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Hiding the surplus

from David Ruccio

Most of us pay the taxes we’re required to pay. That’s because there aren’t many ways to avoid them. Sales, property, payroll, or income—the tax is paid at the time of the purchase, the amount is deducted from our paychecks, or the records go directly to the government. There’s no real way around them. And we pay those taxes out of wages and salaries more or less willingly, since that’s how government services are financed.

Not so for those who are able to capture the surplus. Large corporations and wealthy individuals pay far less than their fair share of taxes. Their ability to evade taxes is only matched by their insistent demand that their tax rates be lowered even more.

We’ve known for a long time that large corporations use a variety of mechanisms—from claiming tax deductions and using loopholes to stashing profits in tax havens abroad—to lower their effective tax burden.

Thus, for example, according to Oxfam America (pdf), between 2008 to 2014, the top 50 companies in the United States paid an effective tax rate (to the federal government as well as to states, localities, and foreign governments) of just 26.5 percent overall, 8.5 percent points lower than the statutory rate of 35 percent and just under the average of 27.7 percent paid by other developed countries. And then they use their tax savings to lobby for even more tax advantages. 

corp-taxes

source

federal1

One of the results of corporate tax evasion is, I’ve argued before, the tax burden has been shifted from corporations to individuals.

tax evasion

But not to wealthy individuals. As new research by Annette Alstadsaeter, Niels Johannsen, and Gabriel Zucman has shown (pdf), the top 0.01 percent of the wealth distribution—a group that includes households with more than $40 million in net wealth—evades about 30 percent of its personal income and wealth taxes. This is an order of magnitude more than the average evasion rate of about 3 percent.

The main reason those at the very top of the wealth distribution are able to evade a large portion of their tax burden is because they’ve managed to use their cut of the surplus to accumulate personal wealth—and then to hide that wealth offshore.

Ownership of wealth is, of course, extremely concentrated. Offshore wealth even more so. According to Alstadsaeter et al., the top 0.01 percent of the distribution owns about 50 percent of offshore wealth, which means the top 0.01 percent manage to hide about one quarter of their true wealth.

We now have an economy in which more and more surplus is captured by a small number of large corporations and wealth individuals, who in turn manage to evade a larger and larger portion of their fair share of taxes by hiding the surplus.

Oxfam’s view is that

Rather than engaging in a mutually destructive race to the bottom, the US should stake out a leadership role in addressing structural problems in the global tax system. The US should push for a truly inclusive process where all governments are able to build mutually beneficial tax rules that improve information sharing, transparency and accountability globally.

Until that happens, the rest of us—who are not members of the boards of directors of large corporations or wealthy individuals—will continue to be forced to shoulder the burden of paying taxes to finance government services. And the distribution of income and wealth will become, year by year, increasingly unequal.

  1. patrick newman
    June 5, 2017 at 3:43 pm

    I suspect there is an issue in the USA as in the UK of the lack of HMRC (IRS to you) resources that are applied to tracking down the concealment of income and wealth by the top 1%. HMRC have been subject to staffing and budget cuts so not only creating difficulties in measuring taxable wealth and income but also fighting court actions against those not willing to pay what is due.

  2. June 5, 2017 at 4:08 pm

    The notion that taxes “pay” for government operations is absurd. How did the government ever get money out of the economy before first spending it into the economy?

    • Risk Analyst
      June 5, 2017 at 7:09 pm

      Charles, I think of that issue as one elephant in the living room that everyone here wants to ignore. Is the Department of Defense really waiting your 1040 payment to buy some ammunition, or are federal taxes just a comically failed attempt to level out society’s wealth distribution? The Federal Reserve’s buying up so much federal debt and creating the circle of the government owning its own debt and paying interest to itself should be the subject of a Jerry Seinfeld stand-up show.

      • June 5, 2017 at 11:16 pm

        Risk Analyst, I enjoyed your reply but the main function of taxes is to prevent inflation. Taxes can also serve social functions by taxing selected groups and income levels. An article by Beardsley Ruml in 1946 discusses the subject in a very erudite way, Ruml , at that time, was the president of the NY Fed. The title of the article is “Taxes for Revenue are Obsolete.” Our political system, social system and economic system will be greatly improved when the false notion of taxes paying for a governments operation is put to rest.

