Wall Street woke up Friday with a tad bit of trepidation. The federal “pay czar,” in his last act, would be releasing a final report on the billions in bonuses America’s biggest banks handed out late in 2008 and early in 2009, at the same time these reeling banks were collecting the biggest taxpayer bailout in American history.

No one knew exactly what pay czar Ken Feinberg would say — or do. He had options. He had the authority to name names and shame the bank execs who gobbled up the most flagrant bailout bonuses. He also had the authority to declare these bonus outlays “contrary to the public interest,” a determination that would enable him to start renegotiating reimbursement.

The pay czar, in the end, did nothing of the sort. He went out, as one headline put it, “with a whimper.” The bailed-out banks, he reported, handed out $2.3 billion in executive bonuses before bailout pay guidelines went into effect. Three-quarters of this bonanza went to execs who walked off with over $500,000 each.

Feinberg didn't name any of these execs — or declare their bonuses “contrary to the public interest.” In effect, as Barron’s would note, his final report let Wall Street “walk scott-free.” Your blood boiling yet? Wait til you see how Wall Street's finest and their bonus babies are faring on the other side of the Atlantic. We have that story — and much more — this week in Too Much.

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America’s biggest banks are facing no penalty for their bailout greed grab in the United States. But they are paying a bonus penalty — over $2 billion so far this year — to British taxpayers. That’s because Britain’s top treasury official last December imposed a 50 percent tax on all annual bonuses over £25,000, the equivalent of about $40,000, awarded to UK-based bankers. This one-time bonus tax, earnings reports revealed last week, has cost Goldman Sachs alone $600 million and another $550 million for JPMorgan. The tax has actually brought in five times more than UK officials originally estimated. Officials figured that banks would slash bonus outlays to avoid the tax penalty. They figured wrong . . .

If America’s 400 richest suddenly gave half their wealth to charity, nonprofits would collect a quick $600 billion, over double the donations they collected last year from the entire U.S. population. That $600 billion may one day arrive — if Bill Gates and Warren Buffett have their way. The two are urging their fellow mega rich to donate away at least half their wealth, and their campaign has nonprofits all a twitter. But don’t count Pablo Eisenberg among the giddy. Eisenberg, a veteran poverty analyst now at the Georgetown Public Policy Institute, says the Gates-Buffett crusade has the “potential to intensify” America's inequities. The reason? The wealthy, Eisenberg noted last week in the Chronicle of Philanthropy, “give their biggest donations” to colleges, hospitals, and cultural organizations and “rarely make large gifts to social-service groups, grass-roots organizations, or nonprofit groups that focus on the poor or minorities.”

Do we have an alternative to waiting around and hoping the mega rich will donate wealth to worthwhile causes? Last week, an heir to America’s most celebrated entertainment fortune offered one up. The message from Abigail Disney, Uncle Walt's grandniece: restore the federal estate tax. Disney spoke at a teleconference where several celebrity affluents — including hedge fund pioneer Julian Robertson — pressed Congress to undo the one-year repeal of the estate tax now in effect. Wealthy families, Disney told reporters, have amassed their fortunes “not in spite of, but because of the American system of taxation” and the services that tax dollars make possible. Added Disney: “After all, without reliable and safe roads there'd have been no Disneyland.” Congress last week voted down an attempt to permanently repeal the estate tax, by 59 to 39. But estate tax foes are still maneuvering to block legislation that would restore the estate tax at meaningful levels . . .  

In Germany, a group of 51 millionaires who call themselves the “Club of the Wealthy” is asking chancellor Angela Merkel to up the tax bill on the nation’s wealthy by 10 percent for the next ten years — to avoid austerity cutbacks in their nation’s public services. Wealthy couples in Germany currently face a 45 percent tax rate on income over €501,460, about $650,000, plus a 5.5 percent “solidarity surcharge” levied on the tax bill their total income generates. In 2008, according to IRS figures released earlier this month, Americans who made over $1 million paid 23.3 percent of their incomes in federal tax . . .   

In what nation do the wealthy pay the least in taxes? That may be Pakistan. Any Pakistani making over $3,488 a year, by law, should be paying income tax, and 10 million Pakistanis make over that cut-off. But only 2.5 million are paying income taxes, one reason why tax collections in the 170 million-strong nation last year hit a record low. Pakistan may also have the world’s most outrageous tax loophole. Under a law enacted in the 1990s, tax officials cannot quiz Pakistani nationals on money they transfer into the nation from abroad. The wealthy, one news report last week related, routinely shuffle “billions of rupees through Dubai back to Pakistan, no questions asked.” Says one now retired Pakistani tax official: “This is a system of the elite, by the elite, and for the elite.”

