“Me, Pay Taxes?”: How Wall Street Avoids Paying Its Fair Share in Taxes
Like many Americans, you’ve probably just spent a good bit of time figuring out how much you owe in taxes. Most of us fill in the forms and follow the rules. But the rules are a lot more flexible for the largest U.S. corporations, and especially for the major Wall Street financial institutions and their top executives and owners. Banks and financial companies capture more than 30 percent of the nation’s corporate profits, but manage to pay only about 18 percent of corporate taxes while contributing less than 2 percent of total tax revenues, according to the Bureau of Economic Analysis and the International Monetary Fund.
What’s more, the owners and senior managers of our major financial institutions can exploit the loopholes in our individual income tax on a far greater scale than the rest of us. Below is a short guide to a few of the major ways that Wall Street avoids paying its fair share.
But I earned it in the Cayman Islands!: American corporations have developed a panoply of ways to route income through low-tax foreign subsidiaries. This practice goes well beyond the financial sector. Indeed, the latest publicized example involves a manufacturing firm, Caterpillar. Because of the inherently “placeless” nature of many financial transactions, however, financial institutions and their investors are among those in the best position to move income around in this fashion. The major Wall Street banks have thousands of subsidiaries in dozens of countries, all capable of engaging in transactions that enjoy the full guarantee of the U.S. parent company even as they take advantage of the tax or legal advantages of their foreign incorporation. Transactions in the multi-trillion dollar global derivatives market, for example, can pretty much be relocated anywhere in the world with the touch of a computer keyboard.
A way to crack down on the massive potential for tax avoidance this creates would be to simply rule that financial transactions backed up by a U.S. firm are in effect U.S. transactions and subject to U.S. tax law. Whatever international tax rules are designed to protect real manufacturing activity in other jurisdictions from inappropriate taxation should not apply to the passive income gained from financial activities that can easily be transacted from anywhere in the world. For some years U.S. tax law attempted to follow this principle, but starting in 1997 an “active financing” loophole made it much easier for multinationals to avoid taxation on financial transactions by moving profits to low-tax foreign subsidiaries. Combined with so-called “look through” provisions, these international tax loopholes mean that U.S. multinationals get to look around the world for the cheapest places to locate their earnings.
It’s not work, it’s investment!: The U.S. taxes capital gains on investments much more lightly than it taxes ordinary income. The details get complicated, but in general the profit on investments is only taxed at a maximum 15 to 20 percent rate, as opposed to a rate of almost 40 percent for high levels of ordinary income. Though its stated goal is to encourage investment and saving, a tax differential of this size can be seen as a subsidy to financial speculation, since it penalizes wage work compared to trading profits, and accrues to any investment held longer than a year, whether or not it can be shown to actually create jobs. In addition to the broad impact of the tax differential, the gap in rates creates a windfall for wealthy Wall Street executives in a position to maximize its benefits. Those who work for big hedge and private equity funds are in the very best position to do that, as they take much of their work income from the investment returns of the fund. Since they are legally permitted to classify this “carried interest” income as capital gains, they can cut their tax rates effectively in half – a windfall that costs the federal government billions of dollars a year, and means that some of the wealthiest individuals in America pay a lower tax rate on their earnings than an upper-middle-class family might.
Who, me, sales tax?: It’s easy to forget at this time of year when we’re all working on our income tax, but the sales tax is also one of the major taxes you pay each year. State and local governments take in more than $460 billion a year through sales taxes charged on everything from cars to candy bars. But Wall Street speculation isn’t charged a sales tax at all. Indeed, you’ll pay more sales tax for your next pack of gum than all the traders on Wall Street will pay for the billions of transactions they undertake every year. The non-partisan Joint Tax Committee of the U.S. Congress estimates that a Wall Street speculation tax of just three basis points – three pennies per $100 of financial instruments bought and sold in the financial markets – would raise almost $400 billion over the next decade. What’s more, such a fee would significantly discourage the kind of predatory trading strategies recently highlighted by author Michael Lewis, strategies that depend on trading thousands of times in a second in order to manipulate stock markets and extract tiny profits from each trade.
This only starts the list of ways Wall Street financial institutions and the people who run them manipulate the system and avoid paying their fair share; there are plenty more, including the use of complex financial derivatives to shelter individual income, the variety of techniques used by hedge and private equity fund partners to avoid effective IRS enforcement, and the continuing tax deductibility of corporate pay above $1 million, as long as it is sheltered under a so-called “performance incentive.” Tax time would be a good time for our elected representatives to get to work closing some of these gaps and loopholes, and leveling the playing field.
By: Marcus Stanley, Economic Intelligence, U. S.News and World Report, April 16, 2014
“A New Front In The War On Poverty”: The Affordable Care Act Will Do For Most Americans What Medicare Did For Seniors
Buried in Sunday’s Washington Post was a small notice of a study on senior citizens living in poverty. The numbers have plummeted from the late 1960s, according to a study of census data done by the Akron Beacon Journal.
27 percent of seniors were living in poverty more than 40 years ago, compared to only 9 percent today. There are 3.7 million seniors living in poverty today as compared to 5.2 million in 1969, while the number of seniors has more than doubled during that time, up to 40.6 million.
So who says President Lyndon Baines Johnson’s War on Poverty was a failure?
The reasons for this drastic reduction can be placed squarely on retirement programs like 401(k)s, Social Security and the establishment of Medicare in 1965. In addition, many continue to work post-65, many saw the tough times of the Depression and World War II and have been careful and frugal.
Another important change that I was involved in back in the 70s working for Sen. Frank Church, who was Chairman of the Aging Committee, involved the capital gains tax on the sale of one’s home. Congress passed an exemption for seniors who sold their homes and downsized, saving them substantial sums from taxes on their primary nest egg. Prices of homes had gone up and this change was crucial for many seniors and is still important today.
But there are still too many Americans, both young and old, living in poverty. Too many are without jobs, too many have jobs that don’t pay enough to raise a family and the future of pensions and retirement savings is far from certain. A new Kaiser study even indicates that additional health expenses could raise the percentage of seniors in poverty up from 9 percent to 15 percent.
And that is why the importance of the Affordable Care Act cannot be understated. Before Medicare, many seniors were one serious illness removed from bankruptcy. Today, the same is true for many Americans. The ACA, when it is fully implemented, will do much the same as Medicare to keep Americans out of poverty.
Here is what life was like before Medicare: The cost of health care for seniors kept many from having even basic hospital coverage. Only one in four had insurance that would cover 75 percent of a hospital stay, and half of all elderly Americans had no insurance at all.
The point is that when we look back at American life in the pre-Johnson era, the pre-Medicare era, we faced a daunting problem. We did much to solve that problem for the vast majority of seniors. Now, with the ACA, we can do the same for most Americans.
By: Peter Fenn, U. S. News and World Report, February 10, 2014
Share This Blog
Unknown Feed- An error has occurred; the feed is probably down. Try again later.
mykeystrokes.com 