No More Learning

Thirty-five years ago, prior to the disruption caused by the Depression and the New Deal, any knowledgeable Wall Streeter could have named the inner executive committee in the exact order of precedence: J. P. Morgan (or 23 Wall Street), John D. Rockefeller I (or 26 Broadway) and Andrew W. Mellon of Pittsburgh. Anything these three agreed on happened as they said it would, including sometimes as in 1916-1917 the decision to enter the war.
One thing they agreed upon basically: not to meddle in each other's respective domains. None wished to tangle at close quarters with either of the others.
But 23 Wall Street, without downrating the others, made its words felt over the most varied domain. That was where newsmen went for tips on what was likely to happen--in Washington, in London, in Paris, at the Federal Reserve. If no tips were available there, the pickings were apt to become slim; although sometimes Winthrop Aldrich at the Rockefellers' Chase Bank, only figuratively at 26 Broadway, might be able to give some special insight.
But when Aldrich spoke, newsmen understood that although the words were his the dramatic line was surely approved by "Big John," doddering along the golf course at Ormond Beach and manically handing out shiny dimes to everyone who came near. J. P. Morgan II rarely spoke. In his place spoke Thomas W. Lamont, the eminence grise of the firm, whose mind perceived so many aspects to any simple question that he could, if he had wished (which he rarely did), have discoursed with visitors for hours about them. Mellon, except when he was Secretary of the Treasury, rarely bothered to cue any outsider into his thinking.
But Morgan's, 23 Wall Street, was the center of the action, a fact often alleged but rarely shown. For example: A. P. Giannini, the self-erected San Francisco banking tycoon, in 1928 bought control of the 116-year-old Bank of America, of New York, from Ralph Jonas and associates, paying $510 a share for 35,000 of 65,000 outstanding shares. He then absorbed the Bowery East River National Bank and the Commercial Exchange National Bank and formed the Bancamerica Corporation as a securities- underwritirig affiliate.
But before he bought the Bank of America Giannini needed the consent of J. P. Morgan and Company.
"I don't want it unless I have the consent of 'The Corner,'" Giannini told his agent.
"I can get that consent," the agent said.
A meeting was arranged between Giannini and Morgan.
"I'll see Seward Prosser and the Federal Reserve officials at once," the New York tycoon told him. "You will certainly be welcomed into the banking picture here. " 34
Said Seward Prosser, chairman of the New York Clearing House and president of the Bankers Trust Company, to Giannini:
"We don't favor ownership of banks by holding corporations. However, we'll be glad to welcome you to the Street if you will agree to do away with all but twenty per cent of your holdings of this consolidated bank. " 35
Giannini agreed reluctantly. While he was distributing this stock, says his biographer, he was informed that an official of the commercial bank-controlled Federal Reserve Bank of New York, speaking for the chairman, had said the Reserve Bank would not transmit to the Federal Reserve Board in Washington the application for trust powers unless Bancitaly Corporation of San Francisco agreed to divest itself of every share it owned of Bank of America in New York.
Giannini immediately went to Washington, where he was told by Roy Young, governor of the Reserve Board, that the Board had no legal right to take over the trust department. Whereupon Giannini refused to distribute the remainder of the stock and went into the market to buy back what he had sold.
"If you don't conform to our wishes here," said Francis D. Bartow, a Morgan partner, to Giannini back in New York, "we must ask you to take your various accounts out of J. P. Morgan and Company. Right or wrong, you do as you're told down here. "
"The hell I will," retorted Giannini. "If you boys want a fight I'll see that you get it. " 36
The next day, reports Julian Dana, a meeting was arranged with Jackson Reynolds, head of the First National Bank, a Morgan satellite. "Reynolds, always an admirer of Giannini, had a word of caution for his ear. 'You have made such a tremendous success that I'm not trying to give you advice on what you should do, A. P. ,' said Reynolds frankly. 'You know your own business better than I do. You may have been badly treated--have all the law on your side. But if I were you I'd take my orders and say nothing. If you don't--well, they'll knock you down and walk all over you. '
"'They can't do that to a red-blooded California boy,' said A. P. coolly. 'If they try it they'll have the biggest damn scrap on their hands they ever tackled. '" 37
Several years later Giannini, by rallying his stockholders, fought back a complicated attempt by Morgan associates to take over his giant Transamerica Corporation from the inside. The story is told in detail by Giannini's biographer. 38
Morgan dominance, so thorough that no outsider could enter Wall Street without Morgan consent (gained at a price) was broken by a host of New Deal banking laws that shifted control over many key financial matters to Washington--to the Federal Reserve Board, which had previously been informally circumvented by the Federal Reserve Bank of New York, to the Securities and Exchange Commission and other agencies. Morgan power thereafter declined; in its day it was great.
