The 50-Year Swindle

by Ben Bagdikian

The Progressive magazine, April 2002

The Enron scandal is simply a case of the big guys making it easier to dramatize the bag of tricks that hundreds of members of the Fortune 500 dip into all the time. As far as mainstream media were concerned, these, by and large, were arcane matters of international trade and finance-nothing to worry the citizenry about. But when reports surfaced that Enron did not pay corporate income taxes in four of the last five years, suddenly The New York Times managed to put on page one a story noting that a "growing percentage of large companies pay no income taxes."

If Secretary of the Treasury Paul O'Neill has his way, that percentage will grow to 100 percent, since he favors abolishing corporate income taxes. What would this mean for average American taxpayers? Simple, he says. The ordinary taxpayers would make the usual payments. On top of that, they would pay what would have been the corporations' taxes. Continuing to tax corporations, O'Neill told the Financial Times, is "an abomination."

O'Neill's candor is almost touching. "Abolishing the corporate tax would inevitably lead to higher personal income tax," the Financial Times of London reported on May 20, 2001, after interviewing him, "but Mr. O'Neill believes such a move would reduce the overall tax burden and promote economic growth."

His absolutist vision sounds radical, but it really isn't. It is merely the logical last step in a fifty-year process of successful corporate lobbying. Year by year during the last half of the twentieth century, Congress and the Internal Revenue Service have shifted the national tax burden away from corporations and onto the backs of individuals and families.

The numbers are painfully simple. After World War II, corporations and individuals carried the tax burden together. Year by year, this has been altered until the corporate-individual split is now closer to 20-to-80-and guess who pays the 80 percent?

In 1953, if you count only income taxes, not various other excises, sales taxes, and special duties, individuals and families paid 59 percent of federal revenues and corporations 41 percent, according to The Statistical Abstract of the United States. By the latest confirmed figures in the Abstract, the corporate share has dropped from 41 to 20 percent, while that of individuals has increased from 59 to 80 percent.

Part of the fifty-year stealth attack has been the compression of the progressive income tax brackets. Today there is the smallest difference in our income tax history between the rates paid by unrich individuals and those paid by corporations and the wealthy. Until the Reagan Administration, the top rate had been 70 percent. Reagan got the official top rate down to 50 percent. The top rate is now 39.6 percent, but like the top bracket historically, those individuals and corporations rich enough to be in that bracket seldom pay that rate because they can afford the most skilled accountants to avoid taxes. Bus drivers and store clerks, like millions of other ordinary taxpayers, seldom own subsidiaries in the Cayman Islands or have the huge deductions of "foreign tax credits."

The income tax history in our time has, with the silence of most of the news media, shifted the burden regressively to sales taxes, which hit the disposable income of ordinary families the hardest. As local sales and property taxes have grown to carry the national burden, it has caused state and local tax rebellions. The most notorious was Proposition 13 in California, which froze property taxes and created havoc with the California civic system. For example, the state's student achievements that, pre-Proposition 13, were among the highest in the country are now among the lowest.

The problem is not just in California. It is national. The corporate tax con game required shifts to sales taxes in a growing number of states and in ever-higher percentages. The shifts have created immeasurable local and state hardships all over the country, starved our local educational systems, and left a permanent crisis in the economics of American cities and counties.

On the flip side, it has made corporations steadily larger and more powerful. This has led to the "legal corruption" of huge campaign contributions that accelerated the ability of corporations to avoid more and more of their responsibility for keeping the country's civic system in decent economic health.

The half-century of stealth attacks have had the insidious effect of conditioning most of the public to accept seemingly unconnected annual changes that, with time, look like acts of God or some force of economics beyond human intervention.

Throughout our history, taxes have been the favorite whipping boy of editorial cartoons and political stump speeches. It's a safe subject for candidates because few people really love to pay taxes. But by treating taxes generically as a sin with simplistic sound bites, politicians undercut the importance of providing the federal funds for services needed by the country's communities and families.

This sloganeering represents a disconnection between fairly distributed taxes and what the majority of the public says it wants from its government-good educational systems for their children, universal health care, adequate affordable housing for the whole population, and properly financed civic services like public health regulations and safe streets.

"It's your money," said President Bush.

Yes, Mr. President, but that money is also what buys our schools, our health system, and is supposed to subsidize a decent level of affordable low-cost homes. Not all of us can, like you, go to Walter Reed Army Hospital and pay nothing when we're sick, or have special health coverage like every member of Congress.

And isn't it true, Mr. President, that it's also our money that's paying the Department of Defense bills, and that will be paying for the world's most thoroughly proven rat hole of federal funds: Star Wars revisited, your idea of building a "nuclear shield" over America? Isn't it our money that will be covering all the other costs of your abandonment of the ABM treaty and your contempt for the danger of global warming? And isn't it also our money that paid for Vice President Dick Cheney's Energy Commission, whose contents and consultants he will not disclose?

Why do I have the sneaking suspicion that, while President Bush tells us all that "It's your money," he is giving "our money" to some of his corporate friends?

By now, in the American political lexicon, all taxes are bad, bad, bad. When localities and states have to raise taxes for indispensable services, the bills or referenda have to be written in Orwellian English, perform semantic acrobatics, or entail a kind of legislative Choctaw that embeds new taxes in phrases only a certified public accountant could love.

