How U.S. tax code robs from the poor to reward the rich

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SIMPLIFIED RATES, DIFFERENT RULES...

I HARDLY RECOGNIZE IT "Rape of the Taxpayer" by Philip M. Stern. Random House, New York, 1973. 483 pages.

After running as an anti-tax candidate for governor of California in 1967, Ronald Reagan promptly raised taxes upon assuming office. When citizens complained at the pain these new taxes were inflicting, Reagan declared: "Taxes are supposed to hurt."

Reagan spoke as one who was supposedly suffering the pain along with all the other Californians. Then an enterprising graduate student checked the public records and found that the Reagans had paid no income tax the previous year. Their income ran into six figures.

Embarrassed by the disclosure, Reagan mumbled something about "suffering some business losses." But he did not explain how a wealthy man could escape the tax that almost every wage earner had to pay.

Maybe Reagan read "Rape of the Taxpayer" before filing his return. It can be used by the wealthy as a "how to" book describing intricate schemes for keeping millions of dollars out of the reach of the tax collector.

But this was not the intent of the author, Philip Stern. High-priced tax advisors already know all this, and are probably offering additional tax avoidance scams to their millionaire clients.

"Rape of the Taxpayer" is aimed at the American public, who have to pay the taxes the millionaires escape. Philip Stern is a supporter of free enterprise, but he is outraged at a tax code that robs the poor to reward the rich. He believes it weakens people's faith in the system.

This book was published in 1973. Since then, several tax loopholes have been closed. But tax favors for the rich have continued through both Democratic and Republican party administrations.

The income tax rate for the higher income brackets has been lowered from 70 percent in 1973 to 28 percent in 1989. Despite muchheralded "tax reforms," numerous tax shelters remain to preserve the millionaires' capital and make tax accountants rich.

Municipal bonds for the wealthy Perhaps the simplest tax avoidance plan was followed by the late Mrs. Horace Dodge, 6 SOCIALIST ACTION who inherited $100 million from her auto tycoon husband. She and her tax advisers put the entire bundle in state and municipal bonds paying an average interest rate of five percent.

This gave Mrs. Dodge an income of $5 million a year for the rest of her life. On all these millions she did not pay a penny of income tax. She had been careful to invest in municipal bonds that were exempt from federal taxes.

The right of states and municipalities to issue such bonds was decreed by Congress in 1913 when the first federal income-tax law was passed. It was intended to soften the states' opposition and enable them to sell their bonds at lower interest rates.

Only the wealthy buy these bonds. Although municipal bonds pay relatively low dividends, a person in a high tax bracket will come out ahead when the tax saving is factored in.

Corporations can also escape taxes this way. In 1971, the Bank of America owned $3 billion worth of municipals and enjoyed a tax-free income of $150 million. In that year, the government lost $2.5 billion in potential revenue.

The capital gains trick Probably the favorite tax-avoidance scam has been the capital gains tax. Capital gains are the profit investors make when they sell stocks or other property at a higher price than they paid. Income from this source is taxed at a lower rate than ordinary income.

At the time this book was written, the highest rate on ordinary income was 70 percent. The profit gained from the increased value of real estate or stocks was taxed a maximum of 50 percent. The first $50,000 of profit was tax-free.

Naturally, the wealthy try to convert most of their income into capital gains. Top executives prefer an option to buy company stock at a set price, rather than getting a salary increase or cash bonus. When the stock rises in price, the executive makes a substantial profit that is taxed at the lower capital gains rate.

There are plenty of sharp operators ready to steer the wealthy into lucrative tax shelters developed under the capital gains law. One offered tax avoiders a chance to "rent a cow." These cows are in herds roaming the western ranges. When the creatures are fattened up and sold, the profit is treated as capIUNE 1991 GEE... FEWER DEDUCTICS, ital gains rather than ordinary income.

Inventive tax consultants have found ways to make timber, apartment buildings, and oil wells yield capital gains. The ruling rich flock into these shelters, often seriously disPutting company headquarters in foreign countries with lenient tax law:

can save multi.

nationals millions in American taxes.

torting the economy. They put up large office buildings simply to profit from depreciation tax allowances, not because more office space is needed. Many of these buildings stand vacant.