This is the way it was, at any rate, up to the date that A. P. Giannini successfully challenged it and until the Depression and New Deal laws undermined it. The Morgan word in Wall Street and far beyond, without the consent of Congress or any president, was law. Morgan's ran Wall Street, not in the sense that it initiated whatever went on down there but in the sense that it could veto anything it didn't like. Mellon and Rockefeller stayed out of its way; only A. P. Giannini was foolish and lucky enough to put the Morgan power to the final test, when Morgan's was under other pressures.
Says Elliott V. Bell, a one-time member of the staff of the New York Times (writing in 1938) and more recently chairman of the executive committee of McGraw-Hill Publishing Company and a director of the Chase Manhattan Bank, the New York Life Insurance Company, the New York Telephone Company, the Tri-Continental Corporation and other stratospheric entities:
"The position of the House of Morgan is unique and in those days [prior to the New Deal] its right to leadership was undisputed. The basis of the Morgan power is not easy to explain. It is not a large bank, as Wall Street banks go. A dozen other institutions have much larger resources. True, the firm exercises a strong influence over a number of these larger banks--the so-called Morgan banks--but it has never been established to what extent that influence is based on financial control. The sheer money power of the Corner is, of course, great; but my own belief is that this is a minor factor in the firm's leadership. What really counts is not so much its money as its reputation and brains. . . .
"But to get back to the Corner. It is not a mere bank; it is an institution. It has become a symbol of Wall Street itself, viewed variously as a predatory creature, exercising a 'spider-web' control over most of the banking and business resources of the country, or, at the other extreme, as a semiphilanthropic organization whose benign ministrations cause great banks and corporations to flourish, giving employment to millions of workers and causing the stocks of 'widows and orphans' to rise in value and give off dividends.
"There was a time, still within the memory of many in Wall Street, when financial titans booted the stock market about to satisfy their own feuds or ambitions; a time when the elder J. P. Morgan could call a handful of bankers into his awe-inspiring presence and bark out orders that would stop a panic. There was a time, much more recent, when government turned first to Wall Street's leaders for advice and means in meeting economic problems; when it almost seemed as though Wall Street regulated Washington.
"In the early years of the depression it was not unusual for one of the big bankers to tell me that he had just been talking to President Hoover on the telephone about this or that proposal to accelerate prosperity's coming around the corner. The comments on these consultations were often by no means flattering to the Chief Executive. " 39
Although the Rockefellers and Morgan partners never tangled and sedulously kept to their own back yards as far as they were each concerned, Mr. Bell relates succinctly the Rockefeller thrust that really undid Morgan's. John D. Rockefeller, actually, had never liked the bullying elder Morgan.
This thrust was administered in 1933 by Winthrop W. Aldrich, then head of the Chase Bank, when he publicly proposed precisely those banking reforms that struck at the heart of the Morgan financial empire and which were later enacted into law: notably the elimination of joint investment and deposit banking.
"In openly challenging the Morgan system," says Mr. Bell, "Mr. Aldrich displayed at its most daring his flair for anticipating events. Probably few people realized at that time, despite the attendant collapse of the banking system, how greatly the power and prestige of the Morgan firm had been impaired and how much it was to be clipped in the events that were to come. Mr. Aldrich by his action made certain that the searchlight of the Senate investigation (already bearing upon his own bank) should be turned with full force upon the Morgans. "
What has been shown here, now, is what once was and is no more. But the crucial question is: What, if anything, has replaced the old order behind the scenes, if it has been replaced?
To believe that all the strings have been moved to Washington would be too naive, although elected officials now do unquestionably have more to say about the country than they had prior to the New Deal. But they don't appear to have enough say-so to open all opportunities in the economic and social system to Jews--or Negroes, Puerto Ricans, Mexican-Americans or intellectual independents--or to stop the continuing concentration of more and more assets into fewer and fewer hands. One assumes, as they don't oppose it, that they tacitly consent to all of these as well as other practices such as informal publication censorship.
The finpols we do know, after actions by Presidents Kennedy and Johnson, can no longer dictate prices; they must at least get acquiescence from Washington, which appears to have moved into a closer partnership with finpolity whether the finpols like it or not. They can no longer dictate interest rates either.
As long as affairs proceed more or less smoothly, this unsolemnized partnership will no doubt continue: Money talks. But when, as and if matters get out of hand and crises strike, it will again be a case of each for himself. While the Crown and the Baronage appear to be honeymooning just now in the Welfare-Warfare State it is probable that in some great crisis analogous to the Great Depression they will find they are pulling in different directions, have different basic interests.
Should that happen, should the finpols find they are once again confronted by pubpols with overwhelming problems on their hands, what will happen? Assuming that the crisis
is not too great it seems that the pubpols, always able to wrap themselves in the flag and point to the apostolic succession since George Washington, will have the edge. The finpols are at their best in behind-the-scenes maneuvering. When public questions must be openly dealt with the pubpols are able to make use of the vast (if temporary in the, life of every pubpol) reserve powers conferred upon them by the Constitution.
