Capital and principal: Right-leaning experts and thinkers consistently point to the fact that high-income earners—those who earn more than $800,000 a year—account for a quarter of federal tax revenue as a rationale for not raising taxes on the wealthy. What’s wrong with this approach?
Maurice Pearl: This is true in actual dollars. But under our current system, people with higher incomes pay less percentage of their income from taxes than what people who work for a living do. We think we should have a progressive tax law where people with higher incomes pay a higher percentage of their income in taxes. The argument we make is that people who have a lot of money pay a lower percentage of their money than people who are poor.
cm: You write in the book that the top 1% own more than 40% of the wealth. What is wealth versus income?
Pearl: Wealth is all portfolios, brokerage accounts, balance in people’s bank accounts, and the value of their homes. The top few million people in the country – 1% of the people – own 40% of everything.
cm: Republicans are now running the 2022 midterm elections over how Trump’s tax cut in 2017 was a huge success. They claim that wages rose and unemployment fell because corporate tax cuts led to increased demand for labor that helped disadvantaged groups. Are they right?
Erica Payne: We wrote the book because of the tax bill. They took on a dynamic that had been going on for 70 years, where the wealthy had less tax obligation to the country, and they used all their political power to speed up that path. The end result is that the country’s richest people are paying less than they have for 70 years as a percentage of their income.
Pearl: The unemployment rate declined from 2010 to the start of the pandemic 10 years later. Nothing great happened in 2017 other than continuing a trend that has been going on for years.
cm: In the book, she outlines the ways in which wealthy people and corporations avoid paying taxes. How did companies including Starbucks, Amazon and Chevron avoid paying any federal income tax in 2018?
Pearl: A lot of these large companies have intellectual property that they put into their overseas affiliates so they can transfer a lot of their income to these overseas affiliates – patents, trademarks, etc. These subsidiaries are located in countries that have lower corporate tax rates than the United States. Starbucks was selling a lot of coffee in Great Britain but booked all profits in the Republic of Ireland, where tax rates were lower. Not all well-known commercial companies in the United States have the funds to set up foreign subsidiaries to move their funds.
Payne: The biggest way wealthy people avoid paying taxes is by taxing their capital gains in exchange for their work. If Morris and I earn $100,000 but make it work and Morris makes the investment, I end the year eight or nine thousand dollars poorer than Morris, even though I worked all year and Morris just pressed a button in his e-commerce account. Making money from your own capital gains is much more beneficial than making money from your business. And therefore [the U.S.] He pretends to embrace the American work ethic but we don’t actually appreciate the work.
cm: You pointed out that your corporation supported a bill in the California legislature to tax earnings from private equity fund managers an additional 17% — the so-called carry-over interest — to offset the tax relief that fund managers receive from their federal income taxes. This failed in supposedly liberal California. why?
Payne: California is usually liberal on social issues. [It is] Not particularly advanced in financial and tax issues. We got a sponsor for the bill to close the movable interest loophole. Every California venture capital fund has signed a letter to the legislature saying the sky will fall if they close this loophole. The legislators surrendered.
cm: Private equity funds claimed they would leave the country if this law was passed?
Payne: We started calling individuals in those private equity funds to challenge them with their letter and we didn’t get any responses. This particular loophole is one of the dumbest loopholes in the tax code but it has some of the most ardent supporters because it secures an enormous amount of money that is split among a small group of [about 5,000] Persons.
cm: She also notes that in the 2017 tax code, there are incentives to invest in plants and facilities outside the United States. Where are the “America First” Republicans on this issue? It seems people should be angry about this.
Payne: It’s in the tax code because Republican donors have asked them to include it. They are not “America First” Republicans, they are campaign donor-first Republicans. The only people for whom the Trump tax plan was positive are the small number of people who fund political campaigns for it.
Pearl: Basically the Republican reasoning was, we have to please the rich or they will be mean to us. The intent was to say that companies already overseas that happen to do occasional business in the US would not have to pay taxes. So, you put a definition where you say based on how much material you have outside the US, and the low taxes you have to pay. This gave each company an incentive to move as much plant and physical equipment abroad as possible.
cm: Historian Tony Judd wrote a few years ago about the decline in political support for Social-Democratic parties in Europe as changing demographics and immigration undermined support for the welfare state. Right-wing parties have campaigned on the idea that benefits go to “undeserving” or non-citizens. How do these kinds of issues play out here in relation to tax subsidies on the wealthy?
Payne: Here the problem is not the will of the public. Public sentiment has always been largely consistent about the need for millionaires and corporations to pay higher taxes. In fact, support for Biden’s infrastructure plan goes up by 10 points when you explain to people that companies will pay for it. The problem is the political system. The vast majority of bipartisan Americans believe that millionaires and corporations should pay higher taxes. Here you have the line between what the public wants and what the officials will do.
cm: In the The Wall Street Journal Ned Lamont, the Democratic governor of Connecticut, was recently quoted as saying he doesn’t want more taxes. “Jobs are being created and I don’t want to do anything to stop this momentum,” he said. Is this a typical sentiment even among prominent Democrats?
Payne: Ned Lamont isn’t exactly a progressive democrat. Some of the biggest problems we have with government tax laws are in states with Democratic governors. In Colorado, Governor Jared Polis supports lower taxes on the rich. Andrew Cuomo attempted to prevent progressive taxation in New York. Gavin Newsom isn’t exactly beating the drums for a progressive tax system.
cm: So, you’re saying that we have two parties – I’ll use a crude term – that were bought by those same rich donors?
Payne: Donor strategy. They have something they want to do, and they know that political control moves back and forth, so they run a well-funded public education [campaign] On why high taxes on the wealthy hurt others. They buy their direct influence across party lines. We must get 51 votes in the Senate to get Biden’s plans to build back better across the finish line. Biden does not need Republicans to reform the tax code. However, there are 12 to 14 Senate Democrats and perhaps 40 House Democrats with connections to Wall Street and corporate America who may not be committed to the critical reforms we need. The Republican Party is a wholly owned subsidiary of some of the richest people in the country, the sole purpose of which is to lower their tax bill.
cm: Are there countries that do a better job in terms of fairness in their tax system?
Pearl: Many Western democracies do a better job than we do. France has a more progressive tax system. If you are a French businessman, you are unlikely to earn a third or fourth billion dollars, but everyone is more likely to have daycare for their children. On average, most people are happier with this type of swap. I think in Europe it was the talk of xenophobia that changed most of their politics.
cm: What four or five things would you do if you had the power to change the tax system?
Payne: First, I’ll equate ordinary income tax rates, capital gains, and inheritance tax income to more than $1 million. I would like to reform the corporate tax law so that companies cannot pretend they are doing business somewhere other than where they do business. I would like to apply global minimum tax like [Secretary of the Treasury] Janet Yellen suggests it. I would put a large fortune tax.
cm: Where is Biden on tax reform and the potential for fundamental change?
Payne: President Biden has put a very powerful proposal for corporate tax reform on the table. He has called for ordinary income and capital gains to be equalized by more than $1 million. The fact that we have a Democratic president saying these things, and now his administration is working so hard to make that happen and get that through the Democratic Senate is a moment when we can make some pretty impressive reforms to our tax system that can bring a level of fairness we haven’t seen in decades.
cm: If it fails it is on these “Wall Street” Democrats?
Payne: If it fails, it is on the Democrats but also on the insurmountable dark forces of influence.