The tax code: Class warfare
interview with Richard Wolff
by David Barsaminan
New York, NY
December 29, 2011
available from Alternative Radio
You can listen to Richard Wolff speak for himself here.
Richard Wolff is Professor of Economics Emeritus at the University of Massachusetts in Amherst and currently a visiting professor at the New School in New York. The New York Times called him “America’s most prominent Marxist economist.” He is the author of numerous books including Capitalism Hits the Fan and Occupy the Economy with David Barsamian.
In a time of acute economic stress, where municipalities, states, and the federal government are pressed to generate more revenues to cover such things as unemployment insurance and providing basic services, talk about the Tax Code and how it is structured, and about property taxes, real estate taxes.
This is an immense topic, the structure of taxes in the U.S., and you would think that our population was reasonably well educated about our tax system given how often it comes up in conversation, given how often politicians rail about the tax system in efforts to get votes and so on. But the truth of it is that Americans know very little about their tax system. And when you try to explain why, there really is no explanation that I’ve ever found anywhere near as persuasive as the following.
If you actually understood the structure of taxes in the U.S., you would be so angry as a working, average American that it’s not clear that you would tolerate the society to continue the way it operates. So maybe there’s a method to the madness of not teaching people about something they seem to care about. So let’s begin.
Taxes are levied by the government on a variety of entities, and you have to keep that separate. For example, taxes are levied on income, on the money you get; they’re levied on corporations for the money they get from selling their goods and services; and they’re levied on individuals, like you and me, on the income we get, the income from our wages and salaries, the income from our interest, if we have a savings account, the income on dividends or capital gains. Whatever kind of income we get, the governments tax us. So income is one thing that’s taxed. The second thing that’s taxed is expenditures. We get taxed when we spend money, for example, a sales tax when we buy a shirt or an excise tax when we fill our car with gas or buy a bottle of beer, and so forth. And the third thing that gets taxed is wealth, property. Let’s keep them separate. You tax income, you tax expenditure, and you tax wealth. Those are three different things, and they have to be kept separate.
Things get a bit more complicated when you discover that different governments tax different things. So, for example, the federal government taxes income. State governments tax income, but particularly also expenditures. And local governments, cities and towns, tax mostly property. So the different levels tend to focus on different things to tax.
All of us pay all of these taxes, so the notion that sometimes you hear people claim, “Gee, it’s not fair for us to be double-taxed,” is silly. We’re all taxed many times. For example, when I earn my income, there’s money withheld from my paycheck to pay income tax to the federal government and to the state government in which I live. I keep the rest of the money. But then when I go and buy a shirt, I pay a sales tax. So now I’m taxed a second time by the state in which I live with an expenditure tax. But on top of that, out of the money left over, I still have to pay a property tax on the house I own, on the car I own. So the notion of being double-taxed or triple-taxed is not something that’s fair or unfair, because it’s universal. Every one of us pays multiple taxes almost every day in one way or another.
Let’s look at them. And let’s start at the bottom. Let’s start with property taxes, because they’re very, very interesting in the U.S. The federal government does not tax your property: it doesn’t tax your house, it doesn’t tax your car, that is, on the property it doesn’t tax it, it doesn’t tax your bank account, it doesn’t tax your stocks and bonds. Those are properties that you have. It doesn’t tax your land. Neither does the state. Who taxes your property? Your local town, your local city.
Here’s how it works. In every town and city they have an official called a tax assessor. His job, her job, is to go around and figure out who’s got what property so that the city or the town can tax that property. But here’s the interesting part and here’s the first example of what people might think about and how angry they would get if they understood it. The job of the tax assessor is to assess the value of the property subject to taxation. So the tax assessor typically will look at your land, if you own any, for example, the land value of the house that sits on that land, if you own your home. So they will go and they will do a study of your land value, of your house’s value, if you’re a business and you have an inventory, you use machines. And then the tax assessor will say, “Okay, this company has this property, this person has that property.”
And you have to give the local town 2%, 4%, 6%. Some percentage of the value of that property has to be paid in taxes to the community.
