The
audience
sat bewildered.
Lundberg - The-Rich-and-the-Super-Rich-by-Ferdinand-Lundberg
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. The champion's left glove flicked stingingly into his face and was instantly followed by a powerful right cross to the jaw. The strong man, without ever having landed a blow, sank unconscious to the floor.
The audience sat bewildered. They had just seen a champion against a novice.
Dempsey figures in this story as the politician, the controlling element, and the strong man symbolizes the people. The governmental method used by Dempsey was that of letting them come to you and then belting them.
This method alone does not work with large groups. With them it is necessary to play either on their inherent divisiveness or to divide them arbitrarily in order to rule. This Napoleonic method is well exemplified in the tax laws, which divide and subdivide the populace into many bits and shreds. It is Napoleonic because the general strategy of the little Corsican was to strike successively each section of divided forces with his full, massed force.
Government uses these methods, it should be noticed, when the public is reluctant or unwilling. Apart from taxation, it is used to good effect in conscription. Let us briefly examine it there in order better to understand the tax outcome, which otherwise, in the absence of a hostile conquering force, is inexplicable.
Most men are instinctively reluctant to serve in the armed forces, where one may be killed or maimed. We know this because, if they were not, all they would have to do is to join at any of the many recruiting stations scattered around. Most of them must be ordered to serve.
If, as in World War II, the government wants some thirteen million men it is obviously difficult to order them forward all at once, risking the political ire of such a multitude. Again, government at no time possesses the manpower to force thirteen million to obey. The FBI, resourceful though it is, could hardly cope with this situation.
The government here brings into play two tactics--Dempsey's lethal punch and the doctrine of divide-and-rule.
First the government divides the manpower into classes--by ages and by marital and parental status. It then summons first those who are politically and psychologically weakest, the single youths aged eighteen to twenty-one who don't even have the vote. Excepting the few true-blue patriots and excitement-hunters who rush to the recruiting offices, all others, thankfully feeling they have been excused from danger, cheer in approval and tell the bewildered youngsters they are only doing their patriotic duty; older men and women hurry off, like often-criticized Germans, to better-paying jobs in munitions plants. Next to be summoned are single men aged twenty-one to twenty-five, while married men approvingly urge the victims on. For the government gets much assistance from that part of the populace it is not at the moment corralling. Any of those who have shown strong signs of not wishing to go are shouted down by their fellow men, shamed. Some who have watched and cheered the process meanwhile have rushed off to get married to the first unattached female they could find; for the government, it seems, has a soft spot in its heart for married men--whom it is not calling.
But now, with a considerable force in training under arms, the government has enough men to deal handily with any late-showing dawdlers. Moreover, the men under arms feel scant sympathy for those who have not been called. The conscript army would, in fact, relish an order to go and get them at bayonet point. As in a wrestling match, the weight has been shifted. Where at first the forward-thrust of weight was with those not called, who chivvied the tender youths into service, this weight has now shifted to the youths under arms who now regard others as slackers and are ready to kill on command. The slackers are summoned--first the battle-shy married men and then those stalwarts with children up to a dozen and beyond.
On the battle line, finally, one finds single men eighteen to forty-five and married men with a dozen or more children--men wearing glasses, with fallen arches, flat feet, no teeth and leaky hearts. As the rule was finally explicated by the soldiers themselves in World War II, "if you can walk, you're in. " They are now all, as the soldiers themselves pronounced, "dogfaces," nobodies. (They were that, too, in civilian life but didn't know it. )
Most of the populace initially acquiesced in this process because it seemed that somebody else was going to be soaked. On this basis they gave their full-hearted consent to the process that finally snared them.
A similar technique is used with respect to the imposition of unfair taxes. For it always appears in reading the tax laws that somebody else is going to be soaked, or at least soaked more than the reader. Does it not clearly appear that some are going to be soaked
up to perhaps 91 per cent? On $1 million of income, that is $910,000, leaving the bloody no-good bastard only $90,000 or about twenty times too much. Three cheers for Congress!