What will happen, though, if the pubpols in charge are abject servitors of the finpols, their sincere admirers? What happens to pubpols who follow too slavishly the finpol script was shown by Herbert Hoover. They expire in futility and the national situation deteriorates. Sooner or later (and for the sake of the public one hopes it is always sooner) the pubpols must be guided by the remorseless logic of the situation as it confronts them and must address it forthrightly in terms of the values their culture has provided them.
The newspapers, largely owned, controlled or patronized with advertising by the finpols do, with the emphasis on Washington affairs, practice pubpology assiduously. Not much in the goings, comings and doings, even private thinking, of the pubpols escapes minute scrutiny and repeated review. It would be too much to expect these same finpolitan newspapers to turn the spotlight of critical attention on their esteemed friends, the finpols. But what the newspapers don't do, perhaps some nonconformist political scientists might do.
Very possibly what we have today at the top is not a tight little committee that hands out the "party line" of finpolity. The leading clubs appear to function more as a Committee of the Whole, with no personality presently thrusting itself forward. They function, not as an open Vatican Council nor as an organization under a pope, but more as the secretive Roman Curia; though always very, very informally. Their determinations, however, are far-reaching and penetrating, having the operative force on true believers of a papal decree.
Nine
THE GREAT TAX SWINDLE
If the propertied elite can enforce basic socio-political decisions--such as denying
employment in the labyrinthine corporate bureaucracy to large numbers of qualified people on irrational ethnic grounds when the basic laws do not support such discrimination--the experience of history would suggest that they would go farther and also deal themselves enormous tax advantages. For down through history the dominant classes, groups, factions, clans, interests or political elites have always been scrupulously prudent in avoiding taxes at the expense of the lower orders. The aristocracy of France before the French Revolution, for example, gave itself virtually total tax exemption. The burden of supporting a profligate royal court with its thousands of noble pensioners was therefore laid upon commoners, thus supplying not a little fuel for the onrushing tidal wave of blood. 1
It would be foolish to contend that there is a propertied elite in the United States and then not be able to show that this elite accords itself fantastic tax privileges down to and
including total exemption. And, true enough, the large-propertied elements in the United States see to it that they are very lightly taxed--many with $5 million or more of steady income often paying no tax at all for many years while a man with a miserable $2,000 income, perhaps after years of no income, denies his family medical or dental care in order to pay tax!
Taxes "are a changing product of earnest efforts to have others pay them. In a society where the few control the many, the efforts are rather simple. Levies are imposed in response to the preferences of the governing groups. Since their well-being is equated with the welfare of the community, they are, inclined to burden themselves as lightly as possible. Those who have little to say are expected to pay. Rationalizations for this state of affairs are rarely necessary. It is assumed that the lower orders will be properly patriotic. " 2 And, as anyone may ascertain any day, aggressively expressed patriotism increases markedly in intensity, readily crossing the borderline into spontaneous violence, the further one looks down the socio-economic and cultural scales into the lower middle class and downward.
There is a fundamental view, widely shared and often overtly expressed in schools and in the mass media, that the American socio-political system is, if not completely fair, as fair to everybody as the ingenuity of man can devise. This belief is monumentally false, as analysis of the tax structure alone discloses. 3
What Is to Be Proved
Prosecutors at the opening of a case in the law courts customarily state to judge and jury what they intend to prove. In adopting this procedure here, let it be said that it will be proved beyond the shadow of a doubt:
1. That the American propertied elite with the connivance of a malleable, deferential Congress deals itself very substantial continuing tax advantages at the expense of the vast majority of the population.
2. That the national tax burden is largely shouldered, absolutely and relatively, by the politically illiterate nonmanagerial labor force rather than by big property owners or by upper-echelon corporate executives (who are often tax free).
3. That the resultant tax structure is such that it intensifies the abject and growing poverty of some 25 to 35 per cent of the populace (about whom latter-day pubpols theatrically wring their hands), and grossly cheats more than 95 per cent in all.
Quite an order, the judicious reader will no doubt say to himself. But let such a reader armor himself in skepticism and let us consider the proof.
