soldiers themselves pronounced, "dogfaces," nobodies. (They were that, too, in civilian life but didn't know it. )
Most of the populace initially acquiesced in this process because it seemed that somebody else was going to be soaked. On this basis they gave their full-hearted consent to the process that finally snared them.
A similar technique is used with respect to the imposition of unfair taxes. For it always appears in reading the tax laws that somebody else is going to be soaked, or at least soaked more than the reader. Does it not clearly appear that some are going to be soaked
up to perhaps 91 per cent? On $1 million of income, that is $910,000, leaving the bloody no-good bastard only $90,000 or about twenty times too much. Three cheers for Congress!
The tax laws divide people into many more groups than the conscription laws. There are, first, the single, the married, the married with children and the heads of households; next come minor students, adults and persons over sixty-five. Those over sixty-five retired and unretired, with and without income, blind or still with vision. But this is only the beginning. People are divided also according to sources of income. The basic division is between earned and unearned income, the latter of many varieties. But there is also taxable and non-taxable income, foreign and domestic income, etc.
While to the general public the basic division appears to be between single and child- blessed married persons, the true basic division is between earned and unearned income. It is invariably true that earned income is taxed most heavily, unearned or property- derived income most lightly down to nothing at all.
But the average taxpayer is quickly made to feel that he is getting away with something at someone else's expense, that he is, as Mr. Stern says, a "tax deviate. " The way the laws are drawn most of us are forced into being tax deviates. The only persons who cannot qualify are single persons with earned incomes, some seven million individuals. They are the low men on the tax totem pole.
The government encourages everyone to feel he is getting away with something by advising all to be sure to take all the deductions--exemptions they are entitled to on the Labyrinthian tax form. And they are many. After correctly filling out this form the average taxpayer has the delicious feeling that he has once again outwitted a grasping bureaucracy. But he has only succumbed to Jack Dempsey's strong right hand. He has, literally, walked into the punch.
It is much like participating in a crooked card game in which, one is assured, everyone is cheating. So why not take what comes one's way? But where an ordinary player is allowed to "get away" with $200, favored players somehow get away with $200,000, $2 million or even $20 million. The small players pay for this in the end.
Thus, as Mr. Stern ably shows, the variations from the posted schedules in what is paid increase very steeply as one rises in the tax brackets. Whereas the income below $5,000, calling for 20. 7 per cent of tax. , actually pays on the average 9 per cent ("What a steal! " we may imagine the simple man saying to himself), the income of 81 million and more calling for a viciously punitive 90. 1 per cent on the schedule (if it is taxable at all) actually pays on the average only 32. 3 per cent, and the incomes over $5 million pay only 24. 6 per cent. The demagogic arrangement of the rates conceals this.
Whereas the average under-$5,000 income receiver, who probably had to work hard for his paltry dollars, saved $274 by his allowable deviation from the posted rate, the average multi-millionaire taxpayer saved $5,990,181 below the apparent rate. While the small man was allowed to cut small corners by an apparent 50 per cent, perhaps to his intense satisfaction with a benign Congress, the recipient of $1 million cut big corners by 66 per cent, and the $5-miillion man by 75 per cent!
Put in other terms, bow much trouble would a person go to in order to chisel $274 and how much to chop out $5,990,181?
The Con-Game Pattern
What the many tax-deviation opportunities provided by Congress for the small payer are is what is known in the underworld as "the come on" or bait. It is especially used in the "con game," the essence of which consists of an approach to a formally respectable
person with an offer of great gain to be made by engaging in an operation that is safe but frankly shady. In the end the person being "conned" is tricked through his own illicit greed.
The tax laws, with their many deductions and exemptions, are thus (cynically? ) set up in the precise pattern of the "con game. " One is invited to step in and chisel on the government by availing oneself of the many small opportunities strewn about for chiselers. One takes up the invitation--or challenge--like Dempsey's strong man. One walks very confidently right into the punch.
Somewhat of an improvement over the "con game," however, most of the victims do not even suspect that it is they who are being unmercifully fleeced in the big delayed thrust.
Four Cases in Point
Mr. Stern dramatically shows what happens to four men who each received $7,000 annual income. A steel worker paid $1,282 in federal taxes after all deductions (not considering all the indirect taxes he has already paid in the market through prices). A man who got all his income from dividends paid only $992. 30. Another who sold shares at a profit of $7,000 paid only $526. A fourth who got his income from state and municipal government bonds paid no tax at all. The latter, incidentally, might have had the same tax-exempt status if he had invested in oil or mineral royalties. It hardly pays, as anyone can see, to work for wages. The tax laws thus grossly discriminate, at all times and in all directions, against salaried and wage workers. Grossly, grossly, grossly. . . .
The higher professionals are similarly brutally discriminated against--perhaps most brutally.
Let us take a busy, highly skilled, unmarried brain surgeon, his fees his sole source of income. If his income was $100,000 after all expenses, then his tax prior to 1964 was $67,320; after 1964 was $55,490. Another man, who sold (possibly inherited) shares at a profit of $100,000 since acquisition, paid only $22,590. A third, who got his income from state and municipal government bonds or possibly from oil or mineral royalties, paid no tax at all. Indeed, in some cases of remote participation in profitable mineral or cattle operations one may make a profit and have the government owing one money in tax credits!
All higher professionals with ample earned incomes are subject to the full force of the graduated tax laws, with the exception of persons in the entertainment field who may incorporate themselves, sell themselves as it "package" and come under the low-tax capital gains provisions.
Again, two men may each make $300,000, one by laboriously writing a best-selling novel, the other by inventing a trivial machine--perhaps, as Mr. Stern says, a new kind of pretzel-bender. The novelist must pay three times the tax of the machine maker.
The Question of Tax Exemption
Should there, first, be any absolute tax exemptions, as of the French nobility? In a national poll the majority answer to this question would probably be "No. " But what of religion? Ah, yes, most people would probably murmur, that surely ought to be exempt because it is "a good thing. " If one so agrees, the principle of total exemption is accepted, and can be applied elsewhere, as indeed it is. Actually, religion in any event could not be taxed by any government. What the so-called religious exemption boils down to in operation is the grant of tax-free status to beneficiaries of ecclesiastical investments. This is obviously something different from religion. While most of the
more than 200 sects own very little property and rank-and-file clergy, even in wealthy churches certainly are paid little, the managers of the heavily propertied ecclesiastical establishments gain from this provision, which splits them from the rest of the populace as accessories before the fact. The high-living upper ecclesiastics of the tax-favored churches are usually thick-and-thin pro-government men, upholding the pubpols in whatever they do. Naturally, they tell their communicants they ought to be glad to pay one-sided taxes and walk into cannon fire.
The leading property-holding church is the Catholic Church, although most Catholics are quite poor. An unusual feature of the Vietnam war, as widely noted, was the strong opposition to it of many American clergy. But, said, the New York Times, "The main exception to the general trend, of course, is the American hierarchy of the Roman Catholic Church, which has largely been silent or, in the case of several leaders such as Cardinal Spellman of New York, supported the war effort. The position of the American Catholic hierarchy, however, contrasts sharply with the peace efforts of Pope Paul. " 19
Cardinal Spellman, indeed, on television declared "My country right or wrong" in a strengthened version of Stephen Decatur's "In her intercourse with foreign nations may my. country always be in the right, but my country right or wrong. " Spellman was, evidently, a churchpol.
The Catholic Church similarly, in return for its retention of properties and privileges, was a strong supporter of the Hitler regime, even as tens of thousands of French, English and American Catholics fought to the death against German and Italian Catholics to depose him. 20 It has supported the dictator Franco in Spain, supported Mussolini in Italy. It supports, indeed, any government that gives its large investments tax exemption.
The pubpols of all nations, in short, get something in return--thick-and-thin support-- for the clerical tax exemption when it becomes substantial. And what the higher clergy doesn't pay, others must.