The tax laws divide people into many more groups than the conscription laws. There are, first, the single, the married, the married with children and the heads of households; next come minor students, adults and persons over sixty-five. Those over sixty-five retired and unretired, with and without income, blind or still with vision. But this is only the beginning. People are divided also according to sources of income. The basic division is between earned and unearned income, the latter of many varieties. But there is also taxable and non-taxable income, foreign and domestic income, etc.
While to the general public the basic division appears to be between single and child- blessed married persons, the true basic division is between earned and unearned income. It is invariably true that earned income is taxed most heavily, unearned or property- derived income most lightly down to nothing at all.
But the average taxpayer is quickly made to feel that he is getting away with something at someone else's expense, that he is, as Mr. Stern says, a "tax deviate. " The way the laws are drawn most of us are forced into being tax deviates. The only persons who cannot qualify are single persons with earned incomes, some seven million individuals. They are the low men on the tax totem pole.
The government encourages everyone to feel he is getting away with something by advising all to be sure to take all the deductions--exemptions they are entitled to on the Labyrinthian tax form. And they are many. After correctly filling out this form the average taxpayer has the delicious feeling that he has once again outwitted a grasping bureaucracy. But he has only succumbed to Jack Dempsey's strong right hand. He has, literally, walked into the punch.
It is much like participating in a crooked card game in which, one is assured, everyone is cheating. So why not take what comes one's way? But where an ordinary player is allowed to "get away" with $200, favored players somehow get away with $200,000, $2 million or even $20 million. The small players pay for this in the end.
Thus, as Mr. Stern ably shows, the variations from the posted schedules in what is paid increase very steeply as one rises in the tax brackets. Whereas the income below $5,000, calling for 20. 7 per cent of tax. , actually pays on the average 9 per cent ("What a steal! " we may imagine the simple man saying to himself), the income of 81 million and more calling for a viciously punitive 90. 1 per cent on the schedule (if it is taxable at all) actually pays on the average only 32. 3 per cent, and the incomes over $5 million pay only 24. 6 per cent. The demagogic arrangement of the rates conceals this.
Whereas the average under-$5,000 income receiver, who probably had to work hard for his paltry dollars, saved $274 by his allowable deviation from the posted rate, the average multi-millionaire taxpayer saved $5,990,181 below the apparent rate. While the small man was allowed to cut small corners by an apparent 50 per cent, perhaps to his intense satisfaction with a benign Congress, the recipient of $1 million cut big corners by 66 per cent, and the $5-miillion man by 75 per cent!
Put in other terms, bow much trouble would a person go to in order to chisel $274 and how much to chop out $5,990,181?
The Con-Game Pattern
What the many tax-deviation opportunities provided by Congress for the small payer are is what is known in the underworld as "the come on" or bait. It is especially used in the "con game," the essence of which consists of an approach to a formally respectable
person with an offer of great gain to be made by engaging in an operation that is safe but frankly shady. In the end the person being "conned" is tricked through his own illicit greed.
The tax laws, with their many deductions and exemptions, are thus (cynically? ) set up in the precise pattern of the "con game. " One is invited to step in and chisel on the government by availing oneself of the many small opportunities strewn about for chiselers. One takes up the invitation--or challenge--like Dempsey's strong man. One walks very confidently right into the punch.
Somewhat of an improvement over the "con game," however, most of the victims do not even suspect that it is they who are being unmercifully fleeced in the big delayed thrust.
Four Cases in Point
Mr. Stern dramatically shows what happens to four men who each received $7,000 annual income. A steel worker paid $1,282 in federal taxes after all deductions (not considering all the indirect taxes he has already paid in the market through prices). A man who got all his income from dividends paid only $992. 30. Another who sold shares at a profit of $7,000 paid only $526. A fourth who got his income from state and municipal government bonds paid no tax at all. The latter, incidentally, might have had the same tax-exempt status if he had invested in oil or mineral royalties. It hardly pays, as anyone can see, to work for wages. The tax laws thus grossly discriminate, at all times and in all directions, against salaried and wage workers. Grossly, grossly, grossly. . . .
The higher professionals are similarly brutally discriminated against--perhaps most brutally.
