Here’s the first thing you need to know about the tax reform plan that one of the most pivotal lawmakers in Congress, New York's Charlie Rangel, announced last week: The total package has no chance of becoming law in what’s left of this year — or next year either.
But Rangel’s proposals, even so, really do matter. His tax package represents the most specific attempt yet by a significant Democrat to lay out a post-George W. Bush tax future. Would that future, should Rangel's plan eventually triumph, leave the United States significantly more equal? Good question. We explore it this week in Too Much.
Also this week: a look at why top officials at America’s elite colleges and universities just might be rooting for Rangel to falter.
The robber baron era lives — and how — in Mexico. Indeed, notes a new analysis in Foreign Policy, the Mexican billionaire who this past 
summer became the world’s single richest individual currently boasts a fortune that over triples, in relative heft, the fortune of John D. Rockefeller “at his peak.” This Mexican billionaire, the 67-year-old Carlos Slim, has parlayed political connections into near-monopoly control over his nation’s land and cell phone networks. Last year, Slim’s net worth jumped, on average, over $1 billion per month. Mexican consumers, for their part, pay over twice as much for phone services as their counterparts in Canada and the United States . . .
A burning question for our top-heavy times: How do owners of the Rolls Royce Phantom — a 19-foot-long motorcar that typically costs about $500,000 — get about on their chauffeur’s day off? Rolls Royce has an answer: the “baby Rolls,” a new drive-it-yourselfer now due to hit showrooms sometime in 2009. BMW, the automaker that has owned Rolls Royce since 1998, has spent an estimated $1.5 billion on the new model’s development and expects to market the baby Rolls at around $260,000. But executives don’t expect their babymobile to cut into sales of the more regal Phantom. Explains Rolls CEO Ian Robertson: “Most of our buyers have a car for each occasion.”
Back in 1992, an American Airlines pilot with 12 years experience, took home $159.73 an hour. The current hourly rate for a pilot with that same experience: $158.85 — or 53 percent less than pilots would be making today if their paychecks had kept up with inflation. Meanwhile, as the airline's pilots union observed last week, the purchasing power of the American Airlines CEO “has gone up 560 percent since 1992.” And top American executives have, over the past two years, collected a quarter billion dollars worth of “performance-based” stock awards. The pilots have been bargaining with American Airlines management since June 2006. They want to see more, union leaders noted last month, than “the vast enrichment” of American executives . . .
The most valuable perk in CEO pay land? Would that be the free personal trips top execs get to take on company jets? Or the free country club dues? Gregory Reyes, the former CEO at Brocade Communications, would probably pick still another perk that regularly graces executive pay deals: the indemnification clause. These clauses commit corporations to cover the job-related legal fees their executives run up. Reyes has certainly been doing some running. His legal defense against stock option backdating charges, the American Lawyer reported earlier this month, “could eventually reach $100 million.” A federal jury found Reyes guilty on all charges in August. He’s appealing . . .
Russian mega millionaires, a Miami Daily Business cover story reports, are flocking to South Florida — and the invasion, for local realtors, couldn’t come at a better time. Thousands of empty condos are now depressing the area real estate market, but Russian buyers are keeping that market's top-end booming. Realtors at Sol Sotheby, for instance, have moved 12 high-end units — average price, $7 million — so far this year. Three of the units went to Russians. One Miami entrepreneur has even launched a Russian-language magazine that features South Florida luxury homes. Sums up Genesis International Realty's Graciela Gonzalez: “Anything under $400,000, you just can’t sell it. If you have a $1 million and up condo, then it’s not a problem.”
Quote of the Week
“It beggars belief that they are somehow working twice as hard as five years ago.”
Brendan Barber, general secretary, British Trades Union Congress, on the news last week that average earnings for the UK's top 100 corporate chief executives have doubled over the past five years, to $6.4 million.
New Wisdom
on Wealth
Beverly Gage, The Rockefellers and the Angry Commoners, Slate. A century ago, this Yale historian points out, the "class question" dominated American politics. Why the silence now?
Eric Toder, What Is the Tax Gap? Tax Notes. A new analysis by a Tax Policy Center senior fellow offers a clear rundown of what we know in the United States — and don't know — about the gap between taxes owed and taxes paid.
Here’s what the tax plan that congressman Charlie Rangel announced last week won’t do: The plan won’t “increase taxes on working families by a staggering $1.3 trillion,” the bizarre charge that Missouri’s Roy Blunt, the second most powerful Republican in the House of Representatives, leveled Thursday.
Unless, that is, your definition of “working families” includes private equity fund managers making hundreds of millions of dollars a year.
These somewhat atypical “working” families would pay more in taxes, perhaps as early as next year, if the first piece of the Rangel plan gets through Congress and past the White House.
Rangel’s plan more or less breaks down into three distinct pieces. The first, essentially a temporary fix, would limit the number of households subject to the alternative minimum tax, the parallel tax code originally created to stop rich families from evading taxes.