But although churches under American tax laws may and do operate businesses tax free, in competition with tax-collecting businesses, a university that does this is not tax exempt. Very evidently if a business does not have taxes levied on it, it is in a competitively favorable position pricewise. As the Catholic Church uniquely among churches does not issue financial statements, one does not really know how many investments and businesses it owns. In other cases the ownership is known. The tax base is constantly being narrowed by exemption of church property which, untaxed, is increasing.
The principle of total exemption now being established as the pipe organs thunder their approval, it can be extended to whatever else is designated as especially worthy. After religion, what is most worthy? Obviously, it is education. Anything that is educational now becomes tax exempt, and as "education" is a word very elastic in referential meaning it is found, in practice, to cover political propaganda. Organizations and radio stations that emit rightist political propaganda, such as those of oilmen H. L. Hunt and Hugh Roy Cullen, now become tax exempt. And so it goes.
What else is worthy of substantial exemption? As a sagacious Congress has decreed, the powerful oil industry, like religion and education, deserves from 27-1/2 per cent to 100 per cent tax exemption.
Meanwhile, for every exemption and deduction granted, in the low as well as high brackets, for every narrowing of the tax base, the tax squeeze must become more stringent elsewhere; for the government must get whatever money it says it needs. If the government granted complete tax exemption to everybody except one person it is
evident that this one person would have to supply the government with all the revenues it required!
The Baited Trap
In order to set the public up for the big tax swindle, the proceeds of which accrue only to the wealthy elements, the government must dangle before it various obvious injustices in which it participates as a beneficiary. The public is, thus, "conned" into a baited trap.
The first, as noted, is the religious exemption (which turns out to be of generalized service as well to propagandists, investors in local government bonds and oil men). But it sounds good to the rank-and-file, who see it as some kind of blow against vicious atheists and freethinkers (all, oddly, created by an all-powerful God).
But, among those paying taxes, the next division takes place between single and married people. In con men's language this is known as "sweetening" the "set up," and is only the beginning of the process. As married people constitute more than 60 per cent of the adult populace, Congress obviously has a majority on its side in discriminating against the single. One should notice again the use of the principle of divide and rule.
Taxwise, the apparent remedy of the single is to get married, but as a practical matter everybody is married who feels able to be married. Those disabled from marriage for one reason or another are simply taxed more heavily.
Thus, under the 1965 tax law, as under previous laws, the taxable income of the single person incurs an initial tax at a much lower sum.
The tax of a single person using the tax tables begins at $900 of actual income, that of a married couple at $1,600. On the first $500 of taxable income (1966), after all deductions, the single person pays 14 per cent; the married couple pays 14 per cent on the first $1,000. Whereas the married couple pays $140 on the first $1,000 of taxable income (after all deductions) the single person pays $145. The disparity gains force as one ascends the tax ladder. On a taxable income of $8,000 the single person incurs a tax of $1,630, the married person only $1,380. On $20,000 the single person pays $6,070, the married person $4,380.
While what the average married person saves on the lower brackets compared with the single person is not enough to maintain a spouse, as one ascends the brackets one finds the tax saving alone can maintain one very well. Congress does not favor marriage through taxes by very much, as will appear, but it does favor marriages by rich people.
Congressional tax favors wherever they fall, do not actually fall according to the stated category but invariably fall according to the category of greater wealth.
This becomes apparent in the $50,000-bracket, where the single man pays $22,590 on taxable income (after all deductions) but the married man pays only $17,060, an advantage of $5,530, enough to support his wife. But at $100,000 of taxable income the wealthy man gets more than ample support for his wife, for he pays $45,180 while the single man pays $55,490. Even a girl with a healthy appetite can be maintained very well on the differential of $10,310.
Before proceeding, the reader should be warned not to pay too much attention to the fact that $50,000 incomes pay $22,590 and $17,060 of taxes respectively for single and married persons.
These seem like rather substantial rates. But this is on taxable income. We have yet to come to wholly nontaxable incomes.
Mr. Stern argues that taxes ought to be the same for married and single persons. But married people and parents apparently feel there is something onerous about their condition, for which they require a tax concession. Congress lets on that it agrees, gives
them a minor concession and then belts them down to the floor by fantastically widening the concession for wealthy people!
Married people get a deduction not enjoyed by the single if they have children. Each child is good for a deduction of $600, which to many seems fair, as children are expensive. But the expense of maintaining children is not proportionately as great in the upper brackets, where the deduction broadens in value with the formal tax rate--the usual story.
Valuable Wives
In the upper income stratosphere, wives (or husbands for wealthy women) are extremely valuable, as Stern shows in detail.
Here is the cash asset value of a spouse at different taxable income levels under pre- 1964 law (it is only slightly less now):
Taxable Income
$10,000. 00
25,000. 00
75,000. 00
100,000. 00
445,777. 78
Asset Value of Spouse
$11,818. 25
131,931. 75
1,000,000. 00
1,891,875. 00
5,996,994. 00
But at $1 million of income, the capital value of a spouse, oddly, begins to decline, as follows:
Taxable Income
$1,000,000. 00
$1,399,555. 55 and higher
Under $2,889. 00
Asset Value of Spouse
$2,7166,153. 75
Zero
Zero
The point about capitalizing a wife in these ways is that one can compute at going rates of return what a wife is worth to one in yearly retained income The wife capitalized at a value of $1 million at 4 per cent is worth $40,000 a year in income to her husband; the $6,996,994--wife is good for $279,877. 66. But in the tax bracket below $5,000 a wife is worth in tax benefits only 73 cents per week, no bargain. 21
Tax Support for Rich Children
A married man with a taxable income of $8,000 under the tax law as of 1965 paid $1,380 (against $1,630 for a single man). If the married man had four children his tax liability was reduced to $924. Under the law four children have gained a married man $456 or $114 per child over the childless married man, But the married man in the $50,000 bracket, who without children paid $17,060 tax, with four children and the same income pays $15,860 tax, a gain for him of $1,200 or $300 per child. His children are worth in tax benefit about three times what the children of the $8,000 man were worth.
Whose Congress writes this sort of a law? Is it a Congress that represents the $8,000-a- year man or the $50,000-a-year man? As I can't ask this question after showing each such disparity, let it be said here that as one crosses the income-mark of about $15,000 the tax laws boldly and brazenly always progressively favor the richer and always absolutely favor unearned income over earned income.
While the tax laws subsidize only very slightly the wives and children of the poorer man at the expense of single people, they do absolutely subsidize those of the wealthier. Here is a flat statement of incredible fact: The upkeep of wives and children of the wealthy is subsidized generously by the existing tax laws. It would, in other words, cost
a wealthy single man nothing additional if he suddenly married an impecunious widow with four children. He would retain as much in-pocket spending money as he had before marriage and might also gain a fine ready-made family. If a single man earning $8,000 a year and itemizing deductions did this he would gain only $820 compared with a gain of $7,030 for the $50,000-a-year man. Most families live on far less than a $50,000-a-year bachelor would get in annual tax reduction by marrying a hungry widow with four children.
But the lower taxpayers, while computing their paltry marital and children's deductions, perhaps feeling pity for the single persons, get the feeling of "getting away" with something, or at least of getting some concession from the government because they are married and have children. Actually, however, they are only being "conned" by a wily Congress.
In any case, whatever encouragement the tax deduction gives to the birth rate is distinctly against the general interest at a time of obvious overpopulation and a seemingly intractable unemployment rate of 4 per cent. By all present signs at least 4 per cent of children born, and perhaps more, will not be able to get jobs.
There are many other ways of dividing the formidable army of taxpayers, throwing first this one and then that one a sop, always under a sentimental camouflage. A single person, incidentally, who is contributing less than half to the support of a disabled or aged relative gets no tax rebate. Unless a person is more than half dependent, which would exclude almost everybody, he cannot be deducted.
