November 27, 2006

If you're collecting cash by the millions, and underreporting your good fortune on your tax returns, do you have reason to worry? The top tax man from the IRS last week gave one answer. IRS data give another. We have that story — and much more — in this week's Too Much.

Greed at a Glance: Peacock Party Time

If Goldman Sachs, the Wall Street financial giant, distributed all its compensation dollars equally among the company’s 25,647 workers, every employee in the firm would have received just about $500,000 so far this year. But compensation at Goldman Sachs — and the rest of Wall Street’s biggest firms — gets divided anything but equally, says a new federal report, and the resulting top-heavy income distribution is hurting average New Yorkers. In Manhattan, notes Bureau of Labor Statistics regional commissioner Michael Dolfman, “the middle class is being squeezed out of the city because of the tremendous purchasing power of the people in the global sectors of the economy.” The movers and shakers in that global sector, Wall Street ’s top 1,000 investment bankers, will average somewhere between $2 million and $3 million in bonuses this year, “more than 10 times their $100,000 to $250,000 salaries,” say researchers from Johnson Associates . . .

New York’s Metropolitan Museum of Art has just opened a new exhibit that honors the “ultimate purveyor of luxury knickknacks,” Louis Tiffany, the first heir to the Tiffany & Co. fortune. A century ago, the grand parties at Tiffany’s 600-acre Long Island estate almost perfectly captured the over-the-top ethos of a plutocratic age. At one Tiffany soirée, in 1914, 150 “men of genius” supped while “a procession of young women in Grecian garb” paraded trays of stuffed peacocks, followed closely by a line of boys in chef hats bearing “platters of suckling pig.” Tiffany died in 1933, and his 84-room mansion burned down in 1957. Over the next few years, “a period that had little use for Tiffany’s brand of opulence,” notes arts analyst Ariella Budick, the burnt-out ruins just sat there. Today, by contrast, a single Tiffany lamp “can fetch hundreds of thousands of dollars,” a turn of events, observes Budick, that Louis Tiffany “would no doubt have hailed.”

Golf courses have become the latest battleground in the ongoing class war between China’s globalized super-rich and average Chinese working families. Earlier this fall, the president of Xiamen University announced plans to make golf a mandatory course for elite students in business programs — and build, on campus, a golf practice course. Golf, the president argues, can help top students “learn networking skills.” Critics say the golf money could be better spent helping poor students with tuition, up over six-fold since 1996. Almost all golf courses currently open in China operate as private clubs closed to the public. At the Shanghai Sheshan Golf Club, site of a just-held international pro golfers tournament, memberships cost 1.45 million yuan, or $181,250, the equivalent of 10 years salary for a Chinese software professional . . .

The world’s “private” banks — the exclusive financial institutions that cater to deep-pockets with at least $1 million ready to invest — are branching out. One Paris-based establishment eager to build an international clientele, Société Générale Private Banking, has created a wine fund that collects rare vintages, including some that run $1,280 a bottle, and has them stored at specialty shops around the world. About a dozen private banking giants, globally, are now competing for wealth management market share. Their target market — families with over $1 million in nonresidential assets —  make up a tiny fraction of the world’s population, less than a hundredth of 1 percent, but hold 28.6 percent of global wealth, $25.3 trillion in all. Enthuses Pierre Mathé, the top private banking exec at Société Générale: “The market is very buoyant. Everyone can have a piece of the cake.”

Just how many American CEOs have had their stock options “backdated”? Researchers from Cornell, Harvard, and a French business school have revealed a new estimate, based on a statistical analysis of over 19,000 option grants from 1996 through 2005. Options give executives the right to buy their company’s shares of stock in the future, at the price in effect at the day of the option grant. The lower this “current” price, the more profitable the option figures to be. Some 850 CEOs, the new research finds, have had their options backdated to make the “current” price the lowest monthly price of their company’s shares. This manipulation stuffed, on average, an extra $1.3 million to $1.7 million into executive pockets, a sum, says study co-author Lucian Bebchuk, that's “not pocket change.”

