read Perfectly Legal ... by David Cay Johnston, who shows how idealogues have
made America safe for wealthy people who don't feel like paying taxes." —Paul
Krugman, The New York Times
"There is an evil which ought to be guarded against in the indefinite accumulation of
property from the capacity of holding it in perpetuity by...corporations. The power
of all corporations ought to be limited in this respect. The growing wealth acquired
by them never fails to be a source of abuses." -- James Madison
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Perfectly Legal:
The Covert Campaign to Rig Our Tax System to Benefit the Super Rich -
and Cheat Everybody Else
by David Cay Johnston
Chapter 3: The Rich Get Fabulously Richer
In 1977, the richest 1 percent of Americans had as much to spend after taxes as
the bottom 49 million. Just 22 years later, in 1999, the richest 1percent—about 2.7
million people—had as much as the bottom 100 million Americans. Few figures
derived from the official government data on incomes present more starkly the
growing chasm between the rising incomes at the top and the falling incomes at the
bottom.
Those in the top 1 percent saw their average income, adjusted for inflation to 1999
dollars and after income taxes were paid, more than double from $234,700 in 1977
to $515,600 in 1999. Meanwhile, the 55 million Americans in the poorest fifth of the
population lived in households whose average income fell from $10,000 in 1977 to
$8,800 in 1999.The Center for Budget and Policy Priorities, a liberal group that
advocates for the poor, calculated these figures from the sophisticated income data
that the Congressional Budget Office began collecting in 1977. Studies by other
economic research and advocacy organizations made similar findings using other
official data. Across the political spectrum, economists found the same basic trend:
the rich really are getting richer and the poor really are getting poorer.
Looking more closely at the top fifth gives a hint as to how incomes were changing
in the last three decades of the twentieth century. Think of a ladder with 100
rungs. The poorest person in America stands at the bottom and the person with
the biggest income stands at the top, with everyone else taking their place on the
rungs in between.
Between 1973 and 2001, those whose income ranked them above 80 percent of
Americans but below the richest 5 percent—those on the eightieth up to the ninety-
fifth rungs—saw their share of national income rise almost imperceptibly. The
Bureau of the Census calculated that in 2001 they earned 27.7 percent of all
income, up from 27 percent in 1973.
The top 5 percent did much better. Their share of the national income grew by
more than a third, from 16.6 percent to 22.4 percent. There is the suggestion of a
pattern here, of those at the top of the ladder having so much added income that
it is reinforcing their position, holding the middle class in place and squeezing those
at the bottom, whose incomes were falling.
While the Bureau of the Census did not break the numbers down further, many
others did. The National Bureau of Economic Research, the nonprofit organization
that makes the official decisions about whether the country is in recession or
expansion, published the most extensive analysis. The bureau’s president is Martin
A. Feldstein, the Harvard University economics professor who was President Ronald
Reagan’s chief economics adviser. He is a leading proponent of supply-side
economics, the idea that economic growth is most likely if taxes on high earners
are lowered and more capital can be invested. Economists of every political view rely
on the bureau’s data and reports because of its reputation for analysis based on
facts.
Thomas Piketty and Emmanuel Saez, both French economists, wrote a paper the
National Bureau of Economic Research published in 2002 that examined in fine
detail income and wealth data for the years 1917 through 2000. They relied mostly
on the National Income and Products Accounts, the most comprehensive economic
data the government collects, and on tax data. Their study focused not on all
Americans, but on those who made the most and how they fared compared to
everyone else.
There are many ways to measure income. First we will consider what Piketty and
Saez found about the portion, or share, of income going to people at each income
level. That is, how big each income group’s slice of the pie was. Then we will
examine the average incomes of people.
They drew their first line between the top 10 percent and the bottom 90 percent.
Overall the bottom 90 percent lost ground. Their share of national income fell from
two thirds to slightly more than half. And their average income, adjusted for
inflation, was essentially the same in 2000 as in 1970.The average income for the
bottom 90 percent in 2000 was $25,035, which was $25 less than three decades
earlier.
The top 10 percent of Americans had done very well since 1970, or so it seemed at
first blush. These 11.3 million households, comprising roughly the population of
California, saw their share of national income grow by almost half, from just under
33 percent in 1973 to just above 48 percent in 1998. When examined more
closely, however, a curious trend appeared. The figures showed that the higher the
income group, the larger the income gains.
Piketty and Saez cut off the top 10 steps on the ladder and divided the top 10
percent into ever-smaller segments of the population.
They examined those on the rungs from 90 to 95.Their share of the national
income was flat. Next came the slightly smaller group between rungs 95 and 99.
Their share grew by 19.5 percent.
Next the professors sliced off the top rung on the ladder, the top 1 percent or
about 1.3 million households, roughly the population of Kentucky. This group
earned more than a fifth of all the income in the country. The economists broke the
top 1 percent down into ever-finer amounts, into minimums on the ladder, the
smallest of which represented a hundredth of 1 percent, or about 13,400 of the
country’s 134 million taxpayer households.
They examined the bottom half of the top 1 percent. Their share of national income
grew by 47 percent, which was more than twice the rate of the group just below
them on the income ladder.