Why is this interesting? Fundamentally, for the following reason. It is the normal, traditional practice in the U.S. to count as taxable property only a portion of the property, not all property is taxed. Many kinds of property are not taxed at all. The ones that are taxed are land, housing, business structures, and business inventories and automobiles. Those are the major kinds of property. This is interesting because what I’ve left out, all stocks and bonds are exempted from property tax. There is no property tax on stocks and bonds in the U.S., not by the federal government, not by the state government, and not by the local government. There is no property tax on your savings account. Money, that’s property you own. I own a savings account that has $50,000 in it, that’s my property. I’ve accumulated that over the years, I’ve inherited it. However I got it, it’s part of my property. To show you how dramatic this is, if I have a house worth $200,000 in Yipsidoodle, Mississippi, I have to pay a property tax to the town of Yipsidoodle on that property. If I sell that house for $200,000 and instead of having a house, I invest that $200,000 in tax and bonds, my tax bill to Yipsidoodle, Mississippi, is zero. There is no property tax. Neither by Yipsidoodle, Mississippi, nor by the state of the Mississippi nor by the U.S.
What kind of a society would tax some property and not other property, when we all know that the kinds of property average Americans have, if they have any at all, is a house and a car. And that’s what’s mainly taxed in America. Whereas what the rich have, that makes them rich, are stocks, bonds, and cash, which are not subject to property tax. You would revolutionize the financial conditions of every American city and town if its property tax were simply extended from the property now taxed— land, houses, business inventories, and so on—to tax also stocks, bonds, and savings accounts. If you want a quick solution to our problems as a nation, that would be one. And even if you didn’t believe in that solution, it’s worth it to think what it means that we have a so-called property tax that exempts the property of the richest amongst us. If ever there was an example of the point of occupy Wall Street’s 99% versus 1%, there it is.
There are other tax exemptions of property. Here are some examples. You will have to decide which of these are suitable dinner conversation. We do not tax the property of religious institutions. Every piece of land upon which a church, a mosque, or a synagogue sit is exempted from property tax. The buildings of all these churches are exempted from property tax. Here’s what that means. If you live in a town that has lots of religious institutions, it means that lots of the property is owned by somebody, a church, who doesn’t have to pay any tax to the community. The local community still has to deliver to these entities: police services, fire services, public education for their children services. All the things that cities and towns do with the money they raised has to be provided to the local churches and synagogues and mosques. But they don’t have to pay anything for it. There’s no way out of that other than to understand that if you deliver free services to tax-exempt properties, it means the rest of the community has to pay extra to deliver those services to those parts of the community that do not pay for them themselves.
This can become really bizarre if you have, in addition to the churches and synagogues and mosques who are tax-exempt from property tax in a town, the misfortune of having, I don’t know, a big, powerful, rich, private university. Here I can use as an example the city of New Haven in Connecticut, whose largest landowner and whose richest citizen is Yale University. Yale University, which has over 200 buildings in New Haven, and is the largest employer, the largest landowner, and by far the richest citizen of New Haven, pays no property taxes on its educational property, which is about 95% of all the property it has. That means the rest of the people of New Haven must pay more to deliver the police services, the fire services, the education for all those Yale employees, children, etc. And remember, the City of New Haven educates these people, who then go on to work for Yale and are productive employees for Yale because the City has paid for their education from kindergarten through high school and perhaps beyond. Yale pays nothing for that.
Here’s the irony, and it’s emblematic of what this all means. Yale is considered the third or fourth richest university on earth. It lives in New Haven, which is counted by the U.S. Census Bureau as one of the ten poorest cities in the U.S. So here we have it. New Haven, Connecticut, one of the 169 towns that make up the state of Connecticut, has the highest property tax rate of all 169 towns in Connecticut because its poor citizens have to pay higher property taxes to deliver free public services to Yale, that makes no payments for them. That’s called Robin Hood in reverse: the poor people of New Haven are subsidizing the third or fourth richest university on earth, who last year counted as its endowment, its wealth, something on the order of 18 or 19 billion—that’s with a B—dollars. That is an unbelievable story, in which a property tax system takes from the poor and brings it to the rich.
