Wednesday, September 17, 2014
Inquirer Daily News

America's two-class tax system

Records bear out that corporations and the wealthy live by a different set of U.S. rules from everyone else.

Donald L. Barlett, left, and James B. Steele are revisiting "America: What Went Wrong," their landmark 1991 series in the Inquirer, in a new project with the Investigative Reporting Workshop. Over the next year, the project team will examine how four decades of public policy has shaped America´s ongoing economic crisis.
Donald L. Barlett, left, and James B. Steele are revisiting "America: What Went Wrong," their landmark 1991 series in the Inquirer, in a new project with the Investigative Reporting Workshop. Over the next year, the project team will examine how four decades of public policy has shaped America's ongoing economic crisis.

Eric Cantor, who has represented a section of Richmond, Va., in Congress since 2001 and now is the House majority leader, appears to want to craft a permanent U.S. tax system that caters exclusively to those at the top. So does Michele Bachmann, the Republican representative from Minnesota, a onetime tax lawyer who hopes to make a run for the White House. Likewise, Tim Pawlenty, the former two-term Republican governor of Minnesota, who also sees himself sitting in the Oval Office. Needless to say, none state their proposals like that. But that's the way their numbers and provisions add up.

Like others in Congress and the media, Cantor, Bachmann, and Pawlenty insist that American businesses are paying too much in corporate income tax. They claim the onerous tax burden is killing jobs and forcing companies to move abroad. To reverse the nation's fortunes, they say, all Washington need do is slash the corporate tax rate, thereby reducing the amount of taxes these businesses are forced to pay. What's scary is a growing number of citizens believe them.

That means a forecast made years ago by William J. Casey, a wily Republican from another era who liked to dabble in the intelligence world's black arts inside and outside the country, and who helped craft the election of Ronald Reagan, is coming true. After taking office, President Reagan installed Casey as head of the CIA in 1981. After his first staff meeting at the agency, Casey was quoted as saying:

"We'll know our disinformation program is complete when everything the American public believes is false."

More coverage
  • CHAT NOW! Barlett and Steele chatting with readers
  • Your say: Comment on this article
  • 1991 series: America: What Went Wrong
  • This project depends on stories from readers. You can share your story with project editor Kat Aaron online
  • "What Went Wrong: The Betrayal of the American Dream" is being published by the Investigative Reporting Workshop
  • Workshop videos: To hear more about Don Barlett and Jim Steele's work
  • Follow the project on Twitter
  • DAY 1
  • How game was rigged against middle class
  • After three decades, American worker loses out to Mexico
  • Who - and how many - in America's middle class
  • DAY 2
  • The lucrative business of bankruptcy
  • DAY 3
  • Big business hits the jackpot with billions in tax breaks
  • DAY 4
  • Why the world is closing in on the U.S. economy
  • DAY 5
  • The high cost of deregulation: Joblessness, bankruptcy, debt
  • DAY 6
  • For millions in U.S., a harsh reality: It's not safe to get sick
  • How death came to a once-prosperous discount-store chain
  • DAY 7
  • Raiders work their wizardry on an all-American company
  • DAY 8
  • When you retire, will there be a pension waiting?
  • Workers saving for their retirement lose on junk bonds
  • DAY 9
  • How special-interest groups have their way with Congress
  • One of the more egregious falsehoods being peddled by the corporate tax cutters is that companies doing business in the United States are taxed at an exorbitant rate. Not so. Though the United States has one of the highest statutory rates on the books at 35 percent, the only fair way to measure what companies actually pay is their effective rate - what they ultimately pay after deductions, credits, and assorted write-offs. By that yardstick, companies in the United States consistently pay taxes at rates lower than corporations in Japan and many nations in Europe.

    During the 1950s, the decade in which more people joined the middle class than at any time in history - before or since - corporations paid 49 percent of their profits in taxes. Last year, it was about half that rate, a decidedly more modest 26 percent. In 2010, corporate tax collections totaled $191 billion - down 8 percent from $207 billion as recently as 2000.

    Perhaps a more telling yardstick, corporate tax revenue in 2009 came to just 1 percent of gross domestic product - the lowest collection level since 1936, or three-quarters of a century ago. In 2010, it edged up to a puny 1.3 percent - the second-lowest since 1940. Even worse, the shriveled tax collections came at a time when corporations were registering an all-time high in profits. At the end of 2010, corporations posted an annualized profit of $1.65 trillion in the fourth quarter. In other words, the more they made, the less they paid.

