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BALTIMORE CITY PAPER | 11/24/2009
Crash Course
The Maryland Millionaire Count, Tax Scams, and Train Wrecks
by Edward Ericson Jr.
Win McNamee/Getty Images via Photo Journal
Your tax dollars at shirk
The Sun has some predictable drivel today regarding the state's
all-important "millionaire" head-count. Seems it's gone down. By 30
percent! And this is a terrible thing! And it's all because of taxes and
Democrats!
Goddamn Democrats.
As the Sun reports, last year the stated number of "millionaires" in the
state, for tax purposes, was 4,910. The year before that it was 7,067.
The drivel part comes next:
Sen. David R. Brinkley, a Frederick County Republican on the Budget
and Taxation Committee, acknowledged that some taxpayers fell to lower
income brackets because of the economy but insisted that some fled the
state's higher taxes. As a financial planner, he said, he advised one
millionaire client to move to Florida.
Way to advise there, Sen. Brinkley!
The problem with the story is it takes at face value Brinkley's
claims—just as the media usually does—that slightly higher tax rates on
wealthy people cause terrible unintended consequences for normal people.
This is not entirely the reporters' fault; one can't light a Cohiba with
a $100 bill these days without getting smoke in the eyes of half a dozen
"economists" who'll insist that lower taxes on the rich are always the
solution to every problem. But the story lacks context and carries no
challenge to a crazy theory that's embedded in the criticism of
tax-the-rich policies.
First, the context. The 7,067 millionaire count from 2007 represents
about .3 percent of all state filers. The 4,910 count from 2008 is about
.2 percent. Statistically, about .25 percent of American filers admit to
$1 million or more in income. So Maryland's numbers are still in line
with national norms.
But these numbers represent a fraction of those who actually netted $1
million or more.
We know this because the IRS, in a roundabout way, estimated what it
calls the "tax gap." It totals about $300 billion a year—or it did,
anyway, last time they calculated, in 2001.
Tax lawyers like to say the poor cheat and the rich merely avoid. The
2001 figures suggest that the rich cheat plenty, too, with more than
$110 billion in missing income—tax receipts imputed to non-farm
business, rents and royalties, sales of business property, and the like.
These are not all millionaires, but they are not EITC filers, either.
And since these figures don't count the money stashed in secret accounts
in the Cayman Islands and Zurich—all of which is incorrectly assumed to
be "legal" in this exercise—they likely understate the amount of tax
cheating that the millionaire class does.
Critics of the millionaire tax say they've never heard of a poor man
hiring a worker. Only the rich do that; therefore, to render the wealthy
less so by taxation is to destroy jobs.
The theory presumes that the wealthy hire people out of charity. In this
model, jobs are bestowed upon lucky workers by the industrious
entrepreneur, who derives his own wealth from some magical practices
(having nothing to do with the workers he may hire) which are anyway
unfathomable to outsiders.
To hear self-proclaimed capitalists make this argument is irritating,
because it suggests they don't understand how our economic system is
supposed to work. They have the process exactly backwards.
In a capitalist system, investors make money not despite hiring workers,
but because they hire workers who, if they are adequately managed,
create value in excess of the wages and benefits they are paid. This
value is called "profit," and the business' owner gets to keep that,
after paying taxes.
In a properly functioning capitalist economy, rich people don't "create
jobs" for workers; workers, upon having jobs, create rich people.
That's how the system works, in theory.
But the reality is different from the theory. In today's marketplace,
the super-rich have become richer in large part by destroying jobs. They
amass staggering wealth by gambling, and fraud, and they depend very
dearly on government policies (especially very low taxes on so-called
"capital gains") to protect what they have and allow them to grab more.
In "capitalism" as it is actually practiced today, jobs really are a
kind of charity, often superfluous to the amassing of multibillion
dollar fortunes.
Today's millionaires and billionaires make their money by creating
contracts—and a lot of those are, at their core, tax dodges. Consider
the "lease-back" scam that gained popularity in the late 1990s.
In a lease back, a government entity—typically a town, county, or
utility cooperative—agrees to lease its physical asset to a for-profit
corporation (usually a bank or insurance company), and then pay them to
"lease back" the asset. In this way, municipal sewers, power plants,
subway trains, and fleets of garbage trucks have found their way onto
the books of financial services companies that have no use for them,
except as tax write-offs. They share this windfall with the government
entities to entice them into the deal, leaving as the only losers the
rest of the tax-paying citizens. Brokers in these deals typically
receive a huge chunk of the expected proceeds up front—tens of millions
of dollars—for arranging the contracts.
The deals were always fraud, and now some of them are coming back to
bite the municipalities and non-profits that made them, while leaving
the bankers unscathed. This week's BusinessWeek cover story explains
this in depth, discussing derivative contracts sold to Detroit and
reprising the saga of the Hoosier Energy Rural Electric Cooperative's
deal with John Hancock Financial Services, which was previously
unearthed by Gretchen Morgenson of the New York Times. As Businessweek
writes:
Around the same time the Hoosier agreement was finalized, the IRS
began cracking down on leaseback deals. The federal agency in a
memorandum called them a "sham" that lacked any business purpose beyond
tax evasion and amounted to a circular exchange of assets and cash.
Legally speaking, a transaction that merely reaps tax rewards and has no
other economic purpose is often considered an abusive tax shelter.
Although the IRS hasn't ruled on Hancock's tax breaks, U.S. District
Court Judge David F. Hamilton concluded in an opinion last fall that
they looked "abusive." Hancock says it believes it's entitled to the tax
benefits.
Hancock is now trying to get out of the contract, and that could cost
Hoosier $120 million. The small utility is raising electric rates and
deferring maintenance and environmental upgrades on its power plants in
case it has to pay. The guys who wrote the 3,000-page contract "earned"
$12 million from the deal.
Similar deals are costing other municipalities more than money,
BusinessWeek says:
In recent years the Washington Metropolitan Area Transit Authority
tied up a third of its subway fleet—almost 300 cars, some 30 years
old—in a series of pacts with investors, some of which required keeping
the same equipment running until 2014. To avoid violating the terms, the
transit authority rejected a 2006 recommendation by the National
Transportation Safety Board (NTSB) to replace or retrofit older cars.
The NTSB warned at the time that in the event of a crash the old cars
posed a higher risk of injury to passengers than newer models. One of
the old cars was involved in a wreck in June that killed nine people. A
spokeswoman for the transit authority said it lacks the funds to replace
the cars.
Of course, this would probably not trouble many of the alleged 2,157
alleged "millionaires" who allegedly might have left Maryland because of
an alleged income tax on their honestly-reported, honestly-earned income.
Everyone knows mass transit is for peasants.
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