Creating a Fair Tax System That Shrinks the Wealth Divide
The United States does not have a lack of financial resources; it has an intentionally unfair distribution of resources. The federal income tax has become less progressive and the rate paid by the wealthiest has been cut dramatically in recent decades. From 1944 through 1951, the highest marginal tax rate for individuals was 91%, increasing to 92% for 1952 and 1953, and reverting to 91% for tax years 1954 through 1963. In 1964, the top marginal tax rate for individuals was 77%. From 1965 through 1981 the top rate was 70%. The top marginal tax rate was lowered to 50% for tax years 1982 through 1986 and today it is just 35%.
The tax on investment income, capital gains, has also been dramatically reduced. The maximum statutory rate on long-term capital gains was 28% in 1991, 20% in 1997 and has been merely 15% since 2003.
The wealth divide has become extreme over the past three decades and tax policies have exacerbated this trend; much of the tax code exemplifies policies for the 1% at the expense of the 99%. The wealth divide is one of the foundational reasons why the economy no longer works and is in steady decline for most people in the United States. The tax code inadequately funds government, but that is the result of unfair tax cuts, not because America is broke (it isn’t). As Andrew Fieldhouse of the Economic Policy Institute testified “Income per capita has jumped 66% over the past 30 years, and is projected to grow another 60% over the next 30 years.” The country needs to put in place policies that reduce the wealth divide and share wealth fairly so that when the economy grows it benefits all citizens, not just the 1%.
The recommendations below begin to correct the unfair policies of the last three decades, but these are only first steps to the transformational changes that are needed.
- Tax the highest income households: From 1960 to 2004, the top 0.1 percent of U.S. taxpayers — the wealthiest one in one thousand — have seen the share of their income paid in total federal taxes drop from 60% to 24.3%. America’s highest income-earners — the top 400 people who have wealth equal to 154 million Americans — have seen their federal income tax drop from 51.2% in 1955 to 18.1% in 2008. If the top 400 paid as much of their incomes in personal income tax as the top 400 of 1955, the federal treasury would have collected $50 billion more in revenue from just those 400 taxpayers. If the top 0.1% of taxpayers — Americans with incomes that averaged $4.4 million — had paid total federal taxes at the same rate as the top 0.1% paid these taxes in 1960, the federal treasury would have collected an additional $250 billion in revenue.
- Merely not extending the Bush tax cuts would add nearly $500 billion each year in tax revenue. Thus in just over two years the goal of the deficit committee would be met. This would be insufficient to correct the wealth divide and does not go as far as Occupy Washington, DC advocates.
- A tax of a half of a percent or less on Wall Street speculation could raise over $800 billion in a decade. The Speculation Tax on the purchase of stocks, bonds and derivatives would be a tiny tax with a big impact. People in the U.S. pay much higher taxes on purchases of food and clothing; it is only fair that the wealthy pay taxes on purchasing wealth instruments.
- A fair tax on capital gains, treating it as ordinary income would raise $1 trillion over a decade. Wealth-based income and work-based income should be treated equally under the law as it used to be. Warren Buffet has received a great deal of attention for pointing out that he pays a lower tax rate than his secretary or anyone who works for him. The reason for this is that investment income is taxed at a much lower rate than income from labor. The United States needs to tax wealth more and work less.
- Congress should enact a “pure worldwide” tax system, in which all profits of U.S. corporations, whether they are generated in the U.S. or abroad, would be taxed by the U.S. This would end “deferral,” i.e. where taxes are deferred until money is brought back into the United States. U.S. corporations would continue to receive a credit against any taxes they pay to a foreign government (the foreign tax credit) so that profits are not double-taxed. Under a pure worldwide tax system, corporations would have little or no tax incentive to move jobs offshore because the U.S. would tax profits of corporations no matter where they are generated. The Treasury estimates that deferral of U.S. taxes on offshore corporate profits costs close to $50 billion each year, and many experts think this estimate is substantially understated.
- Ending deferral does not even address the hundreds of billions lost through tax havens. Tax havens should be shut down through the passage of the Stop Tax Haven Abuse Act. In fact, the U.S. Treasury estimates this costs $100 billion each year. In 2006 the U.S. Senate Permanent Subcommittee on Investigations reported that Americans now have more than $1 trillion in assets offshore and illegally evade between $40 and $70 billion in U.S. taxes each year through the use of offshore tax schemes.
