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!
cent of over-aged males!
Lundberg - The-Rich-and-the-Super-Rich-by-Ferdinand-Lundberg
) 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. The aggrandizing foreign investments, like the domestic investments, are largely made by corporations with tax-free money!
Under the Eisenhower Administration, as we have observed, the dividend tax credit passed in 1954 enabled big stockholders to make a killing while small stockholders gained very little, the usual pattern of the tax laws. With fewer than 1 per cent of all families holding more than 70 per cent of all stock by value, it is clear that very few could be advantaged by this law. As Mr. Stern shows, a man who had a tax bill of $2,020 and had received dividends of $500 would reduce his tax by $20 under the Eisenhower law. But for 306 top taxpayers, with an average dividend income of nearly a million dollars, we have noted the dividend credit meant an average $40,000 in cold cash for each. Quite a difference. 28
Tax-Exempt Medicine--for the Rich
As the wealthy person has more money available, he can always purchase more tax- deductible medical services than the average man. A married taxpaver is limited to a maximum $20,000 medical deduction, a great deal even for a rich man, and to the excess over 1 per cent of taxable income for drugs and medicines.
But if the taxpayer has an employer who pays his medical and hospital expenses, these are exempt from taxes, which is very handy for the company executives who often enjoy this "fringe benefit. " For the ordinary taxpayer any wages paid as "sick pay" are exempt up to $100 a week after a waiting period, but not many figure in such arrangements. Those persons retained by companies that make this a practice obviously enjoy a differential tax advantage over most taxpayers.
Corporation executives often enjoy free medical services, for themselves and their families, from fulltime company medical departments. This amounts to so much tax- free medicine, which is charged to consumers in price and to general taxpayers. High public officials, it must be noted, also often come in for such free medical services at various of the up-to-date governmental military hospitals. Former high officials also participate through the courtesy of incumbents, whom they publicly back when controversy rises.
If he has no organization he can charge for the medical services, the rich man does have up to $20,000 of medical attention each year as a tax-free deduction from spendable income, thus reducing his taxable income. In the 70-per-cent bracket this is worth $14,000, cash.
Most persons in the country never enjoy the services of a doctor until they are in extremis or a doctor must be called in to pronounce them dead. This is because they cannot afford a doctor and instead rely on the nearby pharmacist in all poorer neighborhoods referred to as "Doc. " Their prescriptions are whatever proprietary drugs he recommends. The pleasant-sounding medical deduction, then, is of no service to the many persons without money to spare for doctors and medicine.
Lucrative Charities
One may deduct up to 30 per cent of gross adjusted income for contributions to charities, and if contributions exceed 30 per cent in any one year they may be spread over five years. As most taxpayers manifestly cannot make contributions on such a scale, the provision is obviously of service only to the wealthy.
While the contributions may be made to existing bodies, most of the wealthy prudently decide to make them to their own charitable foundations, which are run as helpful adjuncts to their other affairs.
Oddly enough, one's financial power in society increases as one "gives" money to a personally owned foundation, proving that it is more profitable to "give" than to receive. If a certain man has a million-dollar taxable income (he has made all deductions), he is liable for $660,980 in taxes under the 1965 or nearly 70 per cent flat. But he can still make a charitable contribution for a deduction of $300,000. If he does, his tax will be only $450,980, a tax saving of $210,000. But as he has "given" $300,000 it looks as though he is deprived of $90,000 more than if he had paid straight tax.
But what he has "given" he has given to his own foundation, and he can invest this money in stocks of his own companies and thereby maintain profitable control. Again, the earning power of this $300,000 (at least $15,000 a year) is now tax free itself, greatly increasing its effectiveness. It will recoup his $90,000 out-of-pocket cost in at most six years and thereafter show a tax-free profit. He has more income to dispose of
now in "philanthropic" patronage than if he had retained his taxed earnings and invested or spent them, for the proceeds of such retained money would be taxed.
What does his foundation contribute to? It contributes, as actual cases show, to laboratories seeking cures for various diseases. Surely this is entirely worthy, and so it is. But what do the corporations make that he controls? They may make medicines that are sold at a profit for the cure of various diseases, and any discoveries made by the laboratories to which his taxfree foundations "give" money will be utilized by his medicine-making corporations in making further profits. But few such discoveries will be available to impecunious people. It usually takes money to buy medicines.
"Charity" under our tax laws can be highly profitable. It can be monetarily more profitable, indeed, than noncharity.