So that’s the property tax. Long ago critics of this system have said, all of the so-called public finance problems of American communities could be solved if you simply extended the property tax to include at least stocks and bonds of private individuals. By the way, we would be taxing those most able to pay, because only those most able to pay have significant quantities of stocks and bonds. If you didn’t want to punish poor people who have a little bit of stocks and bonds, you could always make the first $10,000 or $20,000 or $30,000 or $40,000 or $50,000 worth of stocks and bonds exempt, if you wanted to give those people a break. But the idea that people with tens of millions of dollars of stocks and bonds pay no property tax on that property while you tax the person with a 10-year- old jalopy for having that car is really outrageous. If the cities and towns could tap that property revenue, they would need a lot less help from the state governments, which in turn would need a lot less help from the federal government. So it would be a boon to the whole tax system if you just corrected the injustice of our property tax exemptions.
Let me turn next to the expenditure taxes. Most of those are called sales taxes. They’re taxes that you pay when you buy something. The criticism of them that ought to be made is that they make no effort to discriminate according to your ability to pay. If Rockefeller goes in and buys a T-shirt, he pays exactly the same tax as you or I do. So clearly there’s no effort to distinguish among them. There would be lot of ways of doing that, if you wanted to keep to a sales tax, one of which would be to make the rate change with the price of the item. So if you’re buying a very expensive automobile, the sales tax would go up relative to what you pay for a T-shirt or a pair of shoes, and so on. So you would be able to build in a capacity to pay, the way we do with our income tax. So the first rule would be, let’s talk about that.
The other thing about an expenditure tax is that it has built into it a fundamental inequality. Most Americans, for example, have to spend pretty much everything they earn, because they don’t earn enough to save. If you get an income that you have to spend all of, you’re going to get whacked by taxes twice: first you have to pay an income tax on all the money you get; and then, since you have to spend all of your money for food, clothing, shelter, and so on, you get whacked by the sales tax when you spend it. Compare that to a person who gets a very high income.
What that person can do is save some of their income and not spend it. Every dollar you save is a dollar that doesn’t have to pay a sales tax because you’re not spending it. So, for example, if you save money in this country and you use it to buy stocks and bonds, there’s no sales tax on that. No government comes in and says, you ought to pay a sales tax on buying a share of stock, just the way you do on buying a pair of shoes or getting a hamburger. That is also as grotesque inequality that rewards people whose income is high enough that they don’t have to spend all of it.
Let me turn finally to income taxes. They are by far the largest tax that Americans deal with. The federal government basically relies on income taxes. I’ll come to that. But many states also have income taxes, and there are even a few cities across the U.S., for example, New York City, that has a local, municipal income tax. It means, for example, that if you’re a resident of New York City, you pay a tax on your income to New York City, a tax on the same income to New York state, and a tax on that same income to the federal government. You pay three levels of taxes. Most Americans pay only to the federal government or to the federal government and to whatever state they’re in. But there are quite a few states in the U.S. that do not have an income tax. A minority of states, for sure, but still a significant number. And some of our bigger states, such as Texas, are like that.
Let’s look at the income tax. First of all, I’m going to focus only on the federal government because that’s the major place we pay our income taxes. The first thing to understand is that the income tax is the only tax in the U.S. at the federal level that has built into it the notion that you ought to pay more if you’re rich than if you’re not. We call that a graduated income tax. It’s sometimes referred to as a progressive income tax. The basic way it works is this: Everybody pays the same percentage on the first $10,000 of income, then everybody pays a slightly higher percentage on the next $10,000 or $20,000, and so it goes. The higher the income you get, the higher the percentage on the last portion of it. The federal income tax in the U.S. today peaks at 35%, so if you earn above whatever it is these days—I haven’t looked at the numbers recently—say, $70,000—then every dollar over that that you earn, you must give 35 cents to uncle Sam and you keep the other 65 cents for yourself. That’s the top income tax bracket, it’s called. So at least we see there some effort to tax people according to their ability to pay. I think that principle is very important. It’s been the principle of the income tax now for an entire century. The income tax began around 1910, so here we are, literally 100 years later, and nobody, however conservative, has basically been able to get rid of that. The American people, Republicans and Democrats alike, have endorsed a progressive structure of the income tax.
However, rich people, who don’t want to pay taxes and who I’ve already told you don’t pay property taxes on their stocks and bonds and get out of paying sales taxes by having enough income to put a lot of it into savings and investments, have not limited themselves to getting out of local and state taxes. They’ve also worked on the federal level. Let me show you how.