Some Preliminary Remarks
While the American propertied element is not ordinarily completely tax exempt it is subject in general to extremely low taxes. In many salient areas it is absolutely tax exempt, like prerevolutionary French aristocrats. This happy condition derives, as Eisenstein often points out, from special obscurely worded congressional dispensations. The situation, far from being mixed or a matter of shading, is absolutely black arid white. The United States is widely supposed to have a graduated tax system, based on ability to pay, but there is very little actual graduation in the system and what graduation there is turns out to be against the impecunious. *
(* I prefer the somewhat pretentious-sounding "impecunious" to the simpler "poor man" because it is semantically cleaner, less streaked with the crocodile tears of latter-day politicians and professional social workers. A poor mian, after all, is only a man without money and is often very little different in cultural attainment or outlook from many beneficiaries of multiple trust funds. He does not wear a halo; worse, he is never likely to. The recreations of a bayou Negro are little different from those of many denizens of Fifth and Park Avenues; each hunts, fishes, copulates, eats, sleeps, swims and boats and neither is much
of a reader, thinker or patron. The main social difference between them is money and its lack. The defensive idea of some sociologists that there is a "poverty culture," insuring the continued poverty through generations of its participants even though they were given trust funds, must be rejected as untenable. What is called the "poverty culture" is merely the reactive creation of impecunious people rejected for one reason or the other, often arbitrary, from the labor force as unsuitable. But if they were given an ample regular income without the performance of any labor, like members of the trust-fund cult, they would quickly emerge from this "culture," perhaps to comport themselves like. "Beverly Hillbillies" or Socialites. )
It is not being urged that the results to be shown were obtained through some centralized secret plot of bloated capitalists and paunchy cigar-smoking politicians. For it would indeed take a confidently jocund group of autocrats to deliberately plan the existing tax structure-what conservative tax-expert Representative Wilbur Mills, Democrat of Arkansas, in a bit of judicious understatement has called a "House of Horrors. " The late Senator Walter George of Georgia (never regarded as a friend of the common man) called the present scale of exemptions "a very cruel method by which the tax upon the people in the low-income brackets has been constantly increased. "4 Senator Barry Goldwater of Arizona, no liberal, radical, or starryeyed reformer, said "the whole tax structure is filled with loopholes"; Senator Douglas of Illinois, a liberal and a professional economist, asserted that the loopholes have become "truck holes. " 5 Referring to the fantastic depletion allowance, conservative Senator Frank Lausche of Ohio, no extremist or reformer of any kind, said: "It is a fraud, it is a swindle, and it ought to be stopped. " 6
One is, therefore, in fairly sedate baby-kissing company if one says (perhaps overcautiously) that the tax structure is a pullulating excrescence negating common sense, a parody of the gruesomely ludicrous, a surrealist zigzag pagoda of pestilent greed, a perverse thing that makes the prerevolutionary French system seem entirely rational. One takes it that Congressman Mills had something like this in mind with his "House of Horrors. "
Representative Mills in further explication of his "House of Horrors" characterization said the tax laws are "a mess and a gyp," with some taxpayers treated as coddled "pets" and others as "patsies. "
But the tax laws would have been no surprise or cause for consternation to someone like Karl Marx with his doctrine that government is inherently the executive committee of a ruling class. Indeed, they document that dictum--if not to the hilt--then a good distance up the blade.
One can apply to the present American system the exact words of French Finance Minister Calonne in 1787 on the soon-to-be-destroyed French system; "One cannot take a step in this vast kingdom without coming upon different laws, contradictory customs, privileges, exemptions, immunities from taxation, and every variety of rights and claims; and this general lack of harmony complicates administration, disturbs its course, impedes its machinery, and increases expense and disorganization on all sides. " 7
To refer to this system, then, as another but bigger Banana Republic is not merely a bit of misplaced literary hyperbole.
The American tax system is the consequence of diligent labors by diversified parties of major property interest working down through the years to gain their ends. Two congressional committees of seemingly over-easy virtue have been their target. A public demoralized by a variety of thoughtfully provided distractions, and liberally supplied with Barnum's suckers and Mencken's boobs, would not know what takes place even if it were fully attentive because it could not understand the purposely opaque syntax of the tax code, the inner arithmetic or the mandarinic rhetoric of the tax ideologists.
Has the result been spontaneously achieved in hit-or-miss fashion or is it intentional? As there are always those observers who want to interpret all human actions blandly, and who decry any suggestions of conniving or underhandedness, let it be said that on every hand in the tax laws there is clearly revealed (1) intent to deceive and (2) self- awareness of intent to deceive. First, those laws are demagogically sugar-coated in various ways--with entirely illusory and deceptive rates up to 70 or 91 per cent, with a variety of homespun seeming concessions to ordinary people and with numerous items of sentimental bait such as apparent (but only apparent) concern for the handicapped. Next, many seeming concessions to weakness, such as age, are actually supports for financial strength. The opacity of the language, often putting skilled lawyers at odds, alone testifies to intentional deceptiveness. Also, the couching of special bills of benefit to only one person or corporation in general terms, without naming the unique beneficiary, testifies to the same intent. A comparison of the verbiage of the tax laws with the language of the Constitution shows entirely different mentalities at work-- devious in the first instance, straightforward and to the point in the second.
The deviousness does not, as some profess to believe, reflect modern complexity of conditions. It is the deviousness that induces much of the complexity. The writers of the tax laws evidently consider the broad populace--and, what is worse, the rational critic-- as yokels at a country fair, to be trimmed accordingly.
In referring to the broad public it may seem that I have suddenly enlarged the scope of this inquest from a very small to a very large group. But we are confronted here with something of a puzzle: How could nearly 99 per cent of a large population be put into such a wringer by some 1 per cent or less, as though the 99 per cent were the victims of a particularly brutal military conquest? How could such an apparently free population be reduced to the financial status of peasant slaves?