Other Ways of Income Splitting
The treatment of married people is known as income splitting, producing two incomes that are taxed at lower rates.
One can, once the principle is established, carry out this process of income splitting further, producing three, four or more smaller incomes, less taxed, instead of one that is large and subject to much tax. These ways are all practiced by the wealthy.
While the tax laws basically divide the populace between the single and the married and between the childless and parents, its greatest discrimination is with respect to earned income as against unearned or property-derived income.
This salient feature is carried forward in the extension of income splitting.
One way of income splitting is to allot partnerships in businesses to children, thus giving them a taxable income. If the partnership can be split many ways, among children, grandparents and other dependents, into smaller incomes, substantially smaller taxes will be encountered all around. Retained income for the family group will be much larger.
Another way, as we have seen, is to establish trust funds, and the use of trust funds has grown enormously. While trust funds have many aims, one of the objectives they serve is to split assets and incomes among many people, often among many trust funds for the same person.
But the income of such a recipient is not limited to the trust funds. He may also draw salary, have low-tax capital gains and tax-free income from government bonds or oil- mineral royalties. He may, indeed, draw every kind of income there is, taxable and nontaxable.
Does anyone actually do this? They do much better! As President Roosevelt observed in a message to Congress in 1937 "one thrifty taxpayer formed 64 trusts for the benefit of four members of his immediate family and thereby claimed to have saved them over $485,000 in one year in taxes. " But that is ancient history. More recently the Stranahan
family, the leading owner of Champion Spark Plug Company, created more than thirty trusts and thus saved $701,227. 48 in three years, according to Mr. Stern.
But a certain Dr. Boyce, misled by the logic of the tax laws, in one day established ninety identical trusts to hold a mere $17,000 of stocks and bonds. The $100 dividend exemption left them each tax exempt. Appealed to the tax court, the plan was found "preposterous. " "Straining reason and credulity," the learned court said, "it ought to be struck down forthwith. " And, as Mr. Stern remarks, "It was. "
Another device for income splitting, thus obtaining lower taxes, is to establish many corporations in place of one. In one of many instances a finance business split into 137 corporations to avoid $433,000 of taxes annually, and a retail chain divided itself into 142 corporations to avoid $619,000 annually. 22 The surest way of keeping money today is to steer a proper course through the crazy-quilt tax laws.
Additional Tax Dodges
A man who is sixty-five or over, in the best of health, gets an additional deduction of $600 whether his income is $1,000, $10:000, $100,000 or $1 million, although most people over sixty-five have little income at all beyond meager Social Security. But if he is in chronic poor health, unable to work except spasmodically, and under sixty-five, even if he is sixty-four--no extra deduction. A blind person gets an extra exemption of $600, suggesting to the reader of tax instructions that he lives under a Congress with a heart. But if a person retains his sight and is stone deaf, without hands, has had a stroke or is paralyzed from the waist down he does not get this compassionate exemption.
Whenever such a disparity is pointed out to Congress it usually gladly, in the name of consistency and equity, spreads the inequity to include others. We may, therefore, soon see Congress giving an exemption to all disabled or physically handicapped people, thereby further narrowing the tax base.
The point here is not whether a person is handicapped but whether he has income. What value is an extra exemption to a blind, disabled or aged person who has no income" The only person such an exemption could benefit would be one with an income. And all such special exemptions are taken by persons with incomes--often very substantial incomes. They are props to financial strength, not supports of weakness.
Just how much good the exemptions for over age sixty-five do may be seen by considering the income statistics for 1962, the latest year available. Of 7. 4 million male income recipients over sixty-five years old, 18. 6 per cent got less than $1,000 gross; 34 per cent, from $1,000 to $2,000; 18. 4 per cent, from $2,000 to $3,000; and 9. 9, from $3,000 to 84,000--80. 9 per cent under $4,000 gross. Of 7,491,000 female recipients 56. 2 per cent got less than $1,000; 30 per cent, from $1,000 to $2,000; and 6. 7 per cent, from $2,000 to $3,000--92. 9 per cent under $3,000 gross. 23 Much of this income was from tax-free Social Security, which averaged $74. 33 per month in October, 1965.
In other words, exemptions for persons over sixty-five can be of significant advantage only to affluent persons, property owners, retired corporation executives on large pensions with big stock bonuses and upper professionals who have managed to save and invest. Like marital income splitting and deductions for children, it is of significant advantage only if one has a large, preferably unearned income.
For a man in the 70-per-cent tax bracket each such exemption is worth in cash 70 per cent. For a person with zero income it is worth zero. In order to benefit slightly from the extra exemptions for being over sixty-five and blind, a single person using the standard deduction must have in excess of $2,000 taxable income. If he receives $4,001, he will pay tax on $1,800 (standard deduction plus three exemptions) or $294. But, having saved $80 by being blind, he will then be in a minority income group of less than 20 per
cent of over-aged males! He will, despite the smallness: of his income, be in a small, highly privileged income group. If it is a woman with an income of $3,001, she will pay $146--but she will then, despite the smallness of her income, be in a restricted group of less than 8 per cent of overaged females!
The tax deductions for the aged, blind and retired are of significant benefit only if one belongs to a small group of persons with taxable incomes higher than 81. 8 per cent of the males and 92. 9 per cent of the females actually do have. The ones most benefited are the affluent aged, blind and retired.
These income statistics for the aged throw a curious light on the propaganda about the United States as a land of opportunity, the richest country in the world and the home of the individual-success system. Under this system, most people, economically, appear to be failures at the end of the road. And were it not for Social Security, the figures in each of the income brackets cited would, on the average, be about $900 less.
Some hidden hand, force or influence appears to cause most people, after a lifetime of effort, to show up very patently as losers. Could prices, taxes and overpersuasive advertising, as well as individual shortcomings, have anything to do with the result? With only 19. 1 per cent of over-age males having a gross income above $4,000 and 7. 1 per cent of retired females above $3,000, economic success does not appear to have crowned the efforts of most survivors in the most opulent land ever known to history.
In drawing the tax laws Congress is no more being sentimental than when it temporarily exempts the father of twelve from battle duty. Although individual congressmen no doubt have their personal points of view on all of this, collectively Congress in drawing the tax laws is absolutely indifferent to whether one is poor, married, has children or has personal disabilities. But it is not indifferent if one has property or a well-paid position. Then it is most enthusiastically on one's side.
Congress, as we have noted, likes students. It likes them so much that if one is able to gain a scholarship or fellowship he need pay no tax at all on it, an educational exemption, up to $300 a month for thirty-six months and even if the scholarship adds considerably to family income. Scholarships are awarded by many endowed colleges and special bodies, but many corporations now earmark scholarship funds given, for example, to the National Merit Scholarship Fund. Some funds are not earmarked, but the earmarked funds are for the children of emplovees (usually executives) of the company. The granting of the scholarship has the hidden effect of giving the father an untaxed pay raise and the corporation a pre-tax deduction, paid by consumers and small taxpayers. The father will not now have to pay his own taxed money for tuition. And in known cases students of lower standing in test examinations and lower academic standing have drawn earmarked scholarships while students of higher standing have drawn none, even as the public supposes the scholarships are awarded on the basis of strictly on-the-record merit.
For nonabilitv factors are taken into consideration in this quarter, too, as in the hiring of people of negative ethnicity. 24
Divide and Prevail
My object in going into this small stuff is to make this point: Congress is not really sentimental at all but is just busy dividing the taxpayers into separately manageable little bands of over-reachers, each of whom feels particularly and unwarrantably virtuous about some feature of his status--that he is married, has children, has a student in school, contributes to a church, has one out of many possible disabilities, is over sixty-five or was never arrested while robbing the Bank of England on a bicycle ridden on a high wire with a monkey on his back.