- Closing corporate tax loopholes would return the fair share of taxes paid by corporations to the funding of government. Declining corporate taxation is another prime factor in increasing deficits. Corporate income taxes have fallen from roughly 4.8% of GDP in the 1950s to only 1.8% of GDP over the past decade. Ending just two large breaks, deferral of overseas revenue and accelerated depreciation would raise about $114 billion over a decade. The Treasury Department lists $365 billion in corporate tax breaks being gifted annually — that’s $3.65 trillion over the next 10 years. Due to tax loopholes, corporations pay record low tax rates — they actually pay 21% on average. Indeed, a recent report by Citizens for Tax Justice found that Wells Fargo received $18 billion in tax breaks, while both Verizon and General Electric paid negative taxes. Earlier Citizens for Tax Justice reported that 12 major companies which together made $171 billion in profits from 2008-2010 paid a negative $2.5 billion in taxes, thanks to $62 billion in tax subsidies.
The taxes described above would generate at least $600 billion annually. The goal of the Joint Deficit Committee of $1.2 trillion over ten years could be met in two years. The United States has more than enough wealth to meet the needs of its people.
Source: The 99% Deficit Reduction Plan: How to Create Jobs, Reduce the Wealth Divide and Control Spending, October2011/Occupy Washington, DC
The Monetary System
Federal banking rules allow banks to make loans of up to nine times the amount of money they have in reserve. This is called “fractional reserve banking” and is the process by which private banks increase the money supply by creating and loaning out more money than they actually have. Fractional reserve banking is commonly misunderstood to mean that banks must put 10% of their money into reserves, after which they can loan out the remaining 90%. But in fact, when banks put money in reserve, they are then allowed to create and loan out new money, up to nine times the amount they actually put in reserve, or 900% more. This means that when a bank makes a loan, it is literally loaning money into existence. This newly created money enters into circulation and increases the nation’s overall money supply. Then, as the borrower begins making loan payments back to the bank, the principle portion of each payment is removed from circulation, while the interest remains, becoming the bank’s profit. This entire process takes place digitally. No paper money needs to be printed, since loans and repayments are made simply by increasing and decreasing account balances on computers.
This awesome power to create money out of nothing is the reason banks are the most powerful institutions in the nation. The ability to loan new money into existence gives private banks unlimited capital with which to finance and control society’s development, and the pursuit of profit is their only consideration. Commercial bank loans are awarded with no consideration for the social or environmental consequences of the commercial activity, but rather solely on whether the business will make money and hence be able to pay back the loan with interest. The immense wealth banks are able to accrue through this process also allows them to manipulate society’s political institutions. By funding the political campaigns of both major parties and hiring huge armies of lobbyists, banks and other giant corporations have subverted the political process, resulting in a government unresponsive to the needs of citizens.
Currently, all new money entering into circulation is created by banks through the process of issuing loans, which saddles the population with massive debt. However, there are other ways money can be created. The U.S. government could create its own money (rather than borrowing it from the Federal Reserve) and release it into circulation in the form of salaries and wages via public works programs, or in the form of subsidies given directly to private companies that provide benefits to society. Spending money into existence like this increases the money supply without creating debt.
The wholesale privatization of the money creation process, where all new money is released into circulation in the form of bank loans, and where the US Government is forced to borrow money from the Federal Reserve (or else tax the people) before it can spend, enriches private banks at the expense of ordinary Americans, the majority of whom are perpetually in debt. Given the power of large, financial corporations over our government, returning to a just monetary system will require a broad-based movement of protest, education and civil disobedience.
References and external links
Goldman Sachs Group, Inc. is a multinational investment bank founded in 1869 and headquartered at 200 West Street in Lower Manhattan. Leading up to the 2008 financial crisis, Goldman Sachs engaged in some of the worst financial fraud the world has ever seen, including packaging and selling billions of dollars in subprime housing derivatives and other worthless securities to small and mid-level investors while hiding the fact that they were simultaneously betting against these same securities. Through such fraud Goldman Sachs decimated the 401(k)s, pensions and mutual funds of thousands of Americans.
Despite blatantly violating the Securities Act of 1933, which “prohibits deceit, misrepresentation, and other fraud in the sale of securities,” and despite a 650-page Senate subcommittee investigation report accusing them of defrauding clients, not a single official of Goldman Sachs has been prosecuted. Rather, the corporation was rewarded, receiving more government bailout funds than any other investment bank. Goldman Sachs then used this taxpayer money to give its senior executives a staggering $44 billion in mega-bonuses between 2008 and 2011.