Quote of the Week

“Across this country, schools are firing teachers, first responders are underfunded, and hard-working Americans are being denied basic services, all while our deficit reaches record highs. And yet, billion-dollar fortunes are exempt from paying their fair share of estate taxes. There is something wrong with this picture.”
Senator Tom Harkin, July 20, 2010, explaining why he is co-sponsoring legislation that would set a 65 percent estate tax on fortunes over $1 billion

Stat of the Week

How much has rising executive pay tilted America's income scales? One indication: In 1972, the nation's top 1 percent took in 7.75 percent of all income in the United States, excluding the capital gains from buying and selling stock and other assets. The comparable top 1 percent share in 2008: 17.67 percent.

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America's Top Incomes: Down But Not Out

New data — for 2008 — have revealed a shrinking gap between the rich and the rest of us. But the nation's top high-income tracker isn't celebrating. And neither should we.

Will the Great Recession, once the dust settles, leave the United States less unequal? A reasonable question. The last time the United States experienced economic times as painful as ours today, back in the Great Depression, the United States did become less unequal.

In 1928, the last full year before we sank into depression, America’s top 1 percent were taking home 23.9 percent of the nation’s income. A decade of depression later, that top 1 percent share had dropped to 15.8 percent.

Are we now headed in the same more equal direction? America’s most respected income tracker, University of California at Berkeley economist Emmanuel Saez, has just ventured an answer.

Every summer, deep in the dog days, Berkeley’s Saez crunches the latest annual IRS tax return data to pinpoint who’s getting a greater share of America’s income and who’s getting less. He presents his data by finely tuned income group. We see, in his numbers, the dollars filling the pockets of the richest of our rich, not just the top 1 percent, but the top 0.1 and 0.01 percent as well.

The latest Saez numbers, released earlier this month, cover the 2008 tax year, the first full year of the Great Recession. And what conclusion can we draw, from these numbers, about the impact of this recession on inequality?

The Great Recession, Saez concludes, appears “unlikely to have a very large impact on top income shares and will certainly not undo much of the dramatic increase in top income shares that has taken place since the 1970s.”

At first glance, the 2008 Saez income numbers don’t seem to support that conclusion. In 2008, the top 1 percent saw their total incomes drop 19.7 percent from the year before, after taking inflation into account. That represented the biggest single-year dip since 1930.

The average income of America's bottom 99 percent also dipped, but only by 6.9 percent. Overall, the bottom 99 percent of Americans increased their share of the nation’s income in 2008. The top 1 percent lost income share. They ended the year with 20.9 percent of the nation’s earnings, down from 23.5 percent in 2007.

But this dip deceives. The income dropoff at the top almost totally reflects the dismal stock market in 2008. The money the affluent made trading stocks and other securities, over the course of the year, essentially fell by half.

Meanwhile, on every other income front, the affluent more than held their own. In 2008, excluding income from stock trades and other capital gains, America’s top 10 percent actually slightly increased their share of the nation’s wealth.

That share, notes Saez, figures to rise substantially higher next summer when we have the final IRS data for 2009, partly because the stock market recovered significant lost ground in 2009 and partly because Wall Street bonuses and other income streams for the super rich skyrocketed in 2009.

This past spring, for instance, we learned that the combined income of the nation’s top 25 hedge fund managers more than doubled in 2009, to $25.3 billion, an all-time record high. In other words, the 2008 dip in the income share of America’s rich appears almost certain to be relatively shallow and short, just like the income dip at the top that followed the 2001 recession.

What explains our shallow dip in inequality today and the long and lasting dip we saw during the New Deal years? Quite simply, sheer political will.

The dropoffs in income concentration we see when severe hard times hit, as Saez notes, will default to “temporary unless drastic regulation and tax policy changes are implemented and prevent income concentration from bouncing back.”

We had these drastic policy changes during the New Deal, and these changes, Saez stresses, “permanently reduced income concentration until the 1970s.”

So far, here in the Great Recession, we have seen no such drastic changes. Today's changes have been painfully modest.

Take financial reform. The reform legislation signed into law last week will have, observers agree, little impact on Wall Street bonus bonanzas. In 2010, as a New York Times analysis forecast last week, Wall Street bonuses will run “at about the same level as last year and similar to 2007,” before the 2008 crash.

Back in the New Deal era, by contrast, financial reform legislation actually reduced the revenue streams that were pouring dollars into banker pockets.

New Deal reforms also swept away obstacles to union organizing, and a thriving labor movement proceeded to give average Americans an effective political and economic counterweight to concentrated wealth and power. Attempts to help workers organize, in our current Great Recession, remain stalled in Congress.

On taxes, the same story. The New Deal raised the top tax rates on income over $200,000 — about $2.5 million in today’s collars — to over 90 percent.

The current tax rate on oversized incomes sits at 35 percent, and the debate this summer in Congress will only consider whether or not we should let that 35 percent revert back to the 39.6 percent level in effect pre-George W. Bush.

No one knows for certain how this debate will play out. But we do know that the ultimate winner will be the wealthy. Their tax rates will, at summer’s end, sit at less than half their New Deal peak.