This “AMT” has morphed, since its 1969 creation, into a tax that jacks up tax bills on mostly upper middle class families. Last year, the AMT affected 3.5 million households.
That number could jump by 21 million households this year, with each paying an average $2,000 more in taxes, unless Congress takes action before the IRS prints up the 2007 tax return forms.
Rangel’s plan earmarks enough money to roll back any AMT “surge” in 2007 — and raises that money by plugging the “carried interest” loophole that lets private equity and hedge fund managers annually avoid billions of dollars in taxes.
Under Rangel’s proposal, hedge fund kingpins would also have to start paying taxes on income they stash into offshore accounts.
The second piece of the Rangel plan — a piece that he won’t move for a vote until next year — would abolish the AMT outright. To offset the lost AMT revenue, Rangel is proposing a “surcharge” on high incomes, an additional 4 percent tax on incomes over $200,000 and an extra 4.6 percent on incomes over $500,000.
These surcharges would hike the top tax rate that affluent taxpayers pay on ordinary income to 39.6 percent and the top rate on dividends and long-term capital gains — the income from the sale of stocks and bonds, for instance — from 15 to 19.6 percent.
These and other changes in the Rangel proposal would, in 2008, hike taxes on America's most affluent 1 percent (average income: $1.4 million) by an average $34,828, or 8.8 percent, says the Tax Policy Center — and taxes on the nation's top 0.1 percent (average income: $6.5 million) by an average $212,641, or 10.7 percent.
Families at the middle and lower end of the income ladder, in the meantime, would see their taxes fall under the Rangel plan, largely through an increase in the standard deduction.
The third piece of Rangel’s plan addresses corporate taxes. The plan would slice the top corporate tax rate from 35 to 30.5 percent — and end the loopholes that, under current law, have lowered the actual average tax rate on corporate profits to the mid 20 percent range.
Will all these changes, taken together, leave the United States less unequal? To a limited extent, yes. Rangel’s changes would essentially offset most of the tax breaks for the rich that the Bush administration plopped into the tax code in 2001 and 2003.
But a straight undoing of these rich people-friendly tax cuts, a Brookings Institution report noted earlier this year, only negates about one sixth of the rise in U.S. inequality since 1979.
Rangel's plan, in sum, amounts to a modest first step down the road to a more equal United States. That could be good, because all great journeys start with single steps. But that could be bad as well, if lawmakers — and Presidential candidates — end up treating Rangel’s plan as the most, not the least, that can reasonably be achieved.
The private equity and hedge fund tax reforms that Rep. Charlie Rangel proposed last week would raise, the House Ways and Means Committee estimates, $48.3 billion in new revenues over the next decade, enough to help make college affordable for an entire generation.
But you won’t find any of America’s elite colleges and universities leading the charge for private investment fund tax reform. They seem to be quite comfortable with the private equity and hedge fund status quo. And why not? That status quo is making them a fortune.
Over the past ten years, top college endowments have more than tripled their financial stake in private investment funds and other “alternative” investments.
Yale, the university that has led the move to these speculative alternatives, now has about a quarter of its investment portfolio in the hedge fund world. Last year, that portfolio yielded a 28 percent annual return. Yale’s endowment currently totals $22.5 billion.
A dozen years ago, only 17 schools had endowments worth at least $1 billion. The total at the start of last year: 62.
Where’s all this hedge fund fortune going? Not to students in need.
“Today,” the Chronicle of Higher Education reports, “the nation's wealthiest colleges and universities, those with endowments of $500 million or more, serve only a small proportion of low-income students.”
In 2005, households with incomes under $60,000 made up 61 percent of U.S. households. But only 19 percent of students at private colleges with endowments over $1 billion, notes the New America Foundation, “come from families with incomes under $60,000 a year.”
One key factor behind this dynamic: Foundations, under the law, must every year spend at least 5 percent of their assets to further their mission. University endowments face no such mandate — and many are spending less than 5 percent of their ample assets on programs that help students.
These endowments, instead of spending their dollars on education, are lavishly investing with private equity and hedge funds, in the process making fortunes in fees for fund managers.
How much is this endowment empire-building costing college kids? If colleges with billion-dollar endowments actually spent out 5 percent of their assets on education, says the New America Foundation, an extra $1.5 billion would be “available annually for financial aid.”
Senator Charles Grassley from Iowa is now contemplating legislation that would require universities to start sharing their wealth at the 5 percent foundation standard.
Colleges are already objecting. The federal government, a higher ed lobbying group protested earlier this month, should not be telling colleges “how to spend their money.”
Stat of the Week
“In 1982,” notes nationally syndicated columnist Holly Sklar, “the highest-paid CEO made $108 million and the average full-time worker made $34,199, adjusted for inflation in $2006. Last year, the highest-paid hedge fund manager hauled in $1.7 billion, the highest paid CEO made $647 million, and the average worker made $34,861, with vanishing health and pension coverage.”
Too Much is published by the Council on International and Public Affairs, a nonprofit research and education group founded in 1954.
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E-mail: editor@toomuchonline.org.
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