A variety of factors has conspired to this end, but the populace has been handled by a smooth governing technique. In a process that has unfolded partly by sincere stealth, partly by sincere subterfuge, partly by convenient self-deception and partly by barefaced sincere chicanery, the people have been led to accept the tax laws by being offered many apparent advantages over each other in pseudo-exemptions and pseudo- deductions. But the bitter mixture to which the electorate has step by step acquiesced, under the plea partly of necessity and partly of undue advantage, it has finally been forced to swallow with the compliments of Congress--a lesson in adroit political manipulation as well as practical morality.
The tax laws, as drawn, appear to be a loaded gun pointed at the rich and affluent. But this is a tricky gun; as the ordinary man pulls the trigger in high glee he shoots himself! For the true muzzle of the weapon, as in a fantastic spy film, points backward.
As Congress now may appear to be cast as the villain of this opus (which is really without a villain), it should be conceded that there are many excellent public servitors in that body, functioning far beyond any reasonable call of duty. But Congress collectively is very different from congressmen and senators individually. Congress tends to function according to the least common denominator, the worst element in it. Congress, indeed, torn between different factions as it settles toward the least common denominator, becomes very much like a crazy king who doesn't know his own mind. The will of this king is reflected in the laws.
Tax-Free Fortune Building
Until the passage of the income-tax amendment to the Constitution in 1913, and the subsequent estate tax, the big industrial proprietors were virtually tax free, subject after the Civil War mainly to minor local real estate taxes. The biggest fortunes--among them Du Pont, Mellon, Rockefeller--were all largely amassed in the tax-exempt era.
Corporation lawyers, such as Rockefeller's Joseph H. Choate, fought with every legal and political means at their disposal against the imposition of even a token income tax, which they correctly sensed might be the opening wedge to heavier taxes.
What it became, finally, was a siphon gradually inserted into the pocketbooks of the general public. Imposed to popular huzzas as a class tax, the income tax was gradually turned into a mass tax in a jiu-jitsu turnaround. Thus it provided the pubpols with the present stupendous sums for reckless overspending in the areas of defense (Over-Kill) and the letting of lucrative construction contracts in the sacred names of education, medicine, housing and public welfare. Consequently, as far as disposable moneys at their fingertips are concerned, the pubpols are now on a basis of approximate parity with the finpols. Whereas in 1939 only 4 million people paid income taxes, and in 1915 only 2 million did, today more than 46 million do so--truly a case of turning the tax tables on the lowly!
Nearly all of the revenue, moreover--86 per cent of it--comes from the lower brackets, from the initial rate that all must pay, which is the lion's share of the $41 billion taken from individual incomes in 1960. The so-called "progressive" rates leading into the high brackets contribute only 14 per cent. 8 The politicians will never willingly give up this Golconda.
Differently put, the less than 1 per cent of the individuals who own upward of 70 per cent of productive property throw only 14 per cent into the tax caldron as their distinctive, differentiated contribution, while their own publications metronomically salute them as pillars of society. It is truly a piece of sleight-of-hand that would have been the envy of the French Bourbons. In the United States, as it has been said, if you steal you will be hailed as a great man, provided you steal everything in sight.
To get this one-sided tax burden off the backs of the common people will, one suspects, require a political upheaval of first-class dimensions. Nothing less would do it. For the pubpols, with the constant self-sustaining threat of defensive warfare on the one hand (neither Vietnam, Lebanon, Guatemala, Cuba nor the Dominican Republic attacked the United States) and the convenient excuse of profitable open-ended welfare on the other (the Great Society), can now work an oscillating double-pronged assault on the patriotic low-income man. It should always be remembered that the higher incomes pay for little of all this. They merely increase.
In general, the higher the income in the $10,000 and upward class of income receivers, comprising no more than 10 per cent of all taxpayers, the more lucrative tax privileges and absolute exemptions are progressively enjoyed. As one moves into the top 1 per cent of income receivers (the $25,000-plus class) the exemptions become still greater until in the top 2/10ths of 1 per cent (the $50,000-plus class) the exemptions and disparities become boldly and, in a presumably enlightened age, ludicrously profligate. The greater the income, the greater the legal tax exemption--up to 100 per cent. Conversely, the smaller the income the greater the proportion of taxes it pays, mainly through tax-loaded prices of goods and services among very small incomes.
Taxation is a complex subject and will be dealt with here in as compressed and clear a fashion as possible. 9
Four Types of Tax System
The United States, broadly, has four separate tax systems: federal, state, county and municipal. Including the counties and municipalities, there are thousands of separate tax jurisdictions. While all of them together gather in much money for local uses and abuses, separately they are of small importance and are mentioned here only as a means of dismissing them. The federal per capita tax collection in 1962, for example, was
close to $450, whereas all state and local taxes were about $230, so that about two- thirds of all taxes collected are federal. 10
The biggest nonfederal tax is on local real estate and personal property, to which everybody contributes something either as occupant-owner or as residential-business tenant. Depending on the region, the realty tax varies; although wherever it is low, local services are attenuated. A tax growing in use in states and municipalities and almost as productive of revenue is the sales tax, which levies up to 5 per cent on most retail purchases and, obviously, hits the poorest man hardest. This tax will, no doubt, be increasingly relied upon to squeeze money from the patriots.