Let us take a busy, highly skilled, unmarried brain surgeon, his fees his sole source of income. If his income was $100,000 after all expenses, then his tax prior to 1964 was $67,320; after 1964 was $55,490. Another man, who sold (possibly inherited) shares at a profit of $100,000 since acquisition, paid only $22,590. A third, who got his income from state and municipal government bonds or possibly from oil or mineral royalties, paid no tax at all. Indeed, in some cases of remote participation in profitable mineral or cattle operations one may make a profit and have the government owing one money in tax credits!
All higher professionals with ample earned incomes are subject to the full force of the graduated tax laws, with the exception of persons in the entertainment field who may incorporate themselves, sell themselves as it "package" and come under the low-tax capital gains provisions.
Again, two men may each make $300,000, one by laboriously writing a best-selling novel, the other by inventing a trivial machine--perhaps, as Mr. Stern says, a new kind of pretzel-bender. The novelist must pay three times the tax of the machine maker.
The Question of Tax Exemption
Should there, first, be any absolute tax exemptions, as of the French nobility? In a national poll the majority answer to this question would probably be "No. " But what of religion? Ah, yes, most people would probably murmur, that surely ought to be exempt because it is "a good thing. " If one so agrees, the principle of total exemption is accepted, and can be applied elsewhere, as indeed it is. Actually, religion in any event could not be taxed by any government. What the so-called religious exemption boils down to in operation is the grant of tax-free status to beneficiaries of ecclesiastical investments. This is obviously something different from religion. While most of the
more than 200 sects own very little property and rank-and-file clergy, even in wealthy churches certainly are paid little, the managers of the heavily propertied ecclesiastical establishments gain from this provision, which splits them from the rest of the populace as accessories before the fact. The high-living upper ecclesiastics of the tax-favored churches are usually thick-and-thin pro-government men, upholding the pubpols in whatever they do. Naturally, they tell their communicants they ought to be glad to pay one-sided taxes and walk into cannon fire.
The leading property-holding church is the Catholic Church, although most Catholics are quite poor. An unusual feature of the Vietnam war, as widely noted, was the strong opposition to it of many American clergy. But, said, the New York Times, "The main exception to the general trend, of course, is the American hierarchy of the Roman Catholic Church, which has largely been silent or, in the case of several leaders such as Cardinal Spellman of New York, supported the war effort. The position of the American Catholic hierarchy, however, contrasts sharply with the peace efforts of Pope Paul. " 19
Cardinal Spellman, indeed, on television declared "My country right or wrong" in a strengthened version of Stephen Decatur's "In her intercourse with foreign nations may my. country always be in the right, but my country right or wrong. " Spellman was, evidently, a churchpol.
The Catholic Church similarly, in return for its retention of properties and privileges, was a strong supporter of the Hitler regime, even as tens of thousands of French, English and American Catholics fought to the death against German and Italian Catholics to depose him. 20 It has supported the dictator Franco in Spain, supported Mussolini in Italy. It supports, indeed, any government that gives its large investments tax exemption.
The pubpols of all nations, in short, get something in return--thick-and-thin support-- for the clerical tax exemption when it becomes substantial. And what the higher clergy doesn't pay, others must.
But although churches under American tax laws may and do operate businesses tax free, in competition with tax-collecting businesses, a university that does this is not tax exempt. Very evidently if a business does not have taxes levied on it, it is in a competitively favorable position pricewise. As the Catholic Church uniquely among churches does not issue financial statements, one does not really know how many investments and businesses it owns. In other cases the ownership is known. The tax base is constantly being narrowed by exemption of church property which, untaxed, is increasing.
The principle of total exemption now being established as the pipe organs thunder their approval, it can be extended to whatever else is designated as especially worthy. After religion, what is most worthy? Obviously, it is education. Anything that is educational now becomes tax exempt, and as "education" is a word very elastic in referential meaning it is found, in practice, to cover political propaganda. Organizations and radio stations that emit rightist political propaganda, such as those of oilmen H. L. Hunt and Hugh Roy Cullen, now become tax exempt. And so it goes.
What else is worthy of substantial exemption? As a sagacious Congress has decreed, the powerful oil industry, like religion and education, deserves from 27-1/2 per cent to 100 per cent tax exemption.
Meanwhile, for every exemption and deduction granted, in the low as well as high brackets, for every narrowing of the tax base, the tax squeeze must become more stringent elsewhere; for the government must get whatever money it says it needs. If the government granted complete tax exemption to everybody except one person it is
evident that this one person would have to supply the government with all the revenues it required!
The Baited Trap
In order to set the public up for the big tax swindle, the proceeds of which accrue only to the wealthy elements, the government must dangle before it various obvious injustices in which it participates as a beneficiary. The public is, thus, "conned" into a baited trap.
The first, as noted, is the religious exemption (which turns out to be of generalized service as well to propagandists, investors in local government bonds and oil men). But it sounds good to the rank-and-file, who see it as some kind of blow against vicious atheists and freethinkers (all, oddly, created by an all-powerful God).
But, among those paying taxes, the next division takes place between single and married people. In con men's language this is known as "sweetening" the "set up," and is only the beginning of the process. As married people constitute more than 60 per cent of the adult populace, Congress obviously has a majority on its side in discriminating against the single. One should notice again the use of the principle of divide and rule.
Taxwise, the apparent remedy of the single is to get married, but as a practical matter everybody is married who feels able to be married. Those disabled from marriage for one reason or another are simply taxed more heavily.
Thus, under the 1965 tax law, as under previous laws, the taxable income of the single person incurs an initial tax at a much lower sum.
The tax of a single person using the tax tables begins at $900 of actual income, that of a married couple at $1,600. On the first $500 of taxable income (1966), after all deductions, the single person pays 14 per cent; the married couple pays 14 per cent on the first $1,000. Whereas the married couple pays $140 on the first $1,000 of taxable income (after all deductions) the single person pays $145. The disparity gains force as one ascends the tax ladder. On a taxable income of $8,000 the single person incurs a tax of $1,630, the married person only $1,380. On $20,000 the single person pays $6,070, the married person $4,380.
While what the average married person saves on the lower brackets compared with the single person is not enough to maintain a spouse, as one ascends the brackets one finds the tax saving alone can maintain one very well. Congress does not favor marriage through taxes by very much, as will appear, but it does favor marriages by rich people.
Congressional tax favors wherever they fall, do not actually fall according to the stated category but invariably fall according to the category of greater wealth.
This becomes apparent in the $50,000-bracket, where the single man pays $22,590 on taxable income (after all deductions) but the married man pays only $17,060, an advantage of $5,530, enough to support his wife. But at $100,000 of taxable income the wealthy man gets more than ample support for his wife, for he pays $45,180 while the single man pays $55,490. Even a girl with a healthy appetite can be maintained very well on the differential of $10,310.
Before proceeding, the reader should be warned not to pay too much attention to the fact that $50,000 incomes pay $22,590 and $17,060 of taxes respectively for single and married persons. These seem like rather substantial rates. But this is on taxable income. We have yet to come to wholly nontaxable incomes.
Mr. Stern argues that taxes ought to be the same for married and single persons. But married people and parents apparently feel there is something onerous about their condition, for which they require a tax concession. Congress lets on that it agrees, gives
them a minor concession and then belts them down to the floor by fantastically widening the concession for wealthy people!
Married people get a deduction not enjoyed by the single if they have children. Each child is good for a deduction of $600, which to many seems fair, as children are expensive. But the expense of maintaining children is not proportionately as great in the upper brackets, where the deduction broadens in value with the formal tax rate--the usual story.
Valuable Wives
In the upper income stratosphere, wives (or husbands for wealthy women) are extremely valuable, as Stern shows in detail.
Here is the cash asset value of a spouse at different taxable income levels under pre- 1964 law (it is only slightly less now):
Taxable Income
$10,000. 00
25,000. 00
75,000. 00
100,000. 00
445,777. 78
Asset Value of Spouse
$11,818. 25
131,931. 75
1,000,000. 00
1,891,875. 00
5,996,994. 00
But at $1 million of income, the capital value of a spouse, oddly, begins to decline, as follows:
Taxable Income
$1,000,000. 00
$1,399,555. 55 and higher
Under $2,889. 00
Asset Value of Spouse
$2,7166,153. 75
Zero
Zero
The point about capitalizing a wife in these ways is that one can compute at going rates of return what a wife is worth to one in yearly retained income The wife capitalized at a value of $1 million at 4 per cent is worth $40,000 a year in income to her husband; the $6,996,994--wife is good for $279,877.
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. The champion's left glove flicked stingingly into his face and was instantly followed by a powerful right cross to the jaw. The strong man, without ever having landed a blow, sank unconscious to the floor.
The audience sat bewildered. They had just seen a champion against a novice.
Dempsey figures in this story as the politician, the controlling element, and the strong man symbolizes the people. The governmental method used by Dempsey was that of letting them come to you and then belting them.
This method alone does not work with large groups. With them it is necessary to play either on their inherent divisiveness or to divide them arbitrarily in order to rule. This Napoleonic method is well exemplified in the tax laws, which divide and subdivide the populace into many bits and shreds. It is Napoleonic because the general strategy of the little Corsican was to strike successively each section of divided forces with his full, massed force.
Government uses these methods, it should be noticed, when the public is reluctant or unwilling. Apart from taxation, it is used to good effect in conscription. Let us briefly examine it there in order better to understand the tax outcome, which otherwise, in the absence of a hostile conquering force, is inexplicable.
Most men are instinctively reluctant to serve in the armed forces, where one may be killed or maimed. We know this because, if they were not, all they would have to do is to join at any of the many recruiting stations scattered around. Most of them must be ordered to serve.
If, as in World War II, the government wants some thirteen million men it is obviously difficult to order them forward all at once, risking the political ire of such a multitude. Again, government at no time possesses the manpower to force thirteen million to obey. The FBI, resourceful though it is, could hardly cope with this situation.
The government here brings into play two tactics--Dempsey's lethal punch and the doctrine of divide-and-rule.
First the government divides the manpower into classes--by ages and by marital and parental status. It then summons first those who are politically and psychologically weakest, the single youths aged eighteen to twenty-one who don't even have the vote. Excepting the few true-blue patriots and excitement-hunters who rush to the recruiting offices, all others, thankfully feeling they have been excused from danger, cheer in approval and tell the bewildered youngsters they are only doing their patriotic duty; older men and women hurry off, like often-criticized Germans, to better-paying jobs in munitions plants. Next to be summoned are single men aged twenty-one to twenty-five, while married men approvingly urge the victims on. For the government gets much assistance from that part of the populace it is not at the moment corralling. Any of those who have shown strong signs of not wishing to go are shouted down by their fellow men, shamed. Some who have watched and cheered the process meanwhile have rushed off to get married to the first unattached female they could find; for the government, it seems, has a soft spot in its heart for married men--whom it is not calling.
But now, with a considerable force in training under arms, the government has enough men to deal handily with any late-showing dawdlers. Moreover, the men under arms feel scant sympathy for those who have not been called. The conscript army would, in fact, relish an order to go and get them at bayonet point. As in a wrestling match, the weight has been shifted. Where at first the forward-thrust of weight was with those not called, who chivvied the tender youths into service, this weight has now shifted to the youths under arms who now regard others as slackers and are ready to kill on command. The slackers are summoned--first the battle-shy married men and then those stalwarts with children up to a dozen and beyond.
On the battle line, finally, one finds single men eighteen to forty-five and married men with a dozen or more children--men wearing glasses, with fallen arches, flat feet, no teeth and leaky hearts. As the rule was finally explicated by the soldiers themselves in World War II, "if you can walk, you're in. " They are now all, as the soldiers themselves pronounced, "dogfaces," nobodies. (They were that, too, in civilian life but didn't know it. )
Most of the populace initially acquiesced in this process because it seemed that somebody else was going to be soaked. On this basis they gave their full-hearted consent to the process that finally snared them.
A similar technique is used with respect to the imposition of unfair taxes. For it always appears in reading the tax laws that somebody else is going to be soaked, or at least soaked more than the reader. Does it not clearly appear that some are going to be soaked
up to perhaps 91 per cent? On $1 million of income, that is $910,000, leaving the bloody no-good bastard only $90,000 or about twenty times too much. Three cheers for Congress!
The tax laws divide people into many more groups than the conscription laws. There are, first, the single, the married, the married with children and the heads of households; next come minor students, adults and persons over sixty-five. Those over sixty-five retired and unretired, with and without income, blind or still with vision. But this is only the beginning. People are divided also according to sources of income. The basic division is between earned and unearned income, the latter of many varieties. But there is also taxable and non-taxable income, foreign and domestic income, etc.
While to the general public the basic division appears to be between single and child- blessed married persons, the true basic division is between earned and unearned income. It is invariably true that earned income is taxed most heavily, unearned or property- derived income most lightly down to nothing at all.
But the average taxpayer is quickly made to feel that he is getting away with something at someone else's expense, that he is, as Mr. Stern says, a "tax deviate. " The way the laws are drawn most of us are forced into being tax deviates. The only persons who cannot qualify are single persons with earned incomes, some seven million individuals. They are the low men on the tax totem pole.
The government encourages everyone to feel he is getting away with something by advising all to be sure to take all the deductions--exemptions they are entitled to on the Labyrinthian tax form. And they are many. After correctly filling out this form the average taxpayer has the delicious feeling that he has once again outwitted a grasping bureaucracy. But he has only succumbed to Jack Dempsey's strong right hand. He has, literally, walked into the punch.
It is much like participating in a crooked card game in which, one is assured, everyone is cheating. So why not take what comes one's way? But where an ordinary player is allowed to "get away" with $200, favored players somehow get away with $200,000, $2 million or even $20 million. The small players pay for this in the end.
Thus, as Mr. Stern ably shows, the variations from the posted schedules in what is paid increase very steeply as one rises in the tax brackets. Whereas the income below $5,000, calling for 20. 7 per cent of tax. , actually pays on the average 9 per cent ("What a steal! " we may imagine the simple man saying to himself), the income of 81 million and more calling for a viciously punitive 90. 1 per cent on the schedule (if it is taxable at all) actually pays on the average only 32. 3 per cent, and the incomes over $5 million pay only 24. 6 per cent. The demagogic arrangement of the rates conceals this.
Whereas the average under-$5,000 income receiver, who probably had to work hard for his paltry dollars, saved $274 by his allowable deviation from the posted rate, the average multi-millionaire taxpayer saved $5,990,181 below the apparent rate. While the small man was allowed to cut small corners by an apparent 50 per cent, perhaps to his intense satisfaction with a benign Congress, the recipient of $1 million cut big corners by 66 per cent, and the $5-miillion man by 75 per cent!
Put in other terms, bow much trouble would a person go to in order to chisel $274 and how much to chop out $5,990,181?
The Con-Game Pattern
What the many tax-deviation opportunities provided by Congress for the small payer are is what is known in the underworld as "the come on" or bait. It is especially used in the "con game," the essence of which consists of an approach to a formally respectable
person with an offer of great gain to be made by engaging in an operation that is safe but frankly shady. In the end the person being "conned" is tricked through his own illicit greed.
The tax laws, with their many deductions and exemptions, are thus (cynically? ) set up in the precise pattern of the "con game. " One is invited to step in and chisel on the government by availing oneself of the many small opportunities strewn about for chiselers. One takes up the invitation--or challenge--like Dempsey's strong man. One walks very confidently right into the punch.
Somewhat of an improvement over the "con game," however, most of the victims do not even suspect that it is they who are being unmercifully fleeced in the big delayed thrust.
Four Cases in Point
Mr. Stern dramatically shows what happens to four men who each received $7,000 annual income. A steel worker paid $1,282 in federal taxes after all deductions (not considering all the indirect taxes he has already paid in the market through prices). A man who got all his income from dividends paid only $992. 30. Another who sold shares at a profit of $7,000 paid only $526. A fourth who got his income from state and municipal government bonds paid no tax at all. The latter, incidentally, might have had the same tax-exempt status if he had invested in oil or mineral royalties. It hardly pays, as anyone can see, to work for wages. The tax laws thus grossly discriminate, at all times and in all directions, against salaried and wage workers. Grossly, grossly, grossly. . . .
The higher professionals are similarly brutally discriminated against--perhaps most brutally.
Let us take a busy, highly skilled, unmarried brain surgeon, his fees his sole source of income. If his income was $100,000 after all expenses, then his tax prior to 1964 was $67,320; after 1964 was $55,490. Another man, who sold (possibly inherited) shares at a profit of $100,000 since acquisition, paid only $22,590. A third, who got his income from state and municipal government bonds or possibly from oil or mineral royalties, paid no tax at all. Indeed, in some cases of remote participation in profitable mineral or cattle operations one may make a profit and have the government owing one money in tax credits!
All higher professionals with ample earned incomes are subject to the full force of the graduated tax laws, with the exception of persons in the entertainment field who may incorporate themselves, sell themselves as it "package" and come under the low-tax capital gains provisions.
Again, two men may each make $300,000, one by laboriously writing a best-selling novel, the other by inventing a trivial machine--perhaps, as Mr. Stern says, a new kind of pretzel-bender. The novelist must pay three times the tax of the machine maker.
The Question of Tax Exemption
Should there, first, be any absolute tax exemptions, as of the French nobility? In a national poll the majority answer to this question would probably be "No. " But what of religion? Ah, yes, most people would probably murmur, that surely ought to be exempt because it is "a good thing. " If one so agrees, the principle of total exemption is accepted, and can be applied elsewhere, as indeed it is. Actually, religion in any event could not be taxed by any government. What the so-called religious exemption boils down to in operation is the grant of tax-free status to beneficiaries of ecclesiastical investments. This is obviously something different from religion. While most of the
more than 200 sects own very little property and rank-and-file clergy, even in wealthy churches certainly are paid little, the managers of the heavily propertied ecclesiastical establishments gain from this provision, which splits them from the rest of the populace as accessories before the fact. The high-living upper ecclesiastics of the tax-favored churches are usually thick-and-thin pro-government men, upholding the pubpols in whatever they do. Naturally, they tell their communicants they ought to be glad to pay one-sided taxes and walk into cannon fire.
The leading property-holding church is the Catholic Church, although most Catholics are quite poor. An unusual feature of the Vietnam war, as widely noted, was the strong opposition to it of many American clergy. But, said, the New York Times, "The main exception to the general trend, of course, is the American hierarchy of the Roman Catholic Church, which has largely been silent or, in the case of several leaders such as Cardinal Spellman of New York, supported the war effort. The position of the American Catholic hierarchy, however, contrasts sharply with the peace efforts of Pope Paul. " 19
Cardinal Spellman, indeed, on television declared "My country right or wrong" in a strengthened version of Stephen Decatur's "In her intercourse with foreign nations may my. country always be in the right, but my country right or wrong. " Spellman was, evidently, a churchpol.
The Catholic Church similarly, in return for its retention of properties and privileges, was a strong supporter of the Hitler regime, even as tens of thousands of French, English and American Catholics fought to the death against German and Italian Catholics to depose him. 20 It has supported the dictator Franco in Spain, supported Mussolini in Italy. It supports, indeed, any government that gives its large investments tax exemption.
The pubpols of all nations, in short, get something in return--thick-and-thin support-- for the clerical tax exemption when it becomes substantial. And what the higher clergy doesn't pay, others must.
But although churches under American tax laws may and do operate businesses tax free, in competition with tax-collecting businesses, a university that does this is not tax exempt. Very evidently if a business does not have taxes levied on it, it is in a competitively favorable position pricewise. As the Catholic Church uniquely among churches does not issue financial statements, one does not really know how many investments and businesses it owns. In other cases the ownership is known. The tax base is constantly being narrowed by exemption of church property which, untaxed, is increasing.
The principle of total exemption now being established as the pipe organs thunder their approval, it can be extended to whatever else is designated as especially worthy. After religion, what is most worthy? Obviously, it is education. Anything that is educational now becomes tax exempt, and as "education" is a word very elastic in referential meaning it is found, in practice, to cover political propaganda. Organizations and radio stations that emit rightist political propaganda, such as those of oilmen H. L. Hunt and Hugh Roy Cullen, now become tax exempt. And so it goes.
What else is worthy of substantial exemption? As a sagacious Congress has decreed, the powerful oil industry, like religion and education, deserves from 27-1/2 per cent to 100 per cent tax exemption.
Meanwhile, for every exemption and deduction granted, in the low as well as high brackets, for every narrowing of the tax base, the tax squeeze must become more stringent elsewhere; for the government must get whatever money it says it needs. If the government granted complete tax exemption to everybody except one person it is
evident that this one person would have to supply the government with all the revenues it required!
The Baited Trap
In order to set the public up for the big tax swindle, the proceeds of which accrue only to the wealthy elements, the government must dangle before it various obvious injustices in which it participates as a beneficiary. The public is, thus, "conned" into a baited trap.
The first, as noted, is the religious exemption (which turns out to be of generalized service as well to propagandists, investors in local government bonds and oil men). But it sounds good to the rank-and-file, who see it as some kind of blow against vicious atheists and freethinkers (all, oddly, created by an all-powerful God).
But, among those paying taxes, the next division takes place between single and married people. In con men's language this is known as "sweetening" the "set up," and is only the beginning of the process. As married people constitute more than 60 per cent of the adult populace, Congress obviously has a majority on its side in discriminating against the single. One should notice again the use of the principle of divide and rule.
Taxwise, the apparent remedy of the single is to get married, but as a practical matter everybody is married who feels able to be married. Those disabled from marriage for one reason or another are simply taxed more heavily.
Thus, under the 1965 tax law, as under previous laws, the taxable income of the single person incurs an initial tax at a much lower sum.
The tax of a single person using the tax tables begins at $900 of actual income, that of a married couple at $1,600. On the first $500 of taxable income (1966), after all deductions, the single person pays 14 per cent; the married couple pays 14 per cent on the first $1,000. Whereas the married couple pays $140 on the first $1,000 of taxable income (after all deductions) the single person pays $145. The disparity gains force as one ascends the tax ladder. On a taxable income of $8,000 the single person incurs a tax of $1,630, the married person only $1,380. On $20,000 the single person pays $6,070, the married person $4,380.
While what the average married person saves on the lower brackets compared with the single person is not enough to maintain a spouse, as one ascends the brackets one finds the tax saving alone can maintain one very well. Congress does not favor marriage through taxes by very much, as will appear, but it does favor marriages by rich people.
Congressional tax favors wherever they fall, do not actually fall according to the stated category but invariably fall according to the category of greater wealth.
This becomes apparent in the $50,000-bracket, where the single man pays $22,590 on taxable income (after all deductions) but the married man pays only $17,060, an advantage of $5,530, enough to support his wife. But at $100,000 of taxable income the wealthy man gets more than ample support for his wife, for he pays $45,180 while the single man pays $55,490. Even a girl with a healthy appetite can be maintained very well on the differential of $10,310.
Before proceeding, the reader should be warned not to pay too much attention to the fact that $50,000 incomes pay $22,590 and $17,060 of taxes respectively for single and married persons. These seem like rather substantial rates. But this is on taxable income. We have yet to come to wholly nontaxable incomes.
Mr. Stern argues that taxes ought to be the same for married and single persons. But married people and parents apparently feel there is something onerous about their condition, for which they require a tax concession. Congress lets on that it agrees, gives
them a minor concession and then belts them down to the floor by fantastically widening the concession for wealthy people!
Married people get a deduction not enjoyed by the single if they have children. Each child is good for a deduction of $600, which to many seems fair, as children are expensive. But the expense of maintaining children is not proportionately as great in the upper brackets, where the deduction broadens in value with the formal tax rate--the usual story.
Valuable Wives
In the upper income stratosphere, wives (or husbands for wealthy women) are extremely valuable, as Stern shows in detail.
Here is the cash asset value of a spouse at different taxable income levels under pre- 1964 law (it is only slightly less now):
Taxable Income
$10,000. 00
25,000. 00
75,000. 00
100,000. 00
445,777. 78
Asset Value of Spouse
$11,818. 25
131,931. 75
1,000,000. 00
1,891,875. 00
5,996,994. 00
But at $1 million of income, the capital value of a spouse, oddly, begins to decline, as follows:
Taxable Income
$1,000,000. 00
$1,399,555. 55 and higher
Under $2,889. 00
Asset Value of Spouse
$2,7166,153. 75
Zero
Zero
The point about capitalizing a wife in these ways is that one can compute at going rates of return what a wife is worth to one in yearly retained income The wife capitalized at a value of $1 million at 4 per cent is worth $40,000 a year in income to her husband; the $6,996,994--wife is good for $279,877.