First, it’s interesting that progressivity stops at 35%. Why in the world does it stop there? Why doesn’t it continue? $20,000 more, you pay 40%; $20,000 above that, you pay 48%, and so on. Why does it stop at 35%? That’s, of course, a tremendous benefit to the rich— people who earn 200,000, 400,000, 800,000, 1 million, 2 million, 6 million, 10 million. And we have Americans in those categories, lots of them. Why are they not required to pay higher steps? That is a perfectly reasonable, logical question for a tax system that says it’s progressive but stops being progressive at a relatively low standard of, say, $70,000 or $80,000 and at a relatively low tax rate.
To drive my point home, let show you that at other points in American history we have been very different. For example, in the 1950s and 1960s, the top income tax bracket that the highest income tax payers had to pay was 91%. Let me make clear, everybody, say, in the 1950s and 1960s who got over whatever the top bracket was, say, $70,000 or $60,000, every dollar a man or woman got over that, they had to give Uncle Sam 91 cents, they got to keep 9. I’m not describing the Soviet Union or China or Cuba or places like that. I’m describing the United States not that long ago.
Something happened between the 1950s and 1960s and today which can only be described as a mammoth tax break, giveaway, to the richest Americans. Their top bracket went from 91% to 35%. No average American ever saw in those years a tax break even remotely that large or enormous. So there’s no way out of the conclusion that over the last 40 to 50 years the number one beneficiaries of tax cuts in the United States were the richest Americans. Part of the reason the gap between rich and poor has become so extreme in the U.S. is precisely because of the success of the rich in buying the political muscle needed to reduce their tax burdens so dramatically.
But that’s not all. Alongside the cut in the tax rates of American individuals, let’s remember that the income tax also falls on corporations. And they, too, have been busy shifting the burden of taxes off of them. The way I summarize that is with a simple statistic. In the 1940s, the end of the Second World War, for every dollar the federal government got from individuals it got about $1.50 in income taxes on the profits of corporations. In 2010 the same number reads as follows: For every dollar the federal government gets from individual income taxes, it gets 25 cents from corporate income taxes. In other words, corporations have reduced the burden of taxes drastically and shifted it over on to individuals.
Now put these two things together.
Corporations shifted the burden of taxes on the individuals, and rich individuals shifted the burden of their taxes onto the middle and the bottom. There we have a large portion of what is the economic history of the U.S. in terms of taxation over recent years.
The solution, therefore, to the tax problems of our federal government not having enough money to maintain a health service, not having enough money to provide decent Unemployment Insurance, of cities and towns not having enough money to keep their streets clean, to build proper public housing and all the rest is not about there being enough money. The real issue is and should be addressed as a country that has systematically reduced the taxes it used to get both from business and from the rich. The only thing that’s worse than having cut taxes on those who can afford it the most is to think that now the way to solve that problem is to cut the services that the middle and lower class need, because that is punishing the victim rather than the beneficiary of what’s been done with our taxes. So as I said at the beginning, if Americans understood even part of what I’ve just summarized, you would have a tax revolt of a very different kind, of a very different intensity than what we’ve seen.
When somebody goes to have a cup of coffee and a sandwich for lunch, they can’t use that expenditure as a tax write-off. But when a CEO or some bankers go to The Four Seasons, a very expensive restaurant here in New York, for lunch, they can write that off as a business expense.
It’s one of the many examples of how the Tax Code, which, by the way, takes hundreds and hundreds of pages, if you ever actually get it from the IRS—all those hundreds of pages have to do with countless details and regulations and rules that have been written into the Tax Code under the pressure of lobbyists for corporations, for rich people, and so on, to get them little gimmicks that will alleviate the taxes.
Let me address the big one that you referred to. Years ago, the Internal Revenue Service said to the mass of Americans, Look, you have the right to go and use the Tax Code and find each and every gimmick that might conceivably be used by you to lower your tax bill. But you don’t have the expertise, the language is legalese, hard to understand, and you don’t pay enough taxes for it to pay for you to hire a tax accountant or a lawyer to do that work for you, because it will cost you more to pay for that specialist than you will get as a saving in taxes. So we give you something called a general exemption. We give you the right to write off 15% or something like that of your income as somehow a summary of all your expenses. That’s probably more generous to you than you would be able to afford if you went through the trouble of finding little gimmicks or paid someone to do it.