A congressman might deny this, might hold that the body is really sentimental, and point out that payments under Social Security and the Railroad Retirement Act are tax exempt entirely. But every recipient of Social Security and retirement provisions is not automatically entitled to special sympathy. A number of them are survivors from among many who have succumbed before them and as such, someone might argue, ought to pay a special tax--or at least be taxed equally with others. A long-employed utility- company executive, no risk competitor, who retires at age sixty-five with a pension of $40,000, a rather standard figure for his industry, plus owning accumulated stock, money in the bank and a large home, may draw the maximum Social Security payment, tax free, plus the special exemption for over age sixty-five. Upper-bracket officials of long service in their personally owned corporations as well as lower-bracket wage- earners are equally under Social Security and get the same tax exemption whether they need it or not.
When the average man retires, his income drops sharply. But when an executive or owner who has worked over the years for his own company retires, his income from stocks, bonds, pensions, annuities, etc. , does not decline. Yet he gets untaxed Social Security payments as well as the poorer man, showing again the equality of the law in all its majesty. .
Untaxed Income
While the average man, chuckling to himself, is stooping over picking up the sops a cynical Congress has laid out for him, his pocket is being emptied from behind. As he has elected to trade punches with the champion, let us see how he fares.
Ninety per cent of people, more or less, own no stock and receive no dividends. But people who own stock receive the first $100 of dividends tax free; a husband and wife each owning stock get $200 tax free. However, so-called dividends from mutual savings banks and building and loan associations, usually received by low-income people, do not qualify for this strange deduction.
Furthermore, dividends paid in stock or in "rights" to subscribe to stock pay no tax at all even though the company has taken money from earnings with which to increase invested capital. This feature of the laws explains the popularity of the stock dividend: It is tax free.
The stockholder is in a more favored tax position than even this shows because most companies do not pay out all their earnings in dividends. The dividend payout rate varies among companies from zero to 80 or 90 per cent but averages at about 44 per cent.
What this betokens is that accrued earnings, not paid out, are credited to the capital account and amount to so much untaxed money at work for the stockholder.
Let us imagine that someone owns 100 shares in a company that earns an average of $10 a share but pays out an average of $5 a share in dividends. The stockholder receives $500, deducts $100, and puts $400 into his gross taxable income. But the $500 not paid out is at work for him in the company, growing each year. It is tax-free unearned capital. But if a wage worker receives a $500 bonus at year-end and the employer deposits it in a bank for his account, the $500 must be reported as taxable income and will be taxed. Not to pay a tax on it would be a violation of law, and punishable.
Some companies, although they are big earners, pay no dividends at all. Known as "growth companies," they grow by leaps and bounds. If a man invests $10,000 in such a growth company and it grows at 10 per cent a year (rather modest for a growth company) the investment will be worth $16,105 at the end of five years and $20,600 in
a little more than seven years. On all this accrual he has paid no taxes, yet is becoming wealthier and wealthier.
If he decides to take his profit at $20,000 he will pay a maximum of 25 per cent (he might pay less) on $10,000, or $2,500. But he need not do this at all, need never sell and never pay a tax.
When he eventually dies, his heirs will not be liable at all for a capital gain tax even if the original investment of $10,000 has grown to $50 million. Nor need they even pay estate taxes if he has prudently placed it in trust funds for their benefit. While his heirs may receive from him stock worth $50 million, his estate tax may be zero so that all along there has been incurred no income tax, no capital gains tax and no estate tax.
But if he split the original investment of $10,000 among four trust funds, at his death four beneficiaries would have estates worth $12. 5 million each, on which there had never been paid income taxes, capital gains taxes, gift taxes or estate taxes. All would be completely legal.
This road to wealth is not only theoretically possible but is actually traveled in various degrees by many of the rich, as their final accountings show. They die stripped of assets.
The amount of untaxed undistributed profits of corporations each year is very large. In 1950 it was $16 billion. It was $16. 5 billion in 1955, lowered to $10. 8 billion in 1958, rose to $15. 9 billion in 1959. Since then it has ranged between $13. 2 billion to $16. 8 billion in 1963. 25 Since 1946 it has always been each year more than $10 billion. Like money in the bank, the beneficiaries pay no tax on any of it. It is this feature that enables major stockholders to become constantly richer, tax free.
Retained corporate profits, mostly reinvested, have exceeded dividends Since 1962 and in 1965 totaled $25. 6 billion against $18. 9 billion of dividends. They also exceeded dividends in every year from 1946 through 1959, with the exception of 1958, often by a very wide margin; in 1947 and 1948 they were more than double the dividend payout. 26
From 1945 through 1965 total corporate dividends paid out amounted to $226. 9 billion compared with $296. 2 billion of profits retained, as shown by the immediately preceding source. The actual payout rate has been a shade more than 44 per cent. Retained profits and increased earnings on them have been among the more solid reasons for the increase in market value of stocks.
Not to pay dividends is an accepted maxim of tax economists. In the words of one tax advice service, "paying dividends is clearly a tax waste. " 27
The retention and reinvestment of corporate profits is the royal road to tax avoidance and financial expansion, at home and abroad. Abroad it is the basis of what is known as American economic imperialism. It requires, of course, the maintenance of a vast "defensive" military establishment largely paid for by the less affluent lower taxpayers.
production. So it is the buyer of the bread as of other articles and services who pays the taxes.
How to Get Rich by Not Paying Taxes
By way of introducing an always sharp exposition Philip M. Stern points out that in 1959 five persons with incomes of more than $5 million each, when the public supposed such incomes paid 90 per cent tax, paid no federal tax at all. One with an income of $20 million paid no tax. Another with an annual income of nearly 82 million had paid no tax at all since 1949. In 1961, seventeen persons with incomes of $1 million or more and thirty-five others with incomes of $500,000 or more paid no taxes whatever. In 1960 a New York real estate corporation with $5 million of income paid no taxes but showed, instead, a bookkeeping loss of $1,750,000. And various persons with huge investments in tax-free bonds regularly pay no tax whatever on their aggregate incomes. Not only is this sort of thing continuing, year after year, but the number of tax-free big incomes is multiplying like the proverbial rabbits.
The United States, very evidently, has gone a long way toward aping prerevolutionary France, where court-favorites were given complete tax exemption. Corporations, like noble French estates, are not taxed.
Techniques of Government
In order to bring about these results, politicians have drawn lessons from history and developed techniques for treating their demoralized constituents more as adversaries, to be manipulated, than as a consenting public. And they use the very strivings, selfishness and divisiveness among people to bend them to their own dubious purposes.
When Jack Dempsey was the world's heavyweight boxing champion he went on an exhibition tour of the hinterland. As a feature, a goodly sum was offered to any man who could stay in the ring for three rounds with him. In a certain region of the Tennessee hills the champion was challenged by the local strong man, who had beaten men for miles around in boxing and wrestling and who could bend iron bars with his bare hands. A large local crowd turned out at the arena to see the outside smart-aleck get a dose of real country medicine.
"Look out for this fellow, Jack. He's awfully strong and could hurt you," said one of his handlers to the champion as they watched the strong man jump into the ring.
"Watch him walk into my right," said the champion coolly, according to newspaper men who reported the event.
Need one continue?
As they squared off, the champion flatfooted, the strong man suddenly rushed. The champion's left glove flicked stingingly into his face and was instantly followed by a powerful right cross to the jaw. The strong man, without ever having landed a blow, sank unconscious to the floor. The audience sat bewildered. They had just seen a champion against a novice.
Dempsey figures in this story as the politician, the controlling element, and the strong man symbolizes the people. The governmental method used by Dempsey was that of letting them come to you and then belting them.
This method alone does not work with large groups. With them it is necessary to play either on their inherent divisiveness or to divide them arbitrarily in order to rule. This Napoleonic method is well exemplified in the tax laws, which divide and subdivide the populace into many bits and shreds. It is Napoleonic because the general strategy of the little Corsican was to strike successively each section of divided forces with his full, massed force.