Some states and municipalities also, aping the federal government, have income, excise and special-purpose or use taxes. Excise and most special-purpose taxes-- gasoline, liquor, cigarette, business, documentary, etc--are like the sales tax in that they hit the rank-and-file buyer directly.
But, as we have seen, the biggest tax-gathering jurisdiction, singly and collectively taken, is the federal, which imposes income, estate, excise and customs taxes. The latter two are percentage taxes on retail purchases and, except when placed on luxury goods, hit the common man hardest.
This exposition will largely confine itself to the federal income and estate taxes, for with respect to most other taxes the unmoneyed man pays exactly the same as the rich man although the proportion of income paid by the impecunious man is always astronomically higher.
The Sales Tax Steal
In order to make this clear initially, we may note that a man who pays sales taxes of $60 a year out of a $3,000 income has paid 2 per cent of his income on this tax. He would incur such an outlay at 5 per cent, enough to buy a good deal of medicine or dental care, on purchases amounting to $1,200. As the same amount of purchases by a man with $100,000 income incurs a tax of only six-hundredths of 1 per cent, the lower income-receiver pays at a rate more than 3,300 per cent higher in relation to income!
In order to incur a recurrent sales tax that would be 2 per cent of his income (at a 5 per cent rate) the $100,000-a-year man would have to buy $40,000 of sales-taxable goods-- hard to do unless he buys a Rolls-Royce or a seagoing vessel every year.
But the disparity is often greater even than this, difficult though it may be to believe. The lower income is almost always in already taxed dollars. For on a $3,000 income an individual has already paid $620 in income taxes at the pre-1964 rate, $500 at the post- 1964 rate. The $500,000 income, however, is often tax-exempt or, owing to the diversity of its sources, is taxed at a small fraction of the cited 88. 9 per cent pre-1964 or 60 per cent post-1964 rates.
As in all these tax matters there are always further ramifications, let us in this instance pursue one, allowing readers to work out the ramifications of others. Whatever is paid in sales taxes in one year is deductible on the federal return the next year and has an in- pocket value to the taxpayer at whatever percentage tax bracket he is in. The individual with $3,000 taxable income is in the 16. 6 per cent bracket as of 1966, which means that the following year his sales tax of $60 will be good for $10. 00 against his federal taxes. But the $100,000 man who paid $2,000 sales tax on $40,000 (improbable) sales-taxable purchases is in the 55. 5 per cent bracket and will on his return receive a federal tax credit worth $1,110. The leveraging influence of the higher brackets greatly reduces the impact of sales taxes on his purse. if he, like the low-income man, bought goods sales- taxed at only $60, he would get a tax credit of $33. 30, or more than three times that of the low-income man.
But a married man with four children and a gross income of $5,000, and who paid no federal tax, would get no compensatory reduction in any federal tax at all. Those low- income people, in other words, who have no federal tax to pay, are hit flush on the jaw by the sales tax. A married couple with one child and $2,000 of gross income ($40 per week), not uncommon in the American economy, might pay 5 per cent of sales taxes on $1,000 of goods, clothing and medicine. This would be $50, or more than a week's pay. If one traces indirect taxes they pay through prices and rent, one sees that they pay many weeks' income in taxes.
The sales tax clearly is a heavy levy directly on the least pecunious citizens.
Tax-Exempt Corporations Corporations as well as individuals apparently pay income taxes.
In 1965, for example, the official statistics tell us that every dollar received by the government came from the following sources: individual income taxes, 40 cents; corporation income taxes, 21 cents; employment taxes, 14 cents; excise taxes, 12 cents; miscellaneous taxes, 11 cents; and borrowing, 2 cents. " Corporations on the face of it appeared to contribute 21 per cent of federal revenues, and individual income-tax payers 40 per cent, Of these collections, 44 cents went for "national defense. "
But corporations do not really pay any taxes at all (or very, very rarely) surely a novel and (to most people) no doubt a thoroughly wrongheaded, erroneous and even stupid assertion. For are there not daily allusions to corporation taxes and don't official statistics list corporation taxes? Corporations, however, are no more taxed than were the aristocratic prerevolutionary French estates.
The evidence is plain, in open view; there is nothing recondite about the situation. All taxes supposedly paid by corporations are passed on in price of goods or services to the ultimate buyer, the well-known man in the street. This is not only true of federal and state taxes (where levied) but it is also true of local real estate and property taxes paid in the name of corporations. The corporations, in nearly all cases, merely act as collection agents for the government.
The scant exceptions to this rule are those corporations (none of the large ones and very few of any) that are losing money or that make a considerably below-average rate of return on invested capital. The money-losers pay no income tax at all, and may be forced to absorb local property taxes. Those making a below-average return may be required to pay some taxes, the payment of which does indeed contribute to the low return.
