The other day I helped my son with his taxes. He was doing them for the first time, after spending a year with his new college degree looking for a job and managing his student loan account. We found out that he would be paying more in federal taxes than a hedge fund manager who made $5 billion. We calculated that he wouldn't be getting a state refund, because Illinois raised the state tax rate from 3% to 5% in 2011. He would have to pay the full 5% state tax. The top 20 corporations in Illinois paid 2.2% from 2008 to 2010, when the corporate rate was 7.3%.
Having ruined my son's day with this information, I made myself feel even worse by digging deeper into the details of tax avoidance by the wealthy. To get into the 1% club, it takes about $400,000 in salary. Members of the club can make up to 10,000 times MORE than this and pay ZERO taxes because they don't call their income 'income' like we do. They call it "carried interest," which means they can defer taxes almost indefinitely.
Then I went back a few years, to the 1970s, when soon-to-be-in-power Republicans became convinced that lowering taxes on the rich would generate more revenue. It didn't work. Federal revenues are currently at their lowest level in 60 years. The average federal tax rate has gone way down for the richest 1%. Yet remarkably it's gone UP for everyone in the 40th to 95th percentiles of taxpayers, which includes most of the rest of us.
How do wealthy individuals respond? They pout, and avoid taxes even further with clever strategies, such as hiring "full service tax evasion advisers" to help them elude the Internal Revenue Service.
It got worse when I compared my son's taxes to those of corporations. In the 1950s, for every dollar of payroll tax paid by workers, corporations paid three dollars. Now they pay 16 cents.
From 2008 to 2010, the top 100 U.S. corporations paid only 12.2% of their income in taxes, and thirty of them paid nothing at all.
At the state level, a study of 265 large companies revealed that an average of 3% was paid in state taxes, less than half the average state tax rate of 6.2%. The 265 companies avoided a total of $42.7 billion in state corporate income taxes over the three years.
How do corporations respond? They pout, and complain about the corporate tax rate in the U.S., even though the percentage actually paid is very low relative to other OECD countries. Then they look for tax havens. Citizens for Tax Justice reports that the 280 most profitable U.S. corporations sheltered half their profits from taxes between 2008 and 2010.
The rest of us pay a variety of taxes that can consume over 40% of our incomes, such as state and local taxes, payroll taxes, property taxes, sales taxes, and excise taxes. These taxes are regressive and steadily rising. In my hometown of Chicago, the city with the highest sales tax in the country, where the state tax rate was recently increased by 66% and property taxes went up $300 per homeowner, and where 2012 state education spending was cut by a greater percentage than in any other state, a tax break of $85 million per year was given to a company (CME) that has a profit margin higher than any of the top 100 companies in the nation.
When my son's in a better mood I'll tell him about all this. I'll try to convince him that despite all the unfairness, paying taxes is still the best way for many of us to show our patriotism. The more benefits one has received from society, the more he or she should return to our country to keep it productive and well-maintained.
Worse than paying taxes, I'll tell him, is NOT paying taxes. Tax avoiders are cheating millions of people who have contributed to America's productivity over the years and would like to share in some of the resulting benefits.
And then I'll advise him not to stand too close when I start my own taxes.