Most proposals that seem to spread the tax burden more fairly are quietly perforated with myriad arcane loopholes for the wealthy and corporations. They simply achieve the giveaway in language that conceals rather than clarifies. Or sometimes the government decides to offer some new public service by making it cost-free because people can pay for it and then get their money back by using it as a tax deduction. The problem is that the service is useful only to those with high taxes, because those are the people who can make deductions.

According to the General Accounting Office, 42 percent of all taxpayers use the single-page Forms 1040EZ or 1040A, with no deductions. Most of these taxpayers are the ones most in need of many of the new services.

The big swindle that shifts taxes from corporations to individuals is concealed by another myth that politicians keep drumming into the American consciousness: The citizens of the United States are being crushed by ever-rising tax burdens. We are told that we're all taxed to the eyebrows and this must be changed. It is almost mandatory rhetoric in every election campaign.

But, according to the Century Foundation (formerly the middle-of -the-road Twentieth Century Fund) and the Organization for Economic Cooperation and Development (OECD), of all the industrialized democracies, the United States is near the bottom in paying taxes when calculated as a percentage of the country's total wealth, its Gross Domestic Product. Our total taxes as percentage of our GDP are 29.7 percent, Britain's are 33.6 percent; Canada's are 33.6 percent; Germany's are 39 percent; and Sweden's are 49.9 percent. If that makes us feel lucky, we need to add that all those other countries provide health, housing, and other services we do not.

Despite all that, the gravy train for corporations seems never to end. Last year, the Bush IRS offered amnesty to big companies that will admit they committed a crime by hiding revenues in illegal tax shelters. Ninety-five companies admitted they had cheated the country of $15 billion, and the IRS said there were an estimated 413 other illegal shelters remaining. No penalties. Ordinary taxpayers should be so lucky.

As a result, with the passage of time, what would have been unthinkable a generation ago was seriously proposed by Bush last year: The government actually paying back corporations in real dollars what had been the corporations' legally paid taxes for the past fifteen years. Touted by President George W. Bush as an imaginative "tax reform" to create jobs ( joblessness has been increasing ever since), the proposal that passed the House would have paid back fifteen years of the Alternative Minimum Tax. The government imposed the tax years ago on corporations that made healthy profits but sheltered their incomes to avoid taxes and even get rebates. The House bill would have rebated $1.4 billion for IBM, $833 million for General Motors, $671 million for General Electric, $572 million for Chevron Texaco, and $254 million for Enron, among others.

While that bill did not pass the Senate, corporations can look to the courts for a helping hand. This year a New Orleans appellate court decision in a case involving Compaq computers made It easier than ever for corporations to find even more tax shelters for avoidance. The court reduced the number of deals that the IRS can categorize as having been done with the sole purpose of avoiding taxes. David A. Weisbach, a professor of law at the University of Chicago (not an institution famous for wild liberals), called the decision "disastrous" because other corporations will use the decision to avoid their share of taxes.

A specific method of corporate tax avoidance came o me twenty years ago when I got a phone call from Ed Roby, a UPI financial correspondent in Washington. In his annual study of corporate revenues for the year, Roby noticed that American oil companies had extraordinarily low tax rates considering their large revenues. When he probed, he discovered something that cost him his beat.

In the early 1950s, the Saudi royal family, from whom we imported most of our oil, realized that after World War II the American love affair with the automobile and industry's dependence on fossil fuels knew no bounds. It was at the same time that the Saudi royal family was having a growth of sisters and brothers and cousins and aunts and uncles, each with a desire for billions a year in pocket change.

The royals had been charging Aramco, the U.S. oil consortium, 12 percent royalties, so they raised that to 50 percent. Aramco, alarmed, made a deal with the Saudis: Don't call them "royalties" any longer; call them "income taxes." That way the U.S. companies could deduct income taxes paid to a foreign country from their U.S. taxes. Thus, the Saudi royal family, along with their favorite contractors, like Osama bin Laden's father, became incomparably richer with their 12-to-50 percent increase, and American oil companies got a windfall from the spectacular low tax rate that caught Ed Roby's eye.

When Roby put his story on the wire, Mobil and other oil companies organized a publicity assault on Roby personally and on UPI as his employer. The coordinated attacks so rattled UPI that it took Roby off the financial beat. Eventually Roby left the news service.

There has been one small change for the better. While the White House and our courts have made it easier for corporations to avoid taxes, a touch of relief has come from, of all unlikely sources, the World Trade Organization, of which the United States is a party. At a recent meeting in Geneva, the WTO said that the extent of tax havens for American corporations was so huge that global firms like General Electric, General Motors, Microsoft, and Boeing escaped more than $4 billion in taxes. According to The New York Times, the WTO said it amounted to an illegal government subsidy to those corporations. The action was affirmed by Pascal Lamy, Trade Commissioner of the European Union. It has become the largest trade case in history.

It is a sad time when our own government is so eager to forgive corporate taxes that we have to depend on the WTO, a group of global bankers and financiers, to cry, "Foul!"

We need not look to the WTO to be our white-hat hero riding to correct the tax injustice that befalls American citizens. Instead, we should rely on popular public protest. We need to pressure candidates during campaigns, and keep that pressure on once they are in office.

The time has come to end the fifty-year stealth campaign that has swindled the public and hornswaggled the news media, that has permitted politicians to prattle on about "tax reform" and then continue to cheat the majority of ordinary Citizens every April 15.

Ben Bagdikian is the author of "The Media Monopoly" (Beacon Press, sixth edition, 1997), a former dean of the Graduate School of Journalism at the University of California-Berkeley.

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