Government uses these methods, it should be noticed, when the public is reluctant or unwilling. Apart from taxation, it is used to good effect in conscription. Let us briefly examine it there in order better to understand the tax outcome, which otherwise, in the absence of a hostile conquering force, is inexplicable.
Most men are instinctively reluctant to serve in the armed forces, where one may be killed or maimed. We know this because, if they were not, all they would have to do is to join at any of the many recruiting stations scattered around. Most of them must be ordered to serve.
If, as in World War II, the government wants some thirteen million men it is obviously difficult to order them forward all at once, risking the political ire of such a multitude. Again, government at no time possesses the manpower to force thirteen million to obey. The FBI, resourceful though it is, could hardly cope with this situation.
The government here brings into play two tactics--Dempsey's lethal punch and the doctrine of divide-and-rule.
First the government divides the manpower into classes--by ages and by marital and parental status. It then summons first those who are politically and psychologically weakest, the single youths aged eighteen to twenty-one who don't even have the vote. Excepting the few true-blue patriots and excitement-hunters who rush to the recruiting offices, all others, thankfully feeling they have been excused from danger, cheer in approval and tell the bewildered youngsters they are only doing their patriotic duty; older men and women hurry off, like often-criticized Germans, to better-paying jobs in munitions plants. Next to be summoned are single men aged twenty-one to twenty-five, while married men approvingly urge the victims on. For the government gets much assistance from that part of the populace it is not at the moment corralling. Any of those who have shown strong signs of not wishing to go are shouted down by their fellow men, shamed. Some who have watched and cheered the process meanwhile have rushed off to get married to the first unattached female they could find; for the government, it seems, has a soft spot in its heart for married men--whom it is not calling.
But now, with a considerable force in training under arms, the government has enough men to deal handily with any late-showing dawdlers. Moreover, the men under arms feel scant sympathy for those who have not been called. The conscript army would, in fact, relish an order to go and get them at bayonet point. As in a wrestling match, the weight has been shifted. Where at first the forward-thrust of weight was with those not called, who chivvied the tender youths into service, this weight has now shifted to the youths under arms who now regard others as slackers and are ready to kill on command. The slackers are summoned--first the battle-shy married men and then those stalwarts with children up to a dozen and beyond.
On the battle line, finally, one finds single men eighteen to forty-five and married men with a dozen or more children--men wearing glasses, with fallen arches, flat feet, no teeth and leaky hearts. As the rule was finally explicated by the soldiers themselves in World War II, "if you can walk, you're in. " They are now all, as the soldiers themselves pronounced, "dogfaces," nobodies. (They were that, too, in civilian life but didn't know it. )
Most of the populace initially acquiesced in this process because it seemed that somebody else was going to be soaked. On this basis they gave their full-hearted consent to the process that finally snared them.
A similar technique is used with respect to the imposition of unfair taxes. For it always appears in reading the tax laws that somebody else is going to be soaked, or at least soaked more than the reader. Does it not clearly appear that some are going to be soaked
up to perhaps 91 per cent? On $1 million of income, that is $910,000, leaving the bloody no-good bastard only $90,000 or about twenty times too much. Three cheers for Congress!
The tax laws divide people into many more groups than the conscription laws. There are, first, the single, the married, the married with children and the heads of households; next come minor students, adults and persons over sixty-five. Those over sixty-five retired and unretired, with and without income, blind or still with vision. But this is only the beginning. People are divided also according to sources of income. The basic division is between earned and unearned income, the latter of many varieties. But there is also taxable and non-taxable income, foreign and domestic income, etc.
While to the general public the basic division appears to be between single and child- blessed married persons, the true basic division is between earned and unearned income. It is invariably true that earned income is taxed most heavily, unearned or property- derived income most lightly down to nothing at all.
But the average taxpayer is quickly made to feel that he is getting away with something at someone else's expense, that he is, as Mr. Stern says, a "tax deviate. " The way the laws are drawn most of us are forced into being tax deviates. The only persons who cannot qualify are single persons with earned incomes, some seven million individuals. They are the low men on the tax totem pole.
The government encourages everyone to feel he is getting away with something by advising all to be sure to take all the deductions--exemptions they are entitled to on the Labyrinthian tax form. And they are many. After correctly filling out this form the average taxpayer has the delicious feeling that he has once again outwitted a grasping bureaucracy. But he has only succumbed to Jack Dempsey's strong right hand. He has, literally, walked into the punch.
It is much like participating in a crooked card game in which, one is assured, everyone is cheating. So why not take what comes one's way? But where an ordinary player is allowed to "get away" with $200, favored players somehow get away with $200,000, $2 million or even $20 million. The small players pay for this in the end.
Thus, as Mr. Stern ably shows, the variations from the posted schedules in what is paid increase very steeply as one rises in the tax brackets. Whereas the income below $5,000, calling for 20. 7 per cent of tax. , actually pays on the average 9 per cent ("What a steal! " we may imagine the simple man saying to himself), the income of 81 million and more calling for a viciously punitive 90. 1 per cent on the schedule (if it is taxable at all) actually pays on the average only 32. 3 per cent, and the incomes over $5 million pay only 24. 6 per cent. The demagogic arrangement of the rates conceals this.
Whereas the average under-$5,000 income receiver, who probably had to work hard for his paltry dollars, saved $274 by his allowable deviation from the posted rate, the average multi-millionaire taxpayer saved $5,990,181 below the apparent rate. While the small man was allowed to cut small corners by an apparent 50 per cent, perhaps to his intense satisfaction with a benign Congress, the recipient of $1 million cut big corners by 66 per cent, and the $5-miillion man by 75 per cent!
Put in other terms, bow much trouble would a person go to in order to chisel $274 and how much to chop out $5,990,181?
The Con-Game Pattern
What the many tax-deviation opportunities provided by Congress for the small payer are is what is known in the underworld as "the come on" or bait. It is especially used in the "con game," the essence of which consists of an approach to a formally respectable
person with an offer of great gain to be made by engaging in an operation that is safe but frankly shady. In the end the person being "conned" is tricked through his own illicit greed.
The tax laws, with their many deductions and exemptions, are thus (cynically? ) set up in the precise pattern of the "con game. " One is invited to step in and chisel on the government by availing oneself of the many small opportunities strewn about for chiselers. One takes up the invitation--or challenge--like Dempsey's strong man. One walks very confidently right into the punch.
Somewhat of an improvement over the "con game," however, most of the victims do not even suspect that it is they who are being unmercifully fleeced in the big delayed thrust.
Four Cases in Point
Mr. Stern dramatically shows what happens to four men who each received $7,000 annual income. A steel worker paid $1,282 in federal taxes after all deductions (not considering all the indirect taxes he has already paid in the market through prices). A man who got all his income from dividends paid only $992. 30. Another who sold shares at a profit of $7,000 paid only $526. A fourth who got his income from state and municipal government bonds paid no tax at all. The latter, incidentally, might have had the same tax-exempt status if he had invested in oil or mineral royalties. It hardly pays, as anyone can see, to work for wages. The tax laws thus grossly discriminate, at all times and in all directions, against salaried and wage workers. Grossly, grossly, grossly. . . .
The higher professionals are similarly brutally discriminated against--perhaps most brutally.
Let us take a busy, highly skilled, unmarried brain surgeon, his fees his sole source of income. If his income was $100,000 after all expenses, then his tax prior to 1964 was $67,320; after 1964 was $55,490. Another man, who sold (possibly inherited) shares at a profit of $100,000 since acquisition, paid only $22,590. A third, who got his income from state and municipal government bonds or possibly from oil or mineral royalties, paid no tax at all. Indeed, in some cases of remote participation in profitable mineral or cattle operations one may make a profit and have the government owing one money in tax credits!