But for rich people that’s not case. Rich people earn enough that for them paying $5,000, $10,000 to an accountant to make sure that every gimmick is used is well worth it, because they will save you 20 times what it costs you to hire them. They, therefore, go and not only get those gimmicks written into the law but make sure they take advantage of them.
Here’s how your example works. One of the gimmicks is to say that if you have an expense that is part of your business income, well, then it can be counted against that income. So, for example, if you had to spend $300 on a lunch to win a contract for your company, then the $300 for lunch is an expense of getting your income, and you’re allowed to deduct that from the income because you only get what’s left over from the profit. So now it means that an executive who goes and has a $300 lunch with a client can say, “This was an expense,” and that reduces their income tax. You can’t do that when you get a sandwich because it doesn’t pay you, you don’t make enough. But a rich person does.
That gets even more fancy because, for example, that same rich person can have a property, say, in some elegant resort in Vail, Colorado, where they go skiing, and they take a client from time to time. And therefore they claim, “The only reason I have this lovely place with a butler and maid and a chauffeur to get me from the airport to there is to do business.” And the little detail that they take their family five times a year also for having a good time, well, that’s a little detail no one quite pays.
Basically, we have to understand that those with the resources have been able over the years to rewrite, to add to, to modify the tax code in an innumerable number of ways to create for themselves opportunities to get out of paying taxes that simply have not been created on anything like that scale for the average American. As a result, you have the same thing in the existing Tax Code that I already described in terms of all the tax exemptions, where you don’t even have to pay anything.
And one of them is this whole notion of charging off allowable expenses of your life. The average person doesn’t do it, using the standard exemption, because it doesn’t pay. But if you’re rich enough, it pays, so you get out of it. That’s, by the way, why not only can you deduct fancy apartments in Colorado or costly meals in a restaurant, but you can do all kind of other things.
One of my favorite examples is, using this thing called the charitable deduction, you can give something you own to a charity of some sort and you can deduct the market price of what you gave them from your own income and reduce your income tax. This has led to some creative manipulation among wealthy institutions and wealthy people. Suppose you are wealthy enough to have a very expensive painting by Pablo Picasso hanging in your living room. And you realize that you’re earning so much money, you need some deductions, you need to reduce the amount of money for tax purposes so your tax bill is reduced. Here’s what you can do. Suppose you earn $10 million a year, you’re some hotsy-totsy executive, and you have this Picasso on your wall. Let’s say it’s worth $1 million, which many of his paintings are, they’re worth much more than that. So you have a $1 million Picasso, a little sketch. You can give it to—I don’t know, let’s pick Harvard University. Harvard University and you will work out the following deal, and this is legal by the Tax Code. You give to Harvard the painting this year, 2012, and that gives you the exemption this year. So suppose this year you earn $1 million but you give this painting to Harvard in this year worth $1 million. You then take the $1 million worth of painting you give to Harvard, deduct it from your $1 million worth of income this year, which means you have no income for tax purposes at all. The $1 million you actually earned has deducted from it the $1 million worth of painting you give to Harvard. So your tax bill this year will be nothing, even though you earned $1 million.
But that’s only the beginning. Now step two. Harvard, to whom you have given the painting, has the legal right to lend it back to you. Oh. And for how long? They can legally lend it to you for the rest of your life. Therefore, it never leaves your wall in your living room, it never goes to Harvard. This is all done on paper. It stays right on your wall, and it will stay there for the next 10 years or 20 years, however long you live. And then when you die, it will go to Harvard. Harvard is happy because it will eventually get it and it costs them nothing. You’re happy because now, many years before you die, you get the full value of that exemption. That’s all legal. That all had to be written into the Tax Code to make it legal.
That’s what’s done in a thousand ways to make rich people have—what? The results you read in the newspaper from time to time when some inquiring reporter goes and checks big corporations or wealthy individuals and discovers that they don’t pay anything like the taxes they’re technically supposed to pay. That was the famous example last year when Warren Buffet, one of the richest men on earth, explained that he pays as lower tax out of his income than the secretaries in his office do, and that’s because he has a tax accountant who takes advantage of all his expensive meals, all his fancy jets, all his multiple homes around the world, and makes them all into the legal expenses that reduce his burden.