A glance at the income account of any large corporation shows that before share earnings are computed, every outlay has been deducted from total sales. The General Motors income account for 1964, for example, shows that the foreign and domestic income taxes are computed on the basis of income after deduction of all costs, salaries, wages, charges, depreciation, obsolescence, interest on debt and managerial expense accounts and bonuses. Now, after the deduction of federal income taxes, there remained the net income available for preferred and common dividends and for reinvestment. This was the net return or profit, more than 20 per cent on invested capital.
The money for every cent of it, close to $17 billion, came from sales of products. All this money, obviously, had to be absorbed in prices apportioned among millions of sales units, mainly cars. The car buyers obviously paid the income tax as well as a federal excise tax. In many cases, they paid local sales taxes as well.
But, the ever-present casuist will object, if the company did not have to pay income taxes at 48, 50 or 52 per cent, it would have had this much more available for dividends.
The argument is that prices would remain the same, tax or no tax. Instead of refuting such a contention by citing long and involved economic analyses one may simply consider the figures on rate of return on invested capital either for one corporation or for all corporations over a period of decades.
This rate of return does vary in response to a complex multiplicity of factors but, pari passu and mutatis mutandi, it remains fairly fixed within certain maximal-minimal secular limits. It averages out. Rates vary from industry to industry and company to company and the average, median or mode for all companies does no more than tell the general story, which is that the average rate of return on invested capital is not significantly affected by taxes. The taxes are largely absorbed in price as an item of cost, and prices rise as corporate taxes are imposed. That prices don't instantly fall when taxes are reduced derives from the fact that corporations are slow in passing on tax benefits. But removal of the taxes would in time bring prices down; rates of return would remain about the same.
No heretical or offbeat argument is offered here. For it is commonly recognized by knowledgeable persons that corporations pay no taxes. The Wall Street Journal, for example, trenchantly observes that the corporation income tax is "treated by corporations as merely another cost which they can pass on to their customers. " Tax or no tax, the customers pay for everything including a fairly stabilized average rate of return on invested capital.
In further support of the point, the late Representative Daniel Reed, sponsor of the Eisenhower dividend credit, held that "inordinately high" consumer prices prevailed partly because "all products are increased in price in the exact proportion of taxation"; and the former Republican Speaker of the House, Representative Joseph Martin of Massachusetts, reminded listeners that "any graduate economist can tell us that corporations compute profits after taxes, and not before, and their price scales are adjusted accordingly. " 13
There are some economists who contend that not all corporations are able to pack taxes into prices but instead force workers to absorb some of them in unduly low wages. Here the workers partly subsidize the customers. But the corporation, if it can help it, does not allow any tax to come out of its resources or its return on capital. The so-called "corporation tax," then, is a misnomer and a deception on a gullible public, which itself pays all corporation taxes. The corporation tax is a disguised sales tax.
Indeed, at least two-thirds of American corporations even add payroll taxes to their prices. 14 These consist largely of their legally designated proportion of Social Security taxes, which they are theoretically supposed to pay out of their own pockets. These taxes, in greater part, are paid half by the employee individually and directly, and the balance by consumers, who are themselves mainly employees. It would hardly be erroneous, then, to say that employees pay nearly all of Social Security, The only way to make employers pay for them is to deduct from dividend checks or retained profits. Even if this were done, the companies would simply, by inner bookkeeping shifts, transfer money now earmarked for payroll taxes (and passed on in price) to money available for dividends. A greater sum would be made available for dividends and retained profits so that after any deductions for employees' Social Security the same amount would go to dividend recipients. Rate of return would remain the same.
There is really no way of forcing a successful profit-making corporation to pay taxes other than by levying on its capital, thereby reducing it at least as fast as retained earnings build it up. But this action is ruled out under our legal system as confiscatory. It is absolutely taboo. So it is clear that the existent legal system forever protects the
going corporation from taxation, like a nobleman's estate. But this system could be altered by a simple constitutional amendment: "Capital may be taxed directly. "
While undermining the growth power of corporations, for good or ill, and giving politicians another weapon, such a law would profoundly alter our economic system by -making it possible to shift the tax burden at least in part to corporations. This would no doubt induce many tax ideologists to protest that thrift and virtue were being taxed; for "thrift" is the ideological code word for inherited corporate wealth, "virtue" the code word for wealthy man. Would that one could be as thrifty as third-generation inheritors? . While the power of the finpols would no doubt be curtailed by such taxation, that of the pubpols would be relatively enhanced. Whether this would be all to the good is questionable. One might be willing to take one's chances with a Franklin Roosevelt, Adlai Stevenson or John F. Kennedy but be doubtful about taking them with a Lyndon B. Johnson, Barry Goldwater or Richard Nixon. For statesmen are few, "practical" politicians are many, in the world of pubpolity.