Big Killings via Interest
Interest received, except from tax-exempt bonds, is taxable, Every man who gets interest from a bank account, a mortgage or on a federal or corporate bond is liable for taxes on it.
Interest paid out, on the other hand, is 100 per cent deductible. The man who buys an automobile or household appliance on the installment plan may deduct the interest paid before computing his income tax, just like the man who deducts for the payment of $100,000 of interest a year on a margined stock-market account. For the latter, the interest is deductible as an expense of doing business, and in the 70-per-cent bracket is worth to him $70,000. His true interest outlay is only 30 per cent of the face amount.
All such big interest payments are of major advantage to the big operators in stocks, real estate and oil lands who borrow a great deal in order to contrive their killings, which are sometimes sure things--as in the case of the metropolitan realty operators who "mortgage out. "
Where interest paid as a deduction most obviously divides the population, placing another large number in the role of sucker and an apparent large number among the advantaged, is in the matter of home ownership. While tenants, in the form of rent, pay all costs, including mortgage interest and taxes of the owner, the home owner may deduct on his federal tax return interest he pays on his mortgage and his local real estate taxes. On a $30,000 house in which he has a $10,000 equity the home owner may pay 5 per cent perhaps on a $20,000 mortgage, or $1,000; his taxes may be $500; and he may reasonably figure 3 or 4 per cent for depreciation, repairs and maintenance, or $900- $1,200. His rent, then, exclusive of heating, is minimally $2,400. But if he is married and has a $10,000 taxable income he may first deduct the interest payment of $1,000 and then the real estate tax of $500. At the 22 per cent rate for that bracket the deduction is worth $330, bringing his actual rent down to $2,070 or $172. 50 per month. A tenant would have to pay considerably more per month plus some entrepreneurial profit to the owner; he would probably have to pay from $225 to $275 per month, possibly more.
While this seems to give home owners a bit of an edge over tenants (I have omitted items like cost of insurance), Congress is not especially fond of home owners either. It has much bigger game in mind. With home owners sitting contentedly chewing their little tidbit, knowing they are slightly better off taxwise than tenants, the interest deduction meanwhile has opened some large gaps in the tax laws through which profit- hungry elements churn like armored divisions through Stone Age club-wielders.
First, for the wealthy man with many houses and country estates, both the realty tax and interest deductions amount to windfalls. If a million dollars of such residential property is mortgaged up to half at 5 per cent, there is a total interest charge of $25,000. But in the 70-per-cent bracket only $7,500 of this represents an out-of-pocket payment.
Whatever the realty tax bill is, only 30 per cent of it represents an out-of-pocket payment. The same situation applies with respect to personally owned cooperative luxury apartments; the general taxpayers defray up to 70 per cent of the interest and realty tax outlay.
The interest and realty tax deductions, then, are extraordinarily valuable to holders of extensive properties.
But this is only the beginning of the story.
Metropolitan real estate operators, as we have observed, use interest as a ]ever with which to "mortgage out" and then obtain tax-free income.
Here, in other words, is the real milk of the interest deduction coconut. Whereas the average home owner is getting away with peanuts at the expense of tenants, both tenants and home owners in the end must make up out of other taxes they pay, mainly in the form of prices, what the big operators have been able to avoid paying on their profits.
Congress, although not loving home owners, is surely infatuated with big real estate and stock-margin operators. And why not? It is these chaps who have the money to kick in for campaign funds, always a matter of concern to the officeholder.
One may agree that the ordinary citizen is entitled to complain. He knows he is in some sort of squeeze. But, politically illiterate, he clearly does not realize its nature nor does he see that he won't get out of it by obtaining some petty advantage over the single the childless, the tenants and other fellow rank-and-file citizens. He cannot understand that it is the very type of person he likes as a legislator that is his undoing. For he prefers "con men" to seriously honest men.
Tax-Exempt Bonds
One of the biggest tax-exemption loopholes consists of state and municipal government and school bonds. Here, whether one draws $1,000 or $50 million of income, one pays absolutely no tax ever.
Very few people invest in such bonds and nearly all who do are very rich. Tax-exempt bonds are, clearly, a rich man's investment vehicle and are provided for this very purpose.
In the last available Treasury report issued about such bonds, the top 1/10 of 1 per cent of the population owned 45 per cent of all outstanding, the top 3/10 of 1 per cent owned 66 per cent and the top 1-1/2 per cent owned 87 per cent. 29 In short, no down-to-earth people own such bonds.
How many such bonds are outstanding? As of 1963 there were $85. 9 billion outstanding compared with only $17. 1 billion in 1945 . 30 One can see they are very popular with their buyers. At an average interest rate of 3 per cent, this amounts to $2. 577 billion of untaxed annual revenue falling into the hands of wealthy individuals and a few banks and insurance companies.
The ordinary man would not find such investments attractive, as he can get from 4 to 5 per cent on savings. The advantage enters through the leverage exerted by the tax-free feature as one ascends the formal income brackets.
As Mr. Stern has worked it out, for a person with a taxable income of $4,000 a 3 per cent tax-free bond is equal to a stock yielding 3. 75 per cent; for a person in the $20,000- $24,000 bracket to 4. 8 per cent; for a person in the $32,000-$36,000 bracket to 6 per cent; but to a person in the $88,000-$100,000 bracket it is equal to 10. 7 per cent on a stock.
On $140,000-$160,000 income it is equal to 15. 8 per cent on a stock, on $300,000- $400,000 income to 30 per cent on a stock and on everything above $400,000 it is equal to a blessed, flat, cold 33 per cent on a stock! Such a percentage return in a tax jungle is obviously worth reaching for.
As these bonds are secured by a lien on all the real estate taxes in their respective jurisdictions, they are absolutely without risk as to capital or payment of interest. In order to make as much taxable money, a high-income person would obviously have to invest in very risky enterprises that paid dividends of at least 33 per cent on invested capital. Not many established companies do this.
While some persons, like Delphine Dodge, put all their holdings into such securities, the average wealthy man puts only part of his fortune in them, thus reducing his total tax bill. A possible diversified portfolio and the taxes paid on it -might be as follows:
Investment Income
Tax
None
None
None
Total tax
None
Total tax
None
$100 million tax-free
bonds
$100 million oil
royalties
$100 million growth stocks
earning 15 per cent but
reinvesting all; no
dividend payout
Total Investment
$300 million
$3 million (cash)
$15 million (cash)
$15 million (accrued)
Total cash income
$18 million
Total accrued income
$15 million
Total real income
$33 million
But such a man's chauffeur, if single and receiving $6,000 a year, would have paid a tax of $1,130 a year at 1965 rates.
Not only is it possible, but it actually happens, that the house servants--chauffeurs, cooks, maids, gardeners--of some ultra-wealthy people pay income taxes and the employers pay none at all, year after year.
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. The aggrandizing foreign investments, like the domestic investments, are largely made by corporations with tax-free money!
Under the Eisenhower Administration, as we have observed, the dividend tax credit passed in 1954 enabled big stockholders to make a killing while small stockholders gained very little, the usual pattern of the tax laws. With fewer than 1 per cent of all families holding more than 70 per cent of all stock by value, it is clear that very few could be advantaged by this law. As Mr. Stern shows, a man who had a tax bill of $2,020 and had received dividends of $500 would reduce his tax by $20 under the Eisenhower law. But for 306 top taxpayers, with an average dividend income of nearly a million dollars, we have noted the dividend credit meant an average $40,000 in cold cash for each. Quite a difference. 28
Tax-Exempt Medicine--for the Rich
As the wealthy person has more money available, he can always purchase more tax- deductible medical services than the average man. A married taxpaver is limited to a maximum $20,000 medical deduction, a great deal even for a rich man, and to the excess over 1 per cent of taxable income for drugs and medicines.
But if the taxpayer has an employer who pays his medical and hospital expenses, these are exempt from taxes, which is very handy for the company executives who often enjoy this "fringe benefit. " For the ordinary taxpayer any wages paid as "sick pay" are exempt up to $100 a week after a waiting period, but not many figure in such arrangements. Those persons retained by companies that make this a practice obviously enjoy a differential tax advantage over most taxpayers.
Corporation executives often enjoy free medical services, for themselves and their families, from fulltime company medical departments. This amounts to so much tax- free medicine, which is charged to consumers in price and to general taxpayers. High public officials, it must be noted, also often come in for such free medical services at various of the up-to-date governmental military hospitals. Former high officials also participate through the courtesy of incumbents, whom they publicly back when controversy rises.
If he has no organization he can charge for the medical services, the rich man does have up to $20,000 of medical attention each year as a tax-free deduction from spendable income, thus reducing his taxable income. In the 70-per-cent bracket this is worth $14,000, cash.
Most persons in the country never enjoy the services of a doctor until they are in extremis or a doctor must be called in to pronounce them dead. This is because they cannot afford a doctor and instead rely on the nearby pharmacist in all poorer neighborhoods referred to as "Doc. " Their prescriptions are whatever proprietary drugs he recommends. The pleasant-sounding medical deduction, then, is of no service to the many persons without money to spare for doctors and medicine.
Lucrative Charities
One may deduct up to 30 per cent of gross adjusted income for contributions to charities, and if contributions exceed 30 per cent in any one year they may be spread over five years. As most taxpayers manifestly cannot make contributions on such a scale, the provision is obviously of service only to the wealthy.
While the contributions may be made to existing bodies, most of the wealthy prudently decide to make them to their own charitable foundations, which are run as helpful adjuncts to their other affairs.
Oddly enough, one's financial power in society increases as one "gives" money to a personally owned foundation, proving that it is more profitable to "give" than to receive. If a certain man has a million-dollar taxable income (he has made all deductions), he is liable for $660,980 in taxes under the 1965 or nearly 70 per cent flat. But he can still make a charitable contribution for a deduction of $300,000. If he does, his tax will be only $450,980, a tax saving of $210,000. But as he has "given" $300,000 it looks as though he is deprived of $90,000 more than if he had paid straight tax.
But what he has "given" he has given to his own foundation, and he can invest this money in stocks of his own companies and thereby maintain profitable control. Again, the earning power of this $300,000 (at least $15,000 a year) is now tax free itself, greatly increasing its effectiveness. It will recoup his $90,000 out-of-pocket cost in at most six years and thereafter show a tax-free profit. He has more income to dispose of
now in "philanthropic" patronage than if he had retained his taxed earnings and invested or spent them, for the proceeds of such retained money would be taxed.
What does his foundation contribute to? It contributes, as actual cases show, to laboratories seeking cures for various diseases. Surely this is entirely worthy, and so it is. But what do the corporations make that he controls? They may make medicines that are sold at a profit for the cure of various diseases, and any discoveries made by the laboratories to which his taxfree foundations "give" money will be utilized by his medicine-making corporations in making further profits. But few such discoveries will be available to impecunious people. It usually takes money to buy medicines.
"Charity" under our tax laws can be highly profitable. It can be monetarily more profitable, indeed, than noncharity.
Big Killings via Interest
Interest received, except from tax-exempt bonds, is taxable, Every man who gets interest from a bank account, a mortgage or on a federal or corporate bond is liable for taxes on it.
Interest paid out, on the other hand, is 100 per cent deductible. The man who buys an automobile or household appliance on the installment plan may deduct the interest paid before computing his income tax, just like the man who deducts for the payment of $100,000 of interest a year on a margined stock-market account. For the latter, the interest is deductible as an expense of doing business, and in the 70-per-cent bracket is worth to him $70,000. His true interest outlay is only 30 per cent of the face amount.
All such big interest payments are of major advantage to the big operators in stocks, real estate and oil lands who borrow a great deal in order to contrive their killings, which are sometimes sure things--as in the case of the metropolitan realty operators who "mortgage out. "
Where interest paid as a deduction most obviously divides the population, placing another large number in the role of sucker and an apparent large number among the advantaged, is in the matter of home ownership. While tenants, in the form of rent, pay all costs, including mortgage interest and taxes of the owner, the home owner may deduct on his federal tax return interest he pays on his mortgage and his local real estate taxes. On a $30,000 house in which he has a $10,000 equity the home owner may pay 5 per cent perhaps on a $20,000 mortgage, or $1,000; his taxes may be $500; and he may reasonably figure 3 or 4 per cent for depreciation, repairs and maintenance, or $900- $1,200. His rent, then, exclusive of heating, is minimally $2,400. But if he is married and has a $10,000 taxable income he may first deduct the interest payment of $1,000 and then the real estate tax of $500. At the 22 per cent rate for that bracket the deduction is worth $330, bringing his actual rent down to $2,070 or $172. 50 per month. A tenant would have to pay considerably more per month plus some entrepreneurial profit to the owner; he would probably have to pay from $225 to $275 per month, possibly more.
While this seems to give home owners a bit of an edge over tenants (I have omitted items like cost of insurance), Congress is not especially fond of home owners either. It has much bigger game in mind. With home owners sitting contentedly chewing their little tidbit, knowing they are slightly better off taxwise than tenants, the interest deduction meanwhile has opened some large gaps in the tax laws through which profit- hungry elements churn like armored divisions through Stone Age club-wielders.
First, for the wealthy man with many houses and country estates, both the realty tax and interest deductions amount to windfalls. If a million dollars of such residential property is mortgaged up to half at 5 per cent, there is a total interest charge of $25,000. But in the 70-per-cent bracket only $7,500 of this represents an out-of-pocket payment.