The sales tax is often called regressive by those who are critical of it. Maybe just to give one example, let’s say you pick up a very expensive piece of electronic equipment for your home, not something essential to one’s existence. But then you have the whole issue of food being taxed, which is hardly a discretionary or luxury item.
Again, a sales tax can either be regressive, namely, it hits “everybody” at the same rate, precisely what the federal income tax does not do, or you could make it progressive. There are many ways of making it progressive. For example, you could charge a higher sales-tax rate for more expensive items. So on something that costs, say, between zero and $100, you pay a 1% sales tax, something that costs between $100 and $500, you pay—etc., etc. That could be easily done. Or even better—and that has been done in a few places where people mobilize to get it done—classes of items are simply exempted from the sales tax, for example, food. Or for a while many states have had a situation that any article of clothing worth, say, less than $50 is just not taxed. And the cash registers at department stores are set up so that if you buy something for $40, there is no tax part of that. And so on and so on. So if you wanted to make it progressive, that would be easy to do. But you would have to mobilize the political force of the mass of people to get that done. If you don’t, you leave the field to the wealthy, who use their tax lawyers and accountants and their political contributions to get a Tax Code that tilts in their favor. That’s what we have.
Grover Norquist, a Washington lobbyist and operative, has been almost single-handedly successful in demonizing taxation. He’s also managed to change the actual vocabulary. For example, the estate tax is now called the death tax. When you tell that to an average person who is going to die, they’ll probably think, I don’t want to have a tax when I die. But that’s not what this is about.
It’s clever to use names. It occurs to me sometimes, we ought to call the property tax a privilege tax. If we called it a privilege tax, everybody would wonder, whose privilege, and then we would explain to them the privilege of all the people who don’t pay property tax, whether they’re rich universities or folks with stock and bond portfolios and so on. Yes, the whole demonization of taxes has been brilliant, because you’re playing on people’s resentment that they have to pay any tax by trying to frame the issue as whether we pay or don’t pay rather than what the issue really is, which is who pays and who gets out of paying. If you framed it that way, then, of course, the logic would be, gee, who is getting out of it? And then people like me could explain exactly who is being privileged in this way and who isn’t. So, yes, I think Norquist and other tax battlers have been able to basically pull the wool over a lot of people’s eyes by not facing up to the real history, which is why I stress it as a historical example, in which one part of the community shifts the burden of taxes off of itself and on to the other part.
I think another example that might be interesting to people is Social Security. That’s a very big part of what the government has to do now. It has to help people who have done a whole lifetime’s worth of work. They retire at age 65. They have had money withheld by the government for their entire working life. And that then provides them with a pension of sorts. The pension is very modest. Social Security does not provide very much money to people. But it’s a lot better than getting nothing. And people are kind of grateful in America. It’s a very popular program, and always has been, to provide some help not only for the people who reach age 65 but, obviously, for their children, who therefore don’t have as big a burden to take care of their parents as they would otherwise have. So it really doesn’t just benefit the older folks; it benefits everybody in the society.
We don’t have a progressive Social Security system. We actually have a regressive one. Let me explain. Under the current system, the Social Security tax, the money raised to pay pensions and to help people who have debilitating injuries or loss of a parent, things like that, we don’t raise that money in a progressive way, we raise it in a regressive way. It’s very unfair, and I think it’s an important thing to understand, especially these days, when so much is made of the claim, which is false, that the Social Security system is in some kind of financial trouble, can’t pay its way, will dry up, things like that.
So let me explain. Under the law, an individual has a certain amount of money, a certain percentage of their income, withheld for Social Security, 4.-something percent, and the employer has an equal share withheld that they have to pay. So you get put into your account the 50% of what’s put into your account that’s taken out of your salary and an equal amount matched by your employer.