All higher professionals with ample earned incomes are subject to the full force of the graduated tax laws, with the exception of persons in the entertainment field who may incorporate themselves, sell themselves as it "package" and come under the low-tax capital gains provisions.
Again, two men may each make $300,000, one by laboriously writing a best-selling novel, the other by inventing a trivial machine--perhaps, as Mr. Stern says, a new kind of pretzel-bender. The novelist must pay three times the tax of the machine maker.
The Question of Tax Exemption
Should there, first, be any absolute tax exemptions, as of the French nobility? In a national poll the majority answer to this question would probably be "No. " But what of religion? Ah, yes, most people would probably murmur, that surely ought to be exempt because it is "a good thing. " If one so agrees, the principle of total exemption is accepted, and can be applied elsewhere, as indeed it is. Actually, religion in any event could not be taxed by any government. What the so-called religious exemption boils down to in operation is the grant of tax-free status to beneficiaries of ecclesiastical investments. This is obviously something different from religion. While most of the
more than 200 sects own very little property and rank-and-file clergy, even in wealthy churches certainly are paid little, the managers of the heavily propertied ecclesiastical establishments gain from this provision, which splits them from the rest of the populace as accessories before the fact. The high-living upper ecclesiastics of the tax-favored churches are usually thick-and-thin pro-government men, upholding the pubpols in whatever they do. Naturally, they tell their communicants they ought to be glad to pay one-sided taxes and walk into cannon fire.
The leading property-holding church is the Catholic Church, although most Catholics are quite poor. An unusual feature of the Vietnam war, as widely noted, was the strong opposition to it of many American clergy. But, said, the New York Times, "The main exception to the general trend, of course, is the American hierarchy of the Roman Catholic Church, which has largely been silent or, in the case of several leaders such as Cardinal Spellman of New York, supported the war effort. The position of the American Catholic hierarchy, however, contrasts sharply with the peace efforts of Pope Paul. " 19
Cardinal Spellman, indeed, on television declared "My country right or wrong" in a strengthened version of Stephen Decatur's "In her intercourse with foreign nations may my. country always be in the right, but my country right or wrong. " Spellman was, evidently, a churchpol.
The Catholic Church similarly, in return for its retention of properties and privileges, was a strong supporter of the Hitler regime, even as tens of thousands of French, English and American Catholics fought to the death against German and Italian Catholics to depose him. 20 It has supported the dictator Franco in Spain, supported Mussolini in Italy. It supports, indeed, any government that gives its large investments tax exemption.
The pubpols of all nations, in short, get something in return--thick-and-thin support-- for the clerical tax exemption when it becomes substantial. And what the higher clergy doesn't pay, others must.
But although churches under American tax laws may and do operate businesses tax free, in competition with tax-collecting businesses, a university that does this is not tax exempt. Very evidently if a business does not have taxes levied on it, it is in a competitively favorable position pricewise. As the Catholic Church uniquely among churches does not issue financial statements, one does not really know how many investments and businesses it owns. In other cases the ownership is known. The tax base is constantly being narrowed by exemption of church property which, untaxed, is increasing.
The principle of total exemption now being established as the pipe organs thunder their approval, it can be extended to whatever else is designated as especially worthy. After religion, what is most worthy? Obviously, it is education. Anything that is educational now becomes tax exempt, and as "education" is a word very elastic in referential meaning it is found, in practice, to cover political propaganda. Organizations and radio stations that emit rightist political propaganda, such as those of oilmen H. L. Hunt and Hugh Roy Cullen, now become tax exempt. And so it goes.
What else is worthy of substantial exemption? As a sagacious Congress has decreed, the powerful oil industry, like religion and education, deserves from 27-1/2 per cent to 100 per cent tax exemption.
Meanwhile, for every exemption and deduction granted, in the low as well as high brackets, for every narrowing of the tax base, the tax squeeze must become more stringent elsewhere; for the government must get whatever money it says it needs. If the government granted complete tax exemption to everybody except one person it is
evident that this one person would have to supply the government with all the revenues it required!
The Baited Trap
In order to set the public up for the big tax swindle, the proceeds of which accrue only to the wealthy elements, the government must dangle before it various obvious injustices in which it participates as a beneficiary. The public is, thus, "conned" into a baited trap.
The first, as noted, is the religious exemption (which turns out to be of generalized service as well to propagandists, investors in local government bonds and oil men). But it sounds good to the rank-and-file, who see it as some kind of blow against vicious atheists and freethinkers (all, oddly, created by an all-powerful God).
But, among those paying taxes, the next division takes place between single and married people. In con men's language this is known as "sweetening" the "set up," and is only the beginning of the process. As married people constitute more than 60 per cent of the adult populace, Congress obviously has a majority on its side in discriminating against the single. One should notice again the use of the principle of divide and rule.
Taxwise, the apparent remedy of the single is to get married, but as a practical matter everybody is married who feels able to be married. Those disabled from marriage for one reason or another are simply taxed more heavily.
Thus, under the 1965 tax law, as under previous laws, the taxable income of the single person incurs an initial tax at a much lower sum.
The tax of a single person using the tax tables begins at $900 of actual income, that of a married couple at $1,600. On the first $500 of taxable income (1966), after all deductions, the single person pays 14 per cent; the married couple pays 14 per cent on the first $1,000. Whereas the married couple pays $140 on the first $1,000 of taxable income (after all deductions) the single person pays $145. The disparity gains force as one ascends the tax ladder. On a taxable income of $8,000 the single person incurs a tax of $1,630, the married person only $1,380. On $20,000 the single person pays $6,070, the married person $4,380.
While what the average married person saves on the lower brackets compared with the single person is not enough to maintain a spouse, as one ascends the brackets one finds the tax saving alone can maintain one very well. Congress does not favor marriage through taxes by very much, as will appear, but it does favor marriages by rich people.
Congressional tax favors wherever they fall, do not actually fall according to the stated category but invariably fall according to the category of greater wealth.
This becomes apparent in the $50,000-bracket, where the single man pays $22,590 on taxable income (after all deductions) but the married man pays only $17,060, an advantage of $5,530, enough to support his wife. But at $100,000 of taxable income the wealthy man gets more than ample support for his wife, for he pays $45,180 while the single man pays $55,490. Even a girl with a healthy appetite can be maintained very well on the differential of $10,310.
Before proceeding, the reader should be warned not to pay too much attention to the fact that $50,000 incomes pay $22,590 and $17,060 of taxes respectively for single and married persons.
These seem like rather substantial rates. But this is on taxable income. We have yet to come to wholly nontaxable incomes.
Mr. Stern argues that taxes ought to be the same for married and single persons. But married people and parents apparently feel there is something onerous about their condition, for which they require a tax concession. Congress lets on that it agrees, gives
them a minor concession and then belts them down to the floor by fantastically widening the concession for wealthy people!
Married people get a deduction not enjoyed by the single if they have children. Each child is good for a deduction of $600, which to many seems fair, as children are expensive. But the expense of maintaining children is not proportionately as great in the upper brackets, where the deduction broadens in value with the formal tax rate--the usual story.
Valuable Wives
In the upper income stratosphere, wives (or husbands for wealthy women) are extremely valuable, as Stern shows in detail.