    As for the corporate share of total income taxes paid by businesses and individuals, it has plummeted from 40 percent in 1950, the dawn of Middle America's golden age, to 18 percent last year.

    The numbers tell us that a lot of politicians, including would-be presidential candidates, are mathematically challenged.

    The corporate numbers also explain why hardworking Americans are on a greased downward slope from which they are unlikely to recover, as long as the lawmakers and deal-makers in Washington not only refuse to ease their plight, but also continue to pile on, compelling them alone to pay for the country's massive deficit while simultaneously chipping away at their safety nets.

    In 2008, the latest year for which statistics are available, individuals and families with incomes between $25,000 and $50,000 paid nearly $2,500, on average, in individual income taxes - a tax rate of 7.1 percent. Once again, because select corporations in America know the right people in Washington, they are doing better. Stupendously better, as attested to by documents filed with the U.S. Securities and Exchange Commission.

    In its most recent filing, Exxon Mobil Corp., the global energy giant, reported income of $34.8 billion before taxes on total revenue of $310.6 billion for 2009. Its U.S. income tax bill: Zero. Actually, it was a little better than that. Exxon Mobil claimed a tax benefit of $838 million, while it paid $15.8 billion in income taxes to other countries. General Electric Co. did equally well. Its report to the SEC showed income before taxes of $10 billion on total revenue of $155.3 billion. Like Exxon Mobil, GE reported no U.S. income tax paid. And like Exxon Mobil, GE also reported a tax benefit, albeit a little larger at $1.1 billion.

    It should be underscored that the financial statements filed with the SEC are different than those submitted to the IRS. That's because corporations maintain so many different sets of financial records that they would keep a bookmaker's head spinning for years. Hence, what corporate America tells the SEC is not exactly what it tells the IRS. Exxon Mobil and GE insist they will pay U.S. income tax. Precisely how much, or more accurately, how little, will remain a secret.

    Exxon Mobil and GE have lots of company. A Government Accountability Office study of corporate tax returns for 1998 to 2005 found that in any given year the number of large foreign-controlled domestic corporations that reported no income-tax liability ranged as high as 54 percent. In short, one of every two big corporations operating in the United States under foreign ownership paid no taxes. As for large corporations owned by U.S. citizens, a high of 38 percent reported they owed no federal income tax.

    As these and other government statistics show, the United States has two tax systems: A flexible, preferential one for multinational corporations and the rich; a rigid, nonnegotiable one for working people. In other words, if you're not lucky enough to be a global business or a wealthy individual, you must pay pretty much what Congress dictates. If, however, you are among the privileged, well, your company makes billions for you and essentially operates tax-free.

    To be sure, some corporations pay the maximum 35 percent rate. Like individuals, those companies, often medium-size domestic operations, are unable to make use of the accounting gimmicks available to multinational and select other businesses.

    Nonetheless, corporate America collectively has long whined about paying excessive taxes. This even though it derives the largest benefit from government outlays, especially during war years. In 2010, with not one, but two wars (Iraq and Afghanistan) in progress, both of which have lasted twice as long as World War II, and with a third war (Libya) under way, corporate tax collections averaged 1.8 percent of GDP. During World War II, it was a little more than three times that rate - 5.7 percent. Each percentage-point difference means individuals must cough up an additional $150 billion. That would be roughly the equivalent of doubling the amount paid by all taxpayers in Connecticut, Ohio, Pennsylvania, Indiana, Missouri, and Oklahoma. In short, corporate America does not come close to paying its fair share of government's cost. Nor, obviously, is it called upon to make any human sacrifice. As for all those hundreds of billions, they simply were and are added to the national debt, a tab that will be borne disproportionately by working Americans.

    What kind of corporation escapes responsibility for any of these bills? Carnival Cruise Lines for one, a Miami company whose glitzy megaships have names like Carnival Fantasy, Ecstasy, Elation, and Paradise. From 2005 to 2010, Carnival - the world's largest cruise carrier - racked up $13 billion in profits. The company's tax bill for those years? Chump change of $191 million. That's million. And that included U.S. income tax, foreign income, and local income tax. The overall tax rate came in at 1.4 percent. This even though the ships sail out of Miami and are inspected by the Coast Guard.

    Middle America has not fared nearly so well, thanks to a Congress that likes to sock it to ordinary people, the same people who are and will be hammered even more as lawmakers target them to be a scapegoat for the ballooning deficits. Though corporate profits have continued to climb, the wages of working people remain frozen in time. In 2008, according to IRS data, 10 million working individuals and families filed tax returns reporting incomes of between $30,000 and $40,000. Their effective tax rate: 6.8 percent - nearly five times the Carnival rate.