Here’s the interesting thing. It’s only on the first $107,000 of income. On the first $107,000 you earn, everybody pays the same percentage. If you earn $10,000 a year, $40,000 a year, $80,000 a year, up to $107,000, you have the same percentage, 4%. So there’s no progressivity there. But now it gets worse. On every dollar you earn over $107,000, nothing is withheld. So notice again, if you’re rich, if your income is $150,000 or $200,000 or $300,000 or $600,000 or $1 million or $2 million or $5 million, all of the money you earn over $107,000 has no Social Security withheld from you at all. And if you think that’s unfair, you’re just at the beginning. Social Security taxes are withheld only on your wages and salaries, not on any other kind of income. If you have dividends you earn from your stocks, interest you earn from your bonds, capital gains you make by buying stocks and selling them, or rentals you get, if you own property, all of those kinds of income have no Social Security deduction at all. It’s the rich in America who get those kinds of incomes. So there again, you see that the Social Security system puts the burden of taxes on everybody who earns $107,000 or less from wages and salaries. Everybody else, the rich, are exempted. It’s unfair, it’s not progressive. It’s the opposite. It’s regressive.
The Occupy Wall Street movement has certainly brought attention to some of the inequities and contradictions of the Tax Code, but in general, why is so little known about the intricacies of the Tax Code?
I think partly, and the least important, it’s complicated. Again I remind you, take a look at the Tax Code books issued by the Internal Revenue Service and you will see. These are tomes. These are mammoth volumes of immense numbers of pages. The Tax Code is effectively reworked almost every year. If you’re wealthy enough to use a tax accountant, you will get a memo from the tax accountant at least once or twice a year simply letting you know what some of the major changes are each year that might affect you if you’re rich. This is a kind of income that is now more or less taxed. And a clever tax accountant, well paid by a rich client will move assets, will get rid of a horse ranch and buy a painting or get rid of a painting and make a contribution to some university, in order to take advantage of the constant changes. Most Americans have no incentive and don’t have the resources to take advantage of this.
Remember, all the time, interests looking for a new tax break will pay high-priced lobbyists to do the work in Washington or the state house of a state to get the Tax Code adjusted, to get the regulation shifted, to get a new law passed. This adds up. That’s why particular groups have what we’ve come to call loopholes—all those little arrangements that get slipped into a bill at the last stages of it going through passage. Just before it reaches the president’s desk or the governor’s desk for signature, a little amendment is stuck in. Nobody pays much attention, because it’s such a little deal that only 16 sugar farms will be able to take advantage of it. But they will save hundreds of millions of dollars, so it will have paid them to spend $10 million giving some lobbying firm in Washington the ability to hire 50 people to bother the six congressmen and congresswomen they need to vote in a different way, to give them all kind of contributions and all the rest of it to get the thing written that nobody will notice but will save them $100 million over the next five years. And by them saving $100 million of taxes, we all have to remember, the government has to make up somewhere else the money it’s not going to be getting from the people who have gotten that loophole. You add that up, all the people getting loopholes, that’s why we pay the taxes, those of us who can’t get that kind of benefit, under this system.
Lotteries, now run by most states are, you say, disguised forms of taxation. Explain what you mean.
Over the last several decades the American tax system has faced a revolt, understandably, by the middle- and lower- income people, who pay a disproportionate amount of taxes given what the tax system is supposed to do, which is in the sense of the federal income tax, tax people according to their ability to pay. In all the ways I’ve described, that goal, that objective, which is in the interest of most Americans, has been systematically thwarted, frustrated, and indeed the opposite has been produced. Therefore, it’s not surprising that Americans, in general, are angry about taxes, want their taxes cut.
This has left the state in a kind of difficulty. How are you going to deliver all the services, particularly to the rich and the corporations who want those services, if you can’t get the taxes, either from them or from an angry population, to pay for it? One solution, one avenue of dealing with this that political leaders have found is gambling, that is, to reverse the long American distaste for gambling that has made it illegal to have lotteries, to have racetracks, to have all those things in most parts of the U.S. All that has had to be chucked out the window. We can’t afford these religious taboos. The government saw a way of taxing that they didn’t have to call a tax, so they wouldn’t have to admit, Oh, we’re taxing the people. They have to get rid, however, of the taboo on gambling. Why? Because the state could then become the monopoly gambler. Those who have ever lived in an urban area in the U.S. know that the numbers racket and lotteries have long been in existence, but they have been one of the black-market activities in our society, money to be made by illegal means, whether it’s run by criminal gangs or neighborhood folks.