Here is the cash asset value of a spouse at different taxable income levels under pre- 1964 law (it is only slightly less now):
Taxable Income
$10,000. 00
25,000. 00
75,000. 00
100,000. 00
445,777. 78
Asset Value of Spouse
$11,818. 25
131,931. 75
1,000,000. 00
1,891,875. 00
5,996,994. 00
But at $1 million of income, the capital value of a spouse, oddly, begins to decline, as follows:
Taxable Income
$1,000,000. 00
$1,399,555. 55 and higher
Under $2,889. 00
Asset Value of Spouse
$2,7166,153. 75
Zero
Zero
The point about capitalizing a wife in these ways is that one can compute at going rates of return what a wife is worth to one in yearly retained income The wife capitalized at a value of $1 million at 4 per cent is worth $40,000 a year in income to her husband; the $6,996,994--wife is good for $279,877. 66. But in the tax bracket below $5,000 a wife is worth in tax benefits only 73 cents per week, no bargain. 21
Tax Support for Rich Children
A married man with a taxable income of $8,000 under the tax law as of 1965 paid $1,380 (against $1,630 for a single man). If the married man had four children his tax liability was reduced to $924. Under the law four children have gained a married man $456 or $114 per child over the childless married man, But the married man in the $50,000 bracket, who without children paid $17,060 tax, with four children and the same income pays $15,860 tax, a gain for him of $1,200 or $300 per child. His children are worth in tax benefit about three times what the children of the $8,000 man were worth.
Whose Congress writes this sort of a law? Is it a Congress that represents the $8,000-a- year man or the $50,000-a-year man? As I can't ask this question after showing each such disparity, let it be said here that as one crosses the income-mark of about $15,000 the tax laws boldly and brazenly always progressively favor the richer and always absolutely favor unearned income over earned income.
While the tax laws subsidize only very slightly the wives and children of the poorer man at the expense of single people, they do absolutely subsidize those of the wealthier. Here is a flat statement of incredible fact: The upkeep of wives and children of the wealthy is subsidized generously by the existing tax laws. It would, in other words, cost
a wealthy single man nothing additional if he suddenly married an impecunious widow with four children. He would retain as much in-pocket spending money as he had before marriage and might also gain a fine ready-made family. If a single man earning $8,000 a year and itemizing deductions did this he would gain only $820 compared with a gain of $7,030 for the $50,000-a-year man. Most families live on far less than a $50,000-a-year bachelor would get in annual tax reduction by marrying a hungry widow with four children.
But the lower taxpayers, while computing their paltry marital and children's deductions, perhaps feeling pity for the single persons, get the feeling of "getting away" with something, or at least of getting some concession from the government because they are married and have children. Actually, however, they are only being "conned" by a wily Congress.
In any case, whatever encouragement the tax deduction gives to the birth rate is distinctly against the general interest at a time of obvious overpopulation and a seemingly intractable unemployment rate of 4 per cent. By all present signs at least 4 per cent of children born, and perhaps more, will not be able to get jobs.
There are many other ways of dividing the formidable army of taxpayers, throwing first this one and then that one a sop, always under a sentimental camouflage. A single person, incidentally, who is contributing less than half to the support of a disabled or aged relative gets no tax rebate. Unless a person is more than half dependent, which would exclude almost everybody, he cannot be deducted.
Other Ways of Income Splitting
The treatment of married people is known as income splitting, producing two incomes that are taxed at lower rates.
One can, once the principle is established, carry out this process of income splitting further, producing three, four or more smaller incomes, less taxed, instead of one that is large and subject to much tax. These ways are all practiced by the wealthy.
While the tax laws basically divide the populace between the single and the married and between the childless and parents, its greatest discrimination is with respect to earned income as against unearned or property-derived income.
This salient feature is carried forward in the extension of income splitting.
One way of income splitting is to allot partnerships in businesses to children, thus giving them a taxable income. If the partnership can be split many ways, among children, grandparents and other dependents, into smaller incomes, substantially smaller taxes will be encountered all around. Retained income for the family group will be much larger.
Another way, as we have seen, is to establish trust funds, and the use of trust funds has grown enormously. While trust funds have many aims, one of the objectives they serve is to split assets and incomes among many people, often among many trust funds for the same person.
But the income of such a recipient is not limited to the trust funds. He may also draw salary, have low-tax capital gains and tax-free income from government bonds or oil- mineral royalties. He may, indeed, draw every kind of income there is, taxable and nontaxable.
Does anyone actually do this? They do much better! As President Roosevelt observed in a message to Congress in 1937 "one thrifty taxpayer formed 64 trusts for the benefit of four members of his immediate family and thereby claimed to have saved them over $485,000 in one year in taxes. " But that is ancient history. More recently the Stranahan
family, the leading owner of Champion Spark Plug Company, created more than thirty trusts and thus saved $701,227. 48 in three years, according to Mr. Stern.
But a certain Dr. Boyce, misled by the logic of the tax laws, in one day established ninety identical trusts to hold a mere $17,000 of stocks and bonds. The $100 dividend exemption left them each tax exempt. Appealed to the tax court, the plan was found "preposterous. " "Straining reason and credulity," the learned court said, "it ought to be struck down forthwith. " And, as Mr. Stern remarks, "It was. "
Another device for income splitting, thus obtaining lower taxes, is to establish many corporations in place of one. In one of many instances a finance business split into 137 corporations to avoid $433,000 of taxes annually, and a retail chain divided itself into 142 corporations to avoid $619,000 annually. 22 The surest way of keeping money today is to steer a proper course through the crazy-quilt tax laws.
Additional Tax Dodges
A man who is sixty-five or over, in the best of health, gets an additional deduction of $600 whether his income is $1,000, $10:000, $100,000 or $1 million, although most people over sixty-five have little income at all beyond meager Social Security. But if he is in chronic poor health, unable to work except spasmodically, and under sixty-five, even if he is sixty-four--no extra deduction. A blind person gets an extra exemption of $600, suggesting to the reader of tax instructions that he lives under a Congress with a heart. But if a person retains his sight and is stone deaf, without hands, has had a stroke or is paralyzed from the waist down he does not get this compassionate exemption.
Whenever such a disparity is pointed out to Congress it usually gladly, in the name of consistency and equity, spreads the inequity to include others. We may, therefore, soon see Congress giving an exemption to all disabled or physically handicapped people, thereby further narrowing the tax base.
The point here is not whether a person is handicapped but whether he has income. What value is an extra exemption to a blind, disabled or aged person who has no income" The only person such an exemption could benefit would be one with an income. And all such special exemptions are taken by persons with incomes--often very substantial incomes. They are props to financial strength, not supports of weakness.
Just how much good the exemptions for over age sixty-five do may be seen by considering the income statistics for 1962, the latest year available. Of 7. 4 million male income recipients over sixty-five years old, 18. 6 per cent got less than $1,000 gross; 34 per cent, from $1,000 to $2,000; 18. 4 per cent, from $2,000 to $3,000; and 9. 9, from $3,000 to 84,000--80. 9 per cent under $4,000 gross. Of 7,491,000 female recipients 56. 2 per cent got less than $1,000; 30 per cent, from $1,000 to $2,000; and 6. 7 per cent, from $2,000 to $3,000--92. 9 per cent under $3,000 gross. 23 Much of this income was from tax-free Social Security, which averaged $74. 33 per month in October, 1965.
In other words, exemptions for persons over sixty-five can be of significant advantage only to affluent persons, property owners, retired corporation executives on large pensions with big stock bonuses and upper professionals who have managed to save and invest. Like marital income splitting and deductions for children, it is of significant advantage only if one has a large, preferably unearned income.
For a man in the 70-per-cent tax bracket each such exemption is worth in cash 70 per cent. For a person with zero income it is worth zero. In order to benefit slightly from the extra exemptions for being over sixty-five and blind, a single person using the standard deduction must have in excess of $2,000 taxable income. If he receives $4,001, he will pay tax on $1,800 (standard deduction plus three exemptions) or $294. But, having saved $80 by being blind, he will then be in a minority income group of less than 20 per
cent of over-aged males! He will, despite the smallness: of his income, be in a small, highly privileged income group. If it is a woman with an income of $3,001, she will pay $146--but she will then, despite the smallness of her income, be in a restricted group of less than 8 per cent of overaged females!