Whatever the realty tax bill is, only 30 per cent of it represents an out-of-pocket payment. The same situation applies with respect to personally owned cooperative luxury apartments; the general taxpayers defray up to 70 per cent of the interest and realty tax outlay.
The interest and realty tax deductions, then, are extraordinarily valuable to holders of extensive properties.
But this is only the beginning of the story.
Metropolitan real estate operators, as we have observed, use interest as a ]ever with which to "mortgage out" and then obtain tax-free income.
Here, in other words, is the real milk of the interest deduction coconut. Whereas the average home owner is getting away with peanuts at the expense of tenants, both tenants and home owners in the end must make up out of other taxes they pay, mainly in the form of prices, what the big operators have been able to avoid paying on their profits.
Congress, although not loving home owners, is surely infatuated with big real estate and stock-margin operators. And why not? It is these chaps who have the money to kick in for campaign funds, always a matter of concern to the officeholder.
One may agree that the ordinary citizen is entitled to complain. He knows he is in some sort of squeeze. But, politically illiterate, he clearly does not realize its nature nor does he see that he won't get out of it by obtaining some petty advantage over the single the childless, the tenants and other fellow rank-and-file citizens. He cannot understand that it is the very type of person he likes as a legislator that is his undoing. For he prefers "con men" to seriously honest men.
Tax-Exempt Bonds
One of the biggest tax-exemption loopholes consists of state and municipal government and school bonds. Here, whether one draws $1,000 or $50 million of income, one pays absolutely no tax ever.
Very few people invest in such bonds and nearly all who do are very rich. Tax-exempt bonds are, clearly, a rich man's investment vehicle and are provided for this very purpose.
In the last available Treasury report issued about such bonds, the top 1/10 of 1 per cent of the population owned 45 per cent of all outstanding, the top 3/10 of 1 per cent owned 66 per cent and the top 1-1/2 per cent owned 87 per cent. 29 In short, no down-to-earth people own such bonds.
How many such bonds are outstanding? As of 1963 there were $85. 9 billion outstanding compared with only $17. 1 billion in 1945 . 30 One can see they are very popular with their buyers. At an average interest rate of 3 per cent, this amounts to $2. 577 billion of untaxed annual revenue falling into the hands of wealthy individuals and a few banks and insurance companies.
The ordinary man would not find such investments attractive, as he can get from 4 to 5 per cent on savings. The advantage enters through the leverage exerted by the tax-free feature as one ascends the formal income brackets.
As Mr. Stern has worked it out, for a person with a taxable income of $4,000 a 3 per cent tax-free bond is equal to a stock yielding 3. 75 per cent; for a person in the $20,000- $24,000 bracket to 4. 8 per cent; for a person in the $32,000-$36,000 bracket to 6 per cent; but to a person in the $88,000-$100,000 bracket it is equal to 10. 7 per cent on a stock.
On $140,000-$160,000 income it is equal to 15. 8 per cent on a stock, on $300,000- $400,000 income to 30 per cent on a stock and on everything above $400,000 it is equal to a blessed, flat, cold 33 per cent on a stock! Such a percentage return in a tax jungle is obviously worth reaching for.
As these bonds are secured by a lien on all the real estate taxes in their respective jurisdictions, they are absolutely without risk as to capital or payment of interest. In order to make as much taxable money, a high-income person would obviously have to invest in very risky enterprises that paid dividends of at least 33 per cent on invested capital. Not many established companies do this.
While some persons, like Delphine Dodge, put all their holdings into such securities, the average wealthy man puts only part of his fortune in them, thus reducing his total tax bill. A possible diversified portfolio and the taxes paid on it -might be as follows:
Investment Income
Tax
None
None
None
Total tax
None
Total tax
None
$100 million tax-free
bonds
$100 million oil
royalties
$100 million growth stocks
earning 15 per cent but
reinvesting all; no
dividend payout
Total Investment
$300 million
$3 million (cash)
$15 million (cash)
$15 million (accrued)
Total cash income
$18 million
Total accrued income
$15 million
Total real income
$33 million
But such a man's chauffeur, if single and receiving $6,000 a year, would have paid a tax of $1,130 a year at 1965 rates.
Not only is it possible, but it actually happens, that the house servants--chauffeurs, cooks, maids, gardeners--of some ultra-wealthy people pay income taxes and the employers pay none at all, year after year.