      • June 5, 2017 at 11:22 pm

        …and the FOMC should and could be replaced by an AI computer program. A computer program could do a much better job than those guys reading reports and chewing the fat every 3 or 4 months!

    • June 7, 2017 at 3:34 am

      “The notion that taxes “pay” for government operations is absurd.”

      So how do you suggest we deal with the bond coupons the government pays? Should they stop being reported as a federal total?

      • June 7, 2017 at 3:51 am

        Bonds are currently paid via a computer program, I am very sure. The program accesses the bond holders account and bumps it up the required amount and that amount is added to the available for sale of new bonds. That is all there is to it. Taxes are not involved at all. Taxes have never been used to pay interest or bond redemptions.

      • June 7, 2017 at 4:21 am

        But taxes do cause the “National Debt” number to go down and these bond payments do cause a decrease in the “cash on hand” number, right?

      • June 7, 2017 at 1:57 pm

        The answer is simple. How you count something does not change the “something” one iota. You are referring to bookkeeping counting processes but the counting does not change the reality. The quick proof is to count your money and, if you are careful, you will always get the same result. Nothing has changed. Taxes are and should be counted but they are never “spent” again. They only prevent inflation. The reality is that taxes destroy money. If you “pay” taxes by check your account balance goes down. That is all that happens. If you pay in cash at an IRS office I am told they shred the money. And they don’t accept coins because they cannot destroy them. It is against the law. Shredding the cash makes sense. It is much more efficient than transporting, storing, establishing a paper trail, etc to “save” the money to spend again. Much more efficient to just create more which basically costs nothing. Federal government programs are limited by national resources, not by money. Money is free and abundant to the federal government.

  3. June 6, 2017 at 1:18 pm

    In their book, “A History of Taxation and Expenditure in the Western World,” Carolyn Webber
    and Aaron Wildavsky make several important points.

    “Nevertheless, for ease of exposition, we shall call borrowing, taxing, and spending, taken together, “budgeting.” In this sense of the term, the budgets we have grown accustomed to in our own age are not natural to man or society. Each age has had its own patterns of budgeting consonant with its cultures and technologies.

    In its broadest definition, budgeting is concerned with translating financial resources into human purposes. Since funds are limited and have to be spent on different purposes, budgetary processes are mechanisms for making economic and political choices.

    Budgets are also moral orders, regulating relations among people through commands and prohibitions. “There is no money” may not be the saddest sentence of all, but it is one of the most conclusive (along with the other great justifications for decisions-there is no time, it is
    unnatural, and God forbids it). Even the form of budgets (as in the family practice of providing envelopes for this or that expenditure) suggests priorities.”

    I suggest to you that all of this has become major points of conflict today. Particularly in the USA.

    • June 6, 2017 at 2:09 pm

      It definitely has become a major point of conflict. Joe Firestone’s proposal to mint HRCs was at the point of the conflict. The proposal reached Obama’s desk and he turned it down. The proposal was legal under the constitution and under current law. If it had been accepted it would have shown, once and for all, that national programs are limited by resources not money which is totally factual.

      • June 7, 2017 at 10:06 am

        Firestone’s notions about fiscal responsibility are interesting and consistent with a democratic (not necessarily capitalist) economy. He words it as follows,

        — Real fiscal responsibility is a pattern of fiscal policy intended to achieve net benefit relative to public purpose (such as full employment, price stability, a first class educational system, Medicare for All, and the other dimensions listed elsewhere.), while also maintaining or increasing real fiscal sustainability, viewed as the extent to which patterns of Government spending do not undermine the capability of the Government to continue to spend to achieve its public purposes.

        This position is both politically and economically conservative. That’s classical conservatism as laid out most recently by Russell Kirk. That this would be rejected by most of the members of today’s Republican Party is important to note.

      • June 7, 2017 at 2:00 pm

        Precisely, Ken Z, I totally agree.

      • June 8, 2017 at 8:48 pm

        As google doesn’t turn up a fitting definition of HRc, perhaps you should explain yourself, Charles.

      • June 9, 2017 at 3:22 pm

        Sorry. HRCs was meant to be High Seigniorage Coins. HSC would be better!

      • June 9, 2017 at 4:11 pm
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