The dim feeling that this kind of out-of-pocket tax is now paid by corporations is part of what makes the average man feel fairly complacent about the tax situation. But that federal taxes are no impediment to corporations we can see by observing their rates of return. General Motors in 1964, for example, enjoyed a rate of return of 22. 8 per cent on invested capital. Although some rates of big companies exceeded that of General Motors, ranging up to 38. 2 per cent, industry medians ranged from 8. 6 per cent in textiles to 16. 3 per cent in pharmaceuticals, the highest. Smith Kline and French Laboratories had a rate of return of 31 per cent.
Various annual series on rates of return by industries are available and should be consulted with a view to ascertaining that income-tax rates do not significantly affect rate of return. 16
What is not realized by most people is that nearly all investment down through the years consists of corporate reinvestments in varying proportions of their post-tax profits. According to one estimate, from 1919 to 1947, of gross capital formation in the amount of $770 billion in the United States only 2 per cent was contributed by individual savings invested in common stocks. 17
But aren't corporate people always decrying corporate taxes? If the corporations don't pay taxes, why should they object? Their objections are made on grounds other than that they pay the taxes, although they claim this is the issue. Taxes packed into the price of goods and services obviously reduce the purchasing power of individual buyers and place much purchasing power into the hands of government officials who (1) have in mind the purchase of other kinds of goods and (2) can if they wish have purchases handled by sophisticated hard-to-please purchasing agents. The government cannot be gulled unless it wants to be gulled or unless it has faithless employees. Again, the government may buy mountains of cement and heavy equipment but it cannot be induced to buy chewing gum, fashions and millions of automobiles.
Corporations obviously prefer the less sophisticated, happy-go-lucky types of purchasers to the pubpols who, beyond any orders they place, may also require extraneous payments for their patronage such as campaign contributions and retainers. In one way or another, the pubpols exact kickbacks for their massive tax-supported business.
In any event, corporations rarely pay any taxes but merely act as collection agents for the government. This fact is shown most formally and precisely in the case of the utility companies, which are always trumpeting to the world how much they pay in taxes. Because these companies hold a franchised monopoly, they are subject to rate regulation, usually within states but in some cases nationally; but by reason of many
court rulings against confiscation of capital they are legally entitled to a certain minimum generous return on invested capital--at least 7 per cent. Taxes therefore may not be allowed to intrude upon rate of return but, as they are imposed, must be followed by increased consumer rates. Thus the users (the customers) pay all federal income and other taxes of the utility companies.
The point here is that the situation is the same with the non-utility companies, except that they don't have their prices set by a regulatory commission. The market, subject to monopolistic manipulation, supplies whatever limitation there is.
Landlords and Business Partnerships
It is the same with the revenues of landlords and of business partnerships. Unless they happen to be running at a loss or doing less well than average, all their taxes--local, state and federal--like other costs, are packed into the price of goods or services they sell. The buyer pays the taxes.
Where a landlord owns an apartment building his tenants obviously must pay his taxes as well as all other costs in order to leave him with a profit. Yet it is the landlord who constantly laments about the taxes, which he collects for the government, and the tenants who live lightheartedly unawares. If anyone is to lament about taxes paid, it is obviously they; but they are inattentive to the actual process.
Multiple Taxation
The Eisenhower Administration became very indignant about multiple taxation, holding it to be, if not unconstitutional, at least unfair. It felt stockholders were most unfairly treated in this respect, and puckisbly devised a system of dividend credits (4 per cent of dividends discount on the tax itself) that gave very little to many small stockholders but a great deal to a few big ones. A small dividend-received credit remains in the tax laws, but the theory on which it is based--unfair double taxation--is false from beginning to end. For stockholders as such have not, directly or indirectly, paid any tax prior to receiving their dividends. Again, multiple taxation has long prevailed on every hand.
The way these dividend credits worked in 1964 was as follows: Any person receiving dividends could deduct up to $100 of dividends received ($200 for a married couple). Up to $200 of dividends, in short, were tax free for a married couple, and so remained in 1965 and 1966. Beyond this, 2 per cent of all dividends received from domestic taxpaying corporations were deducted directly from the tax total. If a man had $1 million of dividend income, he could deduct a flat $20,000 from his final tax. But a married couple receiving $500 of dividends beyond the tax-free base could deduct only $10.
The dividend credit, in other language, was of significant value only to very wealthy people. Before the Eisenhower law was revised, it had twice the value of 1964.
Expressing his indignation, in the 1952 presidential campaign Eisenhower complained that there were more than a hundred different taxes on every single egg sold, and he was probably correct. 18
But this serves only to point up the fact that it is the rank-and-file consumer who pays most taxes. When, for example, one buys a loaf of bread one pays fractional multiple taxes--the farmer's original land tax; the farmer's income tax (if any); the railroads' real- estate, franchise and income taxes; storage warehouse taxes for the ingredients (income and realty); the bakery's income and realty taxes; the retailers' income and realty taxes; and, possibly, a climactic local sales tax. 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.