The tax deductions for the aged, blind and retired are of significant benefit only if one belongs to a small group of persons with taxable incomes higher than 81. 8 per cent of the males and 92. 9 per cent of the females actually do have. The ones most benefited are the affluent aged, blind and retired.
These income statistics for the aged throw a curious light on the propaganda about the United States as a land of opportunity, the richest country in the world and the home of the individual-success system. Under this system, most people, economically, appear to be failures at the end of the road. And were it not for Social Security, the figures in each of the income brackets cited would, on the average, be about $900 less.
Some hidden hand, force or influence appears to cause most people, after a lifetime of effort, to show up very patently as losers. Could prices, taxes and overpersuasive advertising, as well as individual shortcomings, have anything to do with the result? With only 19. 1 per cent of over-age males having a gross income above $4,000 and 7. 1 per cent of retired females above $3,000, economic success does not appear to have crowned the efforts of most survivors in the most opulent land ever known to history.
In drawing the tax laws Congress is no more being sentimental than when it temporarily exempts the father of twelve from battle duty. Although individual congressmen no doubt have their personal points of view on all of this, collectively Congress in drawing the tax laws is absolutely indifferent to whether one is poor, married, has children or has personal disabilities. But it is not indifferent if one has property or a well-paid position. Then it is most enthusiastically on one's side.
Congress, as we have noted, likes students. It likes them so much that if one is able to gain a scholarship or fellowship he need pay no tax at all on it, an educational exemption, up to $300 a month for thirty-six months and even if the scholarship adds considerably to family income. Scholarships are awarded by many endowed colleges and special bodies, but many corporations now earmark scholarship funds given, for example, to the National Merit Scholarship Fund. Some funds are not earmarked, but the earmarked funds are for the children of emplovees (usually executives) of the company. The granting of the scholarship has the hidden effect of giving the father an untaxed pay raise and the corporation a pre-tax deduction, paid by consumers and small taxpayers. The father will not now have to pay his own taxed money for tuition. And in known cases students of lower standing in test examinations and lower academic standing have drawn earmarked scholarships while students of higher standing have drawn none, even as the public supposes the scholarships are awarded on the basis of strictly on-the-record merit.
For nonabilitv factors are taken into consideration in this quarter, too, as in the hiring of people of negative ethnicity. 24
Divide and Prevail
My object in going into this small stuff is to make this point: Congress is not really sentimental at all but is just busy dividing the taxpayers into separately manageable little bands of over-reachers, each of whom feels particularly and unwarrantably virtuous about some feature of his status--that he is married, has children, has a student in school, contributes to a church, has one out of many possible disabilities, is over sixty-five or was never arrested while robbing the Bank of England on a bicycle ridden on a high wire with a monkey on his back.
A congressman might deny this, might hold that the body is really sentimental, and point out that payments under Social Security and the Railroad Retirement Act are tax exempt entirely. But every recipient of Social Security and retirement provisions is not automatically entitled to special sympathy. A number of them are survivors from among many who have succumbed before them and as such, someone might argue, ought to pay a special tax--or at least be taxed equally with others. A long-employed utility- company executive, no risk competitor, who retires at age sixty-five with a pension of $40,000, a rather standard figure for his industry, plus owning accumulated stock, money in the bank and a large home, may draw the maximum Social Security payment, tax free, plus the special exemption for over age sixty-five. Upper-bracket officials of long service in their personally owned corporations as well as lower-bracket wage- earners are equally under Social Security and get the same tax exemption whether they need it or not.
When the average man retires, his income drops sharply. But when an executive or owner who has worked over the years for his own company retires, his income from stocks, bonds, pensions, annuities, etc. , does not decline. Yet he gets untaxed Social Security payments as well as the poorer man, showing again the equality of the law in all its majesty. .
Untaxed Income
While the average man, chuckling to himself, is stooping over picking up the sops a cynical Congress has laid out for him, his pocket is being emptied from behind. As he has elected to trade punches with the champion, let us see how he fares.
Ninety per cent of people, more or less, own no stock and receive no dividends. But people who own stock receive the first $100 of dividends tax free; a husband and wife each owning stock get $200 tax free. However, so-called dividends from mutual savings banks and building and loan associations, usually received by low-income people, do not qualify for this strange deduction.
Furthermore, dividends paid in stock or in "rights" to subscribe to stock pay no tax at all even though the company has taken money from earnings with which to increase invested capital. This feature of the laws explains the popularity of the stock dividend: It is tax free.
The stockholder is in a more favored tax position than even this shows because most companies do not pay out all their earnings in dividends. The dividend payout rate varies among companies from zero to 80 or 90 per cent but averages at about 44 per cent.
What this betokens is that accrued earnings, not paid out, are credited to the capital account and amount to so much untaxed money at work for the stockholder.
Let us imagine that someone owns 100 shares in a company that earns an average of $10 a share but pays out an average of $5 a share in dividends. The stockholder receives $500, deducts $100, and puts $400 into his gross taxable income. But the $500 not paid out is at work for him in the company, growing each year. It is tax-free unearned capital. But if a wage worker receives a $500 bonus at year-end and the employer deposits it in a bank for his account, the $500 must be reported as taxable income and will be taxed. Not to pay a tax on it would be a violation of law, and punishable.
Some companies, although they are big earners, pay no dividends at all. Known as "growth companies," they grow by leaps and bounds. If a man invests $10,000 in such a growth company and it grows at 10 per cent a year (rather modest for a growth company) the investment will be worth $16,105 at the end of five years and $20,600 in
a little more than seven years. On all this accrual he has paid no taxes, yet is becoming wealthier and wealthier.
If he decides to take his profit at $20,000 he will pay a maximum of 25 per cent (he might pay less) on $10,000, or $2,500. But he need not do this at all, need never sell and never pay a tax.
When he eventually dies, his heirs will not be liable at all for a capital gain tax even if the original investment of $10,000 has grown to $50 million. Nor need they even pay estate taxes if he has prudently placed it in trust funds for their benefit. While his heirs may receive from him stock worth $50 million, his estate tax may be zero so that all along there has been incurred no income tax, no capital gains tax and no estate tax.
But if he split the original investment of $10,000 among four trust funds, at his death four beneficiaries would have estates worth $12. 5 million each, on which there had never been paid income taxes, capital gains taxes, gift taxes or estate taxes. All would be completely legal.
This road to wealth is not only theoretically possible but is actually traveled in various degrees by many of the rich, as their final accountings show. They die stripped of assets.
The amount of untaxed undistributed profits of corporations each year is very large. In 1950 it was $16 billion. It was $16. 5 billion in 1955, lowered to $10. 8 billion in 1958, rose to $15. 9 billion in 1959. Since then it has ranged between $13. 2 billion to $16. 8 billion in 1963. 25 Since 1946 it has always been each year more than $10 billion. Like money in the bank, the beneficiaries pay no tax on any of it. It is this feature that enables major stockholders to become constantly richer, tax free.
Retained corporate profits, mostly reinvested, have exceeded dividends Since 1962 and in 1965 totaled $25. 6 billion against $18. 9 billion of dividends. They also exceeded dividends in every year from 1946 through 1959, with the exception of 1958, often by a very wide margin; in 1947 and 1948 they were more than double the dividend payout. 26
From 1945 through 1965 total corporate dividends paid out amounted to $226. 9 billion compared with $296. 2 billion of profits retained, as shown by the immediately preceding source. The actual payout rate has been a shade more than 44 per cent. Retained profits and increased earnings on them have been among the more solid reasons for the increase in market value of stocks.
Not to pay dividends is an accepted maxim of tax economists. In the words of one tax advice service, "paying dividends is clearly a tax waste. " 27
The retention and reinvestment of corporate profits is the royal road to tax avoidance and financial expansion, at home and abroad. Abroad it is the basis of what is known as American economic imperialism. It requires, of course, the maintenance of a vast "defensive" military establishment largely paid for by the less affluent lower taxpayers.