Over recent decades, squeezed by the mass of people, angry about the taxes that have been shifted on them, even if they don’t understand that that’s happened, the politicians came up with lotteries. Here’s a way to tax the mass of people without calling it a tax while having the mass of people kind of enjoy the whole process. It’s a politicians dream—getting money out of the mass of people without offending them, without appearing to be doing what you’re doing because that can get you voted out of office, if you levy a tax.
Here’s how it works. The government establishes a lottery. It says to the mass of people, Here. Give me your money, in the form of buy lottery tickets. I’m going to then give a tiny handful of you a ton of money and the rest of you are going to get a fantasy, a few hours in which you can say to yourself, Gee, what would life be like if I won $1 million, or whatever it is. If you look at the statistics, here’s how it works. Every government—and it’s mostly been state governments—every government that has instituted a lottery takes in more money from ticket sales than it pays out. That’s the whole point of a lottery. So what we have here is a net flow of money out of the hands of masses of individuals in to the government to help pay for what the government already is doing, whether it be schools or highway maintenance or anything else. So it is a kind of tax. It’s taking more money from people than they otherwise would have. It’s just you’ve cleverly sold them a fantasy, an imaginary moment of thinking what life would be like if they actually won the lottery.
But when you think about it, here’s two facts about it that should show you what the real meaning is. I once spent some time in the state of Connecticut, where I used to live, looking at a map of the state. It showed where people lived who had different levels of income: where the poor people lived, where the middle-income people lived, where the rich people lived. Superimposed on that map of Connecticut was a map of where lottery tickets were sold. Guess what? The lower the income level of the people, the more lottery tickets were sold. In other words, the lottery is a regressive tax: it takes much more money from middle- and lower-income people than it takes from the rich. So it not only pleased politicians to earn more money for the government, it also allowed them to do something that basically fell as a burden on middle- and, particularly, lower-income people.
Economically speaking, lotteries are also a disaster, and it’s easy to explain. What lotteries do is take $2 or $3 or $4 a day, often from poor people. Here’s what economics teaches us. The poor people and the middle- income people, who are the overwhelming majority purchasers of these lottery tickets, would have spent that money on goods and services that would have given jobs to other people. What the state does is take that money from all the little ticket sales and give a huge amount of it to two or three or four individuals, making them suddenly very rich. But here’s what we know in economics. If you’re very rich, if you’re suddenly a millionaire, a huge portion of your income will no longer be spent on goods and services, because you don’t need to, you’re now a very rich person. You will save a lot of it, you will invest a lot of it. You will buy shares of stock, you will put it in a foreign bank account. You will do all kinds of things other than using it to buy goods and services. So this is moving money from people who would have spent it and thereby created a demand for jobs and giving it all to a handful of people who will not spend a good portion of it. It is therefore the very worst thing you want to do in an economy that needs stimulation, that needs demand, that needs consumers buying things, because you’re basically invading consumption by moving money from the masses who would have spent it to a tiny number of people whose very wealth guarantees that they won’t spend a significant part of it. So it is economic nonsense. It simply solves the problem of bankrupt governments unable or, more likely, unwilling to tax the rich and the corporations who have been exempted by their lobbying and their political contributions for the last 50 years.
You say lotteries are also powerful ideological and political weapons. In what way?
They sustain illusions. They sustain that this is a system and a society in which you can become suddenly rich. It’s interesting that at a time when the job situation makes the idea of everybody becoming rich by work look further and further away, look less and less likely, people have an even greater need to turn to the fantasy of a lottery as a way to sustain the illusion that wealth, comfort are within reach. Gee, by just buying one of those little tickets that’s available at every corner store. So, yes, it sustains that notion. Remember also that all the state lottery authorities make a big point of doing public relations, giving you the picture of the mother who won the lottery so you could imagine yourself, too, like her, being a winner. So it sustains the illusion. It plays the role that used to be played by the Horatio Alger myth. You tell a story about a person who came from poverty and worked real hard, and then he or she finally made it into the ranks of the rich. This is a story you tell to offset the misery and depression of all the people who can’t do that, who never did do that. The lottery keeps that going now that the notion of working your way to wealth has become the real fantasy.
(Due to time constraints some portions of the interview were not included in the national broadcast. Those portions are included in this transcript.)
For information about obtaining CDs, MP3s, or transcripts of this or other programs, please contact:
P.O. Box 551
Boulder, CO 80306-0551