    This helps explain how members of the Arison family who started Carnival have held membership in that exclusive club of global billionaires for two decades.

    Ted Arison was born in Tel Aviv, Israel, in 1924 and moved to the United States in 1952. In 1972, he formed a joint venture to establish a shipping business. His partner was Meshulam Riklis, who was born in Turkey but who also grew up in Tel Aviv. Riklis, too, moved to the United States, where he eventually became one of the early-day corporate takeover artists, working alongside famed junk-bond king Michael Milken. His deals were so byzantine that even many on Wall Street had difficulty tracing the money, which seemed to end up in his pocket while others were left holding his debts. He pioneered the use of junk bonds and leveraged buyouts and corporate paper. Lots of paper. Sometimes he raised cash by raiding the pension funds of his employees, like those who worked at McCrory Corp., one of the old five-and-dime chains that were fixtures in small-town America, and where wages were little more than the minimum. Indeed, the wages were so low that many of Riklis' McCrory employees did not even earn enough to qualify for a pension.

    The Arison-Riklis arrangement lasted only two years, when Arison bought out Riklis and formed Carnival Cruise Lines in 1974. From then on, he maintained tight control of Carnival. He systematically added ships, passengers, and amenities, like gambling. Each of his ships was a floating casino, featuring slot machines, roulette and "big 6" wheels, and tables for craps and blackjack.

    In 1987, Arison took the company public. Keeping with tradition, then and now, a hefty chunk of the proceeds from the sale of stock to the public went to Arison personally. The take, according to SEC records, was a special dividend of $81 million. The next year, Carnival immediately began paying dividends to its new shareholders in each quarter. As that suggests, there is nothing new about Carnival's ability to avoid the tax collector and the Arison family's attendant good fortunes. We first wrote about Carnival's tax-free status in November 1991 as part of our "America: What Went Wrong?" series.

    At the time, we noted the fine print in a document filed with the SEC allowed that:

    "The company is not subject to United States corporate tax on its income from the operation of ships, and the company does not expect such income to be subject to such tax in the future. This exemption from U.S. corporate income tax will remain in effect under current United States law for as long as the company retains its status as a controlled foreign corporation."

    Even better for Arison and his family was yet another provision in the SEC public-offering document that said:

    "The company intends to distribute dividends to all shareholders in at least such amounts as are necessary to enable the principal shareholders to pay the income taxes imposed on them with respect to those earnings."

    Translation: Whatever taxes Arison or his family incurred would be covered by a payment to them from the Carnival Corp.

    To fully appreciate this scheme, when you receive your W-2 from your employer next January, ask if the company would write you a check for the taxes withheld from your paycheck. This is a perk way beyond the reach of those who toil from 9 to 5.

    If you still have any doubts about the existence of two distinctly different tax systems, or whether members of Congress have structured one set of rules for the benefit of the ruling class and another for everyone else, consider that Arison renounced his U.S. citizenship in 1990 to further insulate himself personally from the U.S. income tax and returned to Israel. Years earlier, his son Micky, a fixture in Miami, had assumed day-to-day control of the business empire, which also includes the Miami Heat, the NBA team. The elder Arison died in 1999. Son Micky and daughter Shari inherited their father's tax freebies, meaning a second generation of the Arison family continues to enjoy the benefits of a company that pays only token taxes, thanks to American lawmakers.

    Along the way, Micky and Shari also secured their own slots on Forbes magazine's global list of 1,210 billionaires in 54 countries. He is No. 169; she is No. 200.



    About this project

     

    Donald L. Barlett and James B. Steele have embarked on an update of their 1991 “America: What Went Wrong?” project, which was published in The Inquirer.

    Through a collaboration with the Investigative Reporting Workshop at American University, The Inquirer will run pieces from the new project, “What Went Wrong: The Betrayal of the American Dream,” over the coming year. For more on the project, visit http://americawhatwentwrong.org/


    Donald L. Barlett and James B. Steele are contributing editors at Vanity Fair. They have worked together for four decades, first at The Inquirer (1971-1997), where they won two Pulitzer Prizes and scores of other national journalism awards, then at Time magazine (1997-2006), where they earned two National Magazine Awards, and since 2006 at Vanity Fair. They have also written seven books, including the New York Times No. 1 best-seller "America: What Went Wrong?" - an expanded version of the 1991 Inquirer series. Both live in Philadelphia. E-mail the writers at info@barlettandsteele.com.

     

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