Government's sympathy for the rich President Bush is much in favor of the capital gains loophole. It encourages new investment, he says. But even many conservative economists dispute this.

Bush is also in favor of lowering the maximum income tax rate, which also affects the tax saving through capital gains. When Congress set the maximum income tax at 28 percent, they also pegged the capital gains tax at 28 percent. This effectively wipes out the capital gains loophole.

Bush, however, will not let the issue die. He is pressuring Congress to lower the rate to 19 percent. Bush's intense concentration on restoring the capital gains tax advantage has been headlined as "Bush's Tax Fetish" in the magazine, U.S. News and World Report.

The editors say they don't understand why an issue with so little economic effect has "hung around so long and bothered everybody so much." The editors should understand that the super-rich are hurting and their man in the White House is striving to case their pain. to millionaires and corporations. The worldwide nature of modern business presents many ways to shelter income overseas. Putting company headquarters in foreign countries with lenient tax laws can save multi-nationals millions in American taxes.

Poor countries welcome the revenue such corporate "guests" produce. They don't even question why the Caribbean headquarters of a giant multi-national corporation may consist of little more than a mail box and a part-time employee to collect the mail.

U.S. tax authorities have been snooping around the better known tax havens, such as the Cayman Islands. Consequently, some corporate giants have moved their overseas "headquarters" to more remote locations. The jungle island of New Hebrides, in the South Pacific, has become a favorite venue for some large tax avoiders recently.

Stern says, "When you enter the realm of international tax manipulation, you step into a realm that is about as real as a Hollywood movie set." Corporations that exist only on paper will sell assets they possess for only a few minutes to a company that will pay inflated prices to establish a tax loss.

But the loss exists only in the papers submitted to the tax collector. All these entities are part of a single multi-national, and the "sales" are internal paper shuffles.

Stern cites an extreme case of this nature in which a Canadian mine, operated by U,S. Gypsum Canadian, loaded gypsum rock into a ship. As the rock fell from the conveyor, it left Canadian jurisdiction. At that instant it was bought by a paper corporation, U.S. Gypsum Export. Finally, as it landed in the hold of the vessel, it was sold to a third business, U.S. Gypsum, Inc.

Thanks to arcane international tax laws passed by Congress, this fleeting purchase and sale of the rock—while it was in midair-enabled all three "corporations," (really one multi-national), to escape $300,000 in taxes in one year.

Special laws for "special" people Wealthy tax avoiders can only admire the financial gymnastics U.S. Gypsum performed, but many would prefer to be granted a personal exemption by Congress. This has been done frequently through special clauses in tax bills.

Movie Mogul Louis B. Mayer saved $2 million in taxes through such a clause that never mentioned his name. It granted tax exemptions to anyone who engaged in a certain industry in a certain period, and made certain investments, in a certain manner, etc. It happened that only Louis B. Mayer met all these qualifications and enjoyed the tax breaks.

Fourteen such clauses were inserted in a tax bill in 1969. While naming no one, the clauses saved Lockheed $14 million and McDonnell Douglas $6.5 million.

Of course, these corporations and individuals have to make an investment to get these tax breaks. Many thousands of dollars are invested in greedy and venal Congressmen and Senators.

Stern asks a cogent question: "Why do the wealthy few win out over the un-rich many?" Among the reasons he lists are the millions it takes to get elected. Only the wealthy can finance, and thus buy, members of Congress.

Stern also notes that the House Ways and Means Committee and the Senate Finance Committee write all tax bills. Reformminded Congressmen are screened off these committees.

This means only a score of people have to be reached to influence tax legislation. The ultra-secrecy under which these committees operate makes it easy to slip in special clauses for favored clients. The arcane legal language in which tax laws are written make it easy for an outrageous injustice to pass unnoticed.

But the most fundamental reason for tax rip-offs of working people is the absence of any labor representatives in the halls of Congress. This leaves all legislation in the hands of men and women committed to the continuation of an exploitative society.

So long as this situation prevails, the wealthy will never tax themselves-however loudly they cry for sacrifices by other Americans.

The more thoughtful among the ruling rich should ponder European history. It was the refusal of the French nobility to submit to taxation that lead to the French revolution. This resulted in the guillotine and all kinds of other "unpleasantness" for the tax avoiders of that day.

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