Goldman Sachs also manipulates the commodities markets. Using its enormous capital reserves, the company is able to purchase and hoard rice, wheat and other food commodities, thereby inflating global food prices and making hundreds of millions of dollars for speculators. At the same time, poor families in the U.S. struggle to meet basic nutritional needs, and starvation increases in the developing world.
All this is done in collusion with the U.S. Government. In 1999, congress, with the support of President Clinton, overturned the 1933 Glass-Steagall Act, eliminating the historic separation between commercial and investment banking, and allowing banks to gamble with the deposits of ordinary Americans. The Commodity Futures Modernization Act of 2000 similarly removed essential regulations over the speculation of commodities, which led directly to the tripling of global food prices in 2008 and the resulting food riots in over a dozen countries.
While Goldman Sachs CEO Lloyd Blankfein makes an estimated $250,000 a day, regular Americans are losing their jobs and homes at the highest rate since the 1930s. The real unemployment rate (in 2012) is almost twenty percent, far higher than the official figure of nine percent, which intentionally factors out workers who have exhausted their unemployment benefits and those working temporary or part time jobs. The so-called “jobless recovery” means that speculators like Blankfein can get richer even during a recession. As one private trader, Alessio Rastani, candidly told the BBC in the Fall of 2011, “Most traders don’t really care about fixing the economy. If you know what to do, if you have the right plan set up, you can make a lot of money from this [recession].” He continued with another dose of frank cynicism, “This is not a time right now for wishful thinking that governments are going to sort things out. Governments don’t rule the world. Goldman Sachs rules the world.”
Goldman Sachs is not the only bank that has engaged in securities fraud and manipulative, criminal speculation. These practices have become commonplace, and given the level of collusion within both major political parties, it will take a mass movement of education, protest and civil disobedience to restore essential banking regulations, force the government to prosecute corporate financial crime, and build a just and healthy economy.
References and external links:
Wells Fargo & Company is a multinational financial services corporation headquartered in San Francisco, California. It is the fourth largest U.S. bank in terms of assets ($1.3 trillion), and the second largest in terms of deposits. Between 2004 and 2008, Wells Fargo engaged in widespread mortgage and securities fraud. In a practice known as “reverse redlining,” it intentionally gave high interest and adjustable rate mortgages to low-income and minority borrowers, knowing that they would eventually default. It then bundled and sold these subprime, “designed-to-fail” loans to middle-income investors, misrepresenting them as secure, high-rated investments. By lying to borrowers about the terms of their loans (interest rates often skyrocketed after the first year), and by deceiving investors about the quality of their mortgage-backed securities (ratings agencies were often paid to reclassify high risk mortgages as low risk), Wells Fargo made billions of dollars defrauding tens of thousands of ordinary Americans, many of whom lost their homes, their savings, and were forced into bankruptcy.
Despite criminal predatory lending and blatantly violating the Securities Act of 1933, which “prohibits deceit, misrepresentation, and other fraud in the sale of securities,” not a single Wells Fargo executive has been prosecuted. Instead, the corporation was rewarded with $25 billion in government bailout funds, half of which it used to purchase Wachovia. Wells Fargo announced the $12.7 billion acquisition just hours after Congress gave them the money. In a further display of arrogance and contempt for the rule of law, they then dramatically increased salaries for its senior executives, more than doubling that of its CEO, John Stumpf, whose 2009 compensation totaled $21.3 million, earning him the title of the highest paid bank CEO in U.S. history.
Wells Fargo’s criminal behavior continued in 2009 as it began foreclosing on homeowners who got behind on their mortgage payments. Rather than modifying loans, the bank chose to repossess and short-sell thousands of homes insured under the Federal Housing Authority. They then filed claims with the FHA to recoup the difference between the sale price and the outstanding loan balance. In their rush to cash in on federally insured mortgages, the bank forged signatures and hired “robo-signers” to process foreclosures en masse, without examining the underlying paperwork. Federal audits conducted in 2011 revealed that millions of bank foreclosures in 2009 and 2010 violated federal laws and that Wells Fargo and other banks filed thousands of fraudulent FHA reimbursement claims.
A staggering nine million homes were foreclosed on between 2009 and 2011, and the banks responsible, including Wells Fargo, show no signs of letting up. A February 2012 mortgage settlement deal between the government and the nation’s five largest lenders is widely criticized for being a mere slap on the wrist for the banks, who are being asked to pay out a trivial $2,000 for each homeowner they illegally foreclosed on. This sanction, however, has resulted at least to some degree from the Occupy movement exerting upward pressure on State attorneys general and other government officials, which is why we must continue building a mass movement of education, protest and civil disobedience.
References & external links: