Our Unjust Tax Code

Bill and Ted both make $100,000 a year, each have a wife who isn’t working so they can stay home with their one year old child. Bill works for a big company and handles their computers and network, sometimes he works 60 hours a week. Ted’s income comes from his stock portfolio. Since they make the same amount of money each year and have the same number of dependents you’d think they would pay the same amount of federal income tax, but you’d be wrong. Ted’s income is taxed at a lower percentage because the federal tax code privileges capital gains with a lower rate. While this has been a problem for decades the Trump tax “reform” of 2017 made it worse. 

Of course much of the rhetoric surrounding work and taxes claims that poor people don’t pay enough taxes and those who get jobless benefits are the problem when in reality it is the very wealthiest among us who not only don’t pay their fair share they use their wealth to actively push to increase the differential. The very wealthy make campaign donations for the maximum allowed by law, then they setup dark money groups to donate more and run their own ads pushing their chosen candidates. The only things the wealthy ask in return for their largesse is that their privileged tax rate continue and the Internal Revenue Service be underfunded so it doesn’t have the staff to audit them and take them to court.

People like you and me, who work hard all day to actually earn our money, pay more in taxes than people who just sit back and collect a check.

Republicans campaigning for midterm elections in 2022 are claiming that the Trump tax cut in 2017 was a great success. They claim wages went up and unemployment went down because the corporate tax cut created a demand for labor that helped disadvantaged groups. The truth is that the unemployment rate has been going down from 2010 to the beginning of the pandemic 10 years later. Nothing remarkable happened in 2017, 2018, or 2019 other than continuing the trend that had been going on for years. 

The 2017 tax law also includes incentives for investing in plants and facilities outside of the United States. Didn’t Republicans claim they were all about “America First”? Those incentives are in the tax code because Republican donors told them to include it. Republicans are not about “America First”, they are about campaign donors first. The only people the Trump tax plan was good for were the small number who fund the political campaigns of the people who voted for it. When pushing the tax bill Republicans claimed that companies that are actually overseas and happen to do incidental business in the United States shouldn’t have to pay taxes. The defined the tax code based such that the higher the percentage of physical stuff a company has outside of the United States the lower taxes they have to pay. That gave every company an incentive to move as much physical plant and equipment overseas as possible.

ProPublica, the non-profit public interest journalism organization, recently published a number of articles on how our tax code and the Internal Revenue Service have been undermined. While Trumps big tax bill was the latest injury Republicans aren’t the only ones who have favored their big campaign donors with tax breaks. On the positive side Joe Biden is pushing to raise taxes on capital gains and revitalize the IRS so that it can audit more of the wealthy people who are not paying their taxes.

Published in the Seguin Gazette - June 16, 2021

Wealthiest Do Most Tax Evasion

As Tax Day approaches it’s appropriate to think about how the wealthiest among us escape paying their fair share. We can argue over whether there ought to be brackets with higher rates than the current 37% on earnings over $600,000. What I doubt anyone will argue with is need to close the loopholes and tax dodges that high earners use to avoid paying even the current rates.

Propublica, the nonprofit newsroom based in New York, published an article recently discussing this very issue. They found that it is virtually impossible to enforce the tax code against millionaires due to the ability to create complex transactions and the army of attorneys and accountants they can muster to defend and obfuscate those transactions.

In 2016 the Internal Revenue Service determined a wealthy individual named Georg Schaeffler had engaged in abusive tax maneuvers. He stood accused of masking about $5 billion in income. The IRS wanted over $1.2 billion in back taxes and penalties. Schaeffler, is the billionaire heir of a family-owned German manufacturer.

A crack team of specialists formed in 2009 was assigned to the case and embarked on a contentious audit of Schaeffler in 2012. But after seven years of grinding bureaucratic combat in which they were outnumbered by Schaeffler's attorneys and accountants, the IRS abandoned its campaign. The agency informed Schaeffler’s lawyers it was willing to accept just tens of millions, according to a person familiar with the audit.

Shortly after the IRS formed its special team to go after tax cheats like Schaeffler Republicans in Congress began slashing the agency’s budget. The team didn’t receive the resources it was promised and needed in order to do battle with teams like those Schaeffler hired. Since then thousands of IRS employees have left the agency, especially those with expertise in complex audits, the kinds of specialists necessary to staff such an elite unit. The agency had planned to assign 242 examiners to the group by 2012, according to a report by the IRS’ inspector general. But by 2014, it had only 96 auditors. By last year, the number had fallen to 58.

Here’s why this is some important and why you and I have a right to be angry. Studies show that the wealthiest are more likely to avoid paying taxes. Those earning in the top 0.5 percent in income, or $500,000 to $19,000,000, account for fully a fifth of all the underreported income, according to a 2010 study by the IRS’ Andrew Johns and the University of Michigan’s Joel Slemrod. After adjusting for inflation, that’s more than $50 billion in unpaid taxes for 2017 out of a total of $1,587 billion. That’s an average of $62,500 in underreported income per member of the top 0.5 percent. Another way to look at it is they’re underreporting more than the average American worker earns in a year and they’re getting away with it.

While I’d like to say it’s all the Republicans’ fault I have to be honest and admit that there are plenty of Democrats taking campaign donations from those advocating for special tax loopholes that their clients can use to skip out on paying their fair share. We have a bi-partisan problem that is created and exploited by our campaign finance system. When wealthy people do most of the donating then it’s mostly wealthy people our elected officials listen to. Ultimately the only fix for this is public financing of campaigns. In the short term consider donating $5 or $10 to presidential candidates like Elizabeth Warren and Bernie Sanders who promise not to take money from political action committees.

Published in the Seguin Gazette - April 12, 2019