The professors then looked at those on the minirungs from 99.5 to 99.9. Their
share of national income grew even more, rising by 90 percent. Next came those
on the minirungs from 99.9 to 99.99, just 120,000 households. Their share of
national income more than tripled, growing 227 percent.
Finally, the professors examined the very top rung, the richest 13,400 households.
These are the people who made more than 99.99 percent of their fellow Americans.
They had by far the biggest gains. Their share of national income in the year 2000
was more than five times what it had been in 1970.Back then this elite group
received 1 percent of national income, while in 2000 it received more than 5
percent. Even more telling was how it had done compared to those fortunate
enough to stand between the ninetieth and ninety-fifth rungs—the top group’s
share of income had grown almost 1,000 times faster.
The average income of all households in 2000 was $42,700, while the 13,400
households at the very top had an average income of $24 million each or 560 times
the average. It was not always this way. In 1970 the very top group had about 100
times the average.
Clearly the only significant income gains over three decades went to a very narrow
slice at the top. After adjusting for inflation, for each dollar of income in 1970 the
top 13,400 households had four additional dollars plus a dime to spend in 2000,
while the average household in the bottom 99 percent had only eight cents more
per dollar.
The enormous concentration of income among a very very few becomes even
clearer with a simple comparison of income growth between 1970 and 2000. How
did the top one hundredth of 1 percent compare to the bottom 99 percent? For
each dollar of additional income going to each of those in the bottom 99 percent of
Americans the richest each averaged an astonishing $7,500.
Applying the National Bureau of Economic Research report to the incomes reported
on tax returns in 2000 produces an astonishing result. The 13,400 top households
had slightly more income than the 96 million poorest Americans. That is a chasm
vastly greater than the liberal Center on Budget and Policy Priorities reported when
it said that the top 2.7 million had as much as the bottom 100 million.
The data show that slices of the pie have changed, with a few getting a lot bigger
share and many getting less. Now let’s look at a second way to analyze the data by
examining actual incomes, at what Piketty and Saez found about how much money
people at each income level made in 2000 compared to 1970.
What Piketty and Saez showed from the official government data was that two
decades after the promise that lowering tax rates and reducing regulation would
benefit everyone, the income gains were flowing straight up to the top of the
income ladder. Even the derisive description by critics captured in the phrase
“trickle-down economics” was not proving out. At the bottom there was less
money for food, shelter and clothing. Four out of five Americans were making less
or were no better off in 2000 than in 1970.
People in the middle class and even those making more than 95 percent of their
fellow Americans were working harder than ever and going nowhere fast. For those
on the ninetieth rung of the ladder, average income in 2000 was $90,271, which,
after adjusting for inflation, was a one-fourth increase from the $72,320 in 1970.In
real terms incomes for those on the ninetieth rung rose at less than 1 percent per
year, which was far less than the rate of growth in the economy.
Those at the ninetieth rung saw their incomes rise at an annual average of less
than $600 per year, compared to about $4,600 annually at the ninety-ninth rung
and more than $672,000 annually for the top group, those 13,400 super-rich
families.
Money, it seems, was made to flow uphill. The great majority of Americans were, at
least through 2000, having their pockets flattened . Piketty and Suez’s facts and
figures show us what happened, but they do not say why these changes occurred.
Understanding how this happened involves many issues because, in a nation as
complex and diverse as America, there are many ways to collar a dollar. Some of
these, as we shall see, involved pumping up compensation for those high in the
corporate structure, no matter how it affected the company’s workers and
shareholders. These strategies, in turn, had an important side effect: creating a
demand for corporate tax shelters, which helped shift the overall tax burden off
capital and onto labor. By 2002, the portion of federal revenues coming from
corporations was below 10 percent, down from a third in the Eisenhower years.
The demand for tax shelters in turn encouraged an anything-goes morality about
hiding money, both corporate profits and individual incomes, from the IRS. Some
companies went so far as to renounce America as their headquarters, at least on
paper, once they learned that if they used a Bermuda mailbox as their tax
headquarters they could earn profits tax-free in the United States.
Arranging to have torrents of money flow to a very few pockets also required
putting immense pressure on Corporate America’s front lines, the employees, to
make the numbers demanded from on high. Even if it meant cheating people out of
their wages or disability benefits, or foisting costs off onto the taxpayers,
corporate managers were driven to produce the results the home office demanded
or else join the ranks of the downsized. The cuts in regulatory agencies, and even
in many law enforcement agencies, made such thievery easy. When people
complained that they had been cheated out of overtime or even regular pay, the
agencies had no resources to pursue the cases, even when there was a pattern of
abuse by brand-name companies like Wal-Mart and Taco Bell.
In all of this, both big corporations and those among the very wealthy who wanted
to handcuff law enforcement—at least when it came to stealing by business
practice—had as allies their good friends in Congress. Corporate America’s effort to
mold both political parties to do its bidding was increasingly successful as politicians
needed ever more contributions to buy the television ads that got them reelected.