The 'Tax Gap' and the Nation's Top Tax Man

If you make over $1 million a year, IRS chief Mark W. Everson announced last week, “you’re a lot more likely to be audited these days than just a few years ago.”

Well, maybe not a lot more likely. In the 2004 federal fiscal year, Everson's own data show, the IRS audited 5.03 percent of those Americans who reported $1 million or more in annual income. In fiscal 2006, the IRS audited a grand total of 6.3 percent of these high-income returns.

Why so few high-income audits? The IRS enforcement division, for starters, remains significantly understaffed. Back in 1997, 25,215 IRS officers and agents worked to keep tabs on 118 million tax returns. In fiscal 2006, Americans filed over 132 million tax returns, but the IRS had only 21,185 staffers looking out for fraud.

The predictable result: Fantastically large sums of income are going unreported. The “tax gap” — the IRS label for “the difference between what taxpayers should have paid and what they actually paid on a timely basis” — is running, at last count, close to $350 billion a year.

Higher audit rates for high-income taxpayers would cut this gap enormously. So would requiring stock brokers to report what their clients originally paid for the shares they buy, not just the price they sell at. The absence of this requirement, in current law, leaves wealthy Americans free to fudge the true extent of their stock-trading profits — and avoid billions in taxes.

“High-income households,” as J. Russell George, the Treasury Department’s inspector general for tax administration, explained at a congressional hearing earlier this year, “typically have a large percentage of their income that is not subject to third-party information reporting and withholding.”

The good news? The Senate Finance Committee, the Wall Street Journal reported last week, is actually “circulating a list of ways to shrink the ‘tax gap’ between taxes owed and taxes actually paid,” with most of the ideas on the list “aimed at upper-income taxpayers.”

Giving Inequality the Good Old College Cheer

The single most powerful engine of inequality in the United States? Over the past quarter-century, that’s been the American business corporation. But now corporations are getting a run for their inequality money — from America’s colleges and universities.

Contemporary higher education, a host of new surveys make clear, is widening the grand divide between America’s most affluent and everyone else. Indeed, the Washington, D.C.-based Education Trust charges in a new study, the nation’s top public universities are rapidly becoming “enclaves for the most privileged of their state’s young people.”

In these flagship universities, spending on financial aid for students from families that make over $100,000 a year jumped 400 percent between 1995 and 2003, the latest year with stats available. Over that same period, spending for students from families making less than $40,000 increased just 20 percent.

The financial aid grants that major state universities are now handing students from $100,00-and-up families — $3,823 on average — are actually running larger than the grants these universities are giving students from low- or middle-income families.

In the process, notes the Education Trust’s new Engines of Inequality: Diminishing Equity in the Nation’s Premier Public Universities, America’s big-time colleges “are becoming disproportionately whiter and richer.” Minority students, for instance, represent over 35 percent of high school graduates in Georgia, just 7 percent of incoming freshmen at the University of Georgia.

But the policies and practices in American higher education that are driving inequality wider go far beyond student aid. Universities, in their internal compensation patterns, are more and more institutionalizing the same sort of enormous top-to-bottom pay gaps that have come to define America's corporate sector.

How pronounced has inequality in higher ed compensation become? The million-dollar university president, the Chronicle of Higher Education reported last week, may soon be commonplace. The million-dollar college football coach, USA Today adds in a new survey, already is. We have more on higher ed's rapidly swelling pay gap.

Stat of the Week: A Pivotal Single Percentage Point

Ever wonder how much income is sloshing around inside the pockets of America's most affluent? One statistical sign of our unequal times: Adding a single percentage point to the top two federal income tax rates — the 33 percent rate that this year applies to income from $188,450 to $336,550 and the 35 percent rate that applies to income over $336,550 — would, over the next five years, raise federal revenues by $90 billion, reports the Congressional Budget Office.

Quote of the Week: Big Money, Big Power

“I want to focus on an issue that is almost never talked about on the floor — that is the power of big money. What are the moral implications? What do these people do when they have tremendous amounts of money? They use that money to perpetuate their own
wealth and their own power. Every day, Congress works on behalf of big-money interests.”
Senator-Elect Bernie Sanders, Vermont, Mother Jones, November 20, 2006

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