The retreat from these rates — and the rest of the New Deal reforms that helped create a more equal America — has over recent decades concentrated awesome quantities of wealth at America’s economic summit. If we don't change course, and soon, that retreat could become a rout.

New Wisdom
on Wealth

David Cay Johnston, U.S. Tax Rates: A Bargain Hunter's Dream? Tax.com, July 19, 2010. The facts on the ground that the political tax-cut rhetoric ignores. The key question: Who benefits from the rampant distortion of tax reality?

Berkley Bedell, Impact of 'death tax' on rich is not the only issue, Des Moines Register, July 21, 2010. An 89-year-old successful Iowa businessman makes the case for taxing the rich and ending the concentration of America's wealth in the hands of the nation's wealthiest 1 percent.

The Spirit Level Debate, Royal Society for Arts, London, July 22, 2010. A podcast of last week's historic debate over whether inequality matters. Also available: an interview with Richard Wilkinson and Kate Pickett, authors of The Spirit Level: Why Greater Equality Makes Societies Stronger, and their detailed written rebuttal to recent right-wing critiques.

Joseph Alley, Terrell Gilbert, and Robert Dow, Executive Compensation and Corporate Governance Provisions of the Dodd-Frank Act, Business Ethics, July 22, 2010. A survey of the executive pay provisions in the financial reform legislation signed into law last week.

Citizens for Tax Justice, Allowing the Bush Dividends Tax Cut to Expire for the Richest 2% Will Not Harm Seniors, July 22, 2010. The top apologist for cutting the taxes of wealthy people has offered a bizarre new rationale for keeping the Bush tax cuts in place.

Is Small Business Waking Up?

Scott Klinger, Chuck Collins, and Holly Sklar. Unfair Advantage: The Business Case Against Tax Havens. Business Against Tax Havens, American Sustainable Business Council, Business for Shared Prosperity, and Wealth for the Common Good, July 2010.

Once upon a time, corporations paid taxes. Lots of taxes. A half-century ago, nearly a quarter of federal revenue came from corporate taxes. This year, corporate taxes will contribute just 7.2 percent of federal revenue totals, or so estimates the OMB, the federal budget office.

What explains this massive shift in the corporate tax burden? Have lawmakers, in their wisdom, simply chosen to lower tax rates on corporate earnings? They certainly have made that choice. But corporations have been choosing, too. They’ve been choosing to evade taxes legally due.

And over the last two decades, details this punchy, just-published Unfair Advantage report, corporations have increasingly been avoiding those taxes by parking profits in the Cayman Islands and a host of other offshore tax havens.

One example: In 2008, the 29 offshore subsidiaries of Goldman Sachs helped slash the tax rate on the bank’s $2 billion in profits to less than 1 percent. Goldman that year actually paid its CEO, Lloyd Blankfein, over three times more in personal compensation than the bank paid Uncle Sam in federal taxes.

Corporate reliance on offshore tax havens, Unfair Advantage relates, has surged enormously over the past two decades. Corporate executive compensation, over those same two decades, has also seen a massive surge. No coincidence there.

To fatten their corporate bottom lines — and stoke their personal rewards — corporate execs have turned their corporate tax offices into profit centers. Up until the 1990s, executives feared getting caught cheating on their corporate taxes. They worried that cheating charges would blemish their company image.

By the 1990s, these image concerns no longer mattered. The immense rewards that execs could reap by aggressively slashing their corporate taxes — to pump up their bottom line — gave these execs a powerful personal incentive to play fast and loose on their corporate tax returns.

We’re not talking a few bad corporate apples here. We’re talking, notes Unfair Advantage, about the cream of Corporate America. In 2007, of the 100 largest publicly traded U.S. corporations, 83 ran subsidiaries in offshore tax havens.

The tax games these companies play don’t just deny government the revenue we need to maintain essential public services. These games give big corporations a major competitive advantage over small businesses that pay their taxes.

More and more small businesses are taking note of that reality. Small business leaders last week helped unveil this Unfair Advantage report, and they’re pressing Congress to start moving to shut the tax havens down.

Two lawmakers, Carl Levin from Michigan and Lloyd Doggett from Texas, have introduced legislation that closes a variety of tax haven loopholes. Unfair Advantage lists still more steps lawmakers could — and should — be taking.

Among those steps: Impose a 5 percent “bidding penalty” on tax haven-laden corporations that go after federal contracts. The basic principle here: No tax dollars should go to corporations that cheat on their taxes to stuff the pockets of their movers and shakers.

Our tax system, as Unfair Advantage reminds us, ought to be reducing inequality, not rewarding it.

Inequality Links

Working Group
on Extreme Inequality

Common
Security Clubs

United for a
Fair Economy

The Equality Trust

One Society

Wealth for the
Common Good

New Economy
Working Group

Class Action

Tax Justice
Network

Inviting Thought
(about Inequality)

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