Politicians insisted that no one bought their vote with their donation and that was
true. But what donations did buy, every politician acknowledged, was access. That
access meant that every senator and representative was listening primarily to the
concerns and ideas of the super rich, of the political donor class. At the same time
the forces arrayed on the other side—unions, consumer advocates and social
service charities—had little to give and, except for the unions, were barred by law
from making campaign donations. These forces were so enfeebled that Congress
often behaved as a wholly owned subsidiary of Corporate America, enabling the
super rich to use their access to lawmakers to assert that what was good for them
was good for the rest of America.
These lawmakers—often passing bills they had not read (some of which came to
the floor of the House or Senate without a single public hearing)—may not even
have realized how they were systematically undermining the economic welfare of
most Americans. Most lawmakers would probably be astonished, for example, to
learn that they passed laws that took away the most powerful incentive for
accountants to behave with integrity, a change that was behind the accounting
scandals at Enron, Global Crossing, Adelphia, Tyco, Waste Management and so
many other companies. And yet the lawmakers encouraged these corporate
scandals by ending a single legal principle—the policy that each partner in an
accounting or law firm was liable for the acts of every other partner. The
significance of how this rule eliminated a powerful self-policing mechanism was
written about in academic journals and debated by the most thoughtful in the
corporate professions, but was unknown to the public because it was ignored in
the news media. Significantly, that change represented a triumph of political
influence interfering with the market. Likewise, few lawmakers probably have any
idea that they passed another federal law that requires companies to put too little
money away in pension plans for younger workers.
This law not only contributes to a lack of financial soundness, it also requires that
so much extra money be set aside for older workers that it creates an incentive to
lay them off. And few lawmakers grasp that the spread of 401(k) plans shifts risks
onto investment amateurs. Fewer still understand how 401(k) plans artificially add
to a company’s balance sheet and generate cash flow by tapping the government’s
pockets, all with no more work than it takes to electronically move a stock
certificate from one computer file to another. The steady erosion of law
enforcement budgets for white-collar crime also emboldened those who would have
behaved better if the chances of getting caught were significant. In the area of
taxes, especially, cuts in enforcement had a dramatic effect on behavior.
A pollster named Frank Luntz persuaded Republicans that the single best way to
get votes was to attack the Internal Revenue Service. He urged them to call for tax
relief—being careful not to say “tax cuts”—a campaign that has cost the
government tens of billions of dollars and emboldened lawbreakers. The IRS budget
has been restrained so severely that only one in five of the tax cheats it identifies is
pursued to make him pay. The other four pay nothing.
Tax law enforcement became so weak that businessmen were quoted on the front
page of The New York Times in the year 2000 boasting about how they neither paid
taxes nor withheld them from their employees’ paychecks. More than two years
later, not one of them had been indicted or even forced through civil court action to
pay up. Not only did more than 1,500 people, caught red-handed hiding money
offshore when their banker turned over records of their crimes, escape
prosecution, but most were not even asked to pay the taxes they had evaded. The
advantages that many of these laws, regulations and budget cuts give to
corporations and the rapacious rich went unreported in the major news media.
As publishers cut news budgets, junk journalism expanded because covering
opinions and official leaks about sex scandals was far less expensive than digging
out complicated facts about the economy, budgets and taxes. Fewer reporters
were assigned to explain how government policies and administrative practices
affected individual lives and the economy. And with stagnant incomes, Americans
were working longer hours just to stay even, leaving less time for family, not to
mention keeping up with what serious news there was about politics and
government. The executives and investors who wanted these changes were not in
a rush.
Unlike journalists who think of the next edition and politicians who think of the next
election, many of them were patient, spending money for decades to get their way
one law, one rule, one fewer regulator at a time. And with their campaign
contributions, they wielded enormous influence. In the 2000 elections for
Congress, the nonpartisan Center for Responsive Politics found that more than 80
percent of identifiable political contributions came from just one in 625 Americans.
By the 2002 elections, the ratio was down to just one in 833, roughly equaling the
top tenth of 1 percent. At the same time the number of Americans who voted
continued to decline. In 2000, a majority of those 18 to 21—the age group to
whom voting was extended during the Vietnam War years—did not cast ballots.
And studies showed that many of those who did cast ballots knew less about even
the major issues of the day than the generation or two before them, much less the
subtle and complex economic, regulatory and tax matters that affected whether
they would ever get ahead. Active pursuit of self-interest makes democracy work.
But democracy also requires vigorous debate and give-and-take. When the great
majority of people are not pursuing their own interests, the power of the political
donor class grows. And while the wealthy have, and always will have,
disproportionate influence over politics, their power can only be held in check by the
great mass of voters recognizing and pursuing their own self-interest. The spread
of corporate policies that prohibit workers from wearing campaign buttons or
discussing politics at work is part of the trend that squelches debate that might
pose a threat to the political donor class and its power in reshaping our tax system
to benefit their interests.
How the rich arranged to do so much better than everyone else, and the reasons
why they took home huge increases in income while many lost ground, were not
state secrets. To the extent that government continues to be conducted in the
open, many of the answers can be found in the public record. But if no one looks in
obvious places and they do not become part of the news, then, like Edgar Allan Poe’
s “Purloined Letter,” those answers can be hidden in plain sight, as we shall see in
the next chapter.
