The Betrayal of the American Dream (16 page)

Among those who have benefited from having their own congressionally approved dollar bills are the men who run the hedge funds. Part of their earnings take the form of what the architects of tax language have labeled “carried interest.” Because these earnings are performance-related, they are taxed at a much lower rate as capital gains, not as income. The government taxes a carried interest dollar at a maximum of 15 percent. Most people in America in regular salaried jobs pay taxes at a higher rate. But they don’t speak the language of the privileged—people like the Republican presidential candidate Mitt Romney, who acknowledged that he pays taxes approaching 15 percent, thanks in part to carried interest, on income up to $42.6 million over two years. Most of us don’t understand the incredible importance of carried interest, or even what it is. It’s the kind of complex, murky term that has made the tax code such a field day for the rich and their lawyers. But the lesson of carried interest is clear: there is one dollar for the rich, and one much smaller dollar for the rest of us.

If hedge fund managers and others were required to pay taxes at the normal rate, it would generate tens of billions in additional tax revenue. It would also remove some egregious unfairness. Philip Falcone, the billionaire creator of Harbinger Capital Partners, a New York City–based hedge fund, made a fortune betting against subprime mortgages before the collapse of the housing market. John Paulson, another hedge fund manager, made an even bigger fortune betting that subprime mortgages would be a loser. In short, two billionaire hedge fund managers made staggering sums betting that you would default on your mortgage and lose your house and that the financial institution holding your mortgage would collapse. In doing so, they were taxed at a much lower rate on that income than the rate applied to the salary you received, which went to pay the mortgage on the house you no longer have. How can that be right?

Falcone and Paulson are but two of this mushrooming breed of global financial buccaneers in private equity and hedge funds who have made huge amounts of money courtesy of Congress’s largesse on the carried interest deduction. The riches that have come their way are financing lifestyles that average Americans cannot even fathom. If the fraternity were to bestow an award for flaunting that wealth, the hands-down winner would be Stephen Schwarzman, the CEO of Blackstone, the huge private equity fund.

Schwarzman’s now-infamous multimillion-dollar sixtieth birthday party in New York City has long since passed into the annals of “the rich are different than us,” but it is worth revisiting for what it says about their boldness and ability to turn aside any public policy that threatens their wealth.

Held at the famed Seventh Regiment Armory on Park Avenue on February 14, 2007, Schwarzman’s birthday party attracted hundreds of the glitterati from New York and beyond. Arriving guests were ushered inside by a brass band and a contingent of children dressed in military uniforms. The cavernous armory, home to the most prestigious antiques show in America every year, was festooned with colorful banners and had been decorated to resemble the Schwarzmans’ Park Avenue apartment. Copies of paintings from Schwarzman’s art collection were mounted on the walls, and a huge portrait of Schwarzman himself, painted by the head of Britain’s Royal Society of Portrait Painters, had been sent over from Schwarzman’s apartment to greet arriving guests. “Dinner was served in a faux night club setting, with orchids and palm trees,” according to the
Wall Street Journal.
Patti LaBelle sang “Happy Birthday,” composer Marvin Hamlisch performed a number from
A Chorus Line,
and Rod Stewart sang for half an hour for a fee reported to be $1 million.

After stories of the party appeared in the media, legislation was introduced in the Senate to repeal the carried interest tax break that gave Schwarzman and his fellow private equity managers multimillion-dollar tax breaks on their personal income.

Hearings were held, and the giveaway was roundly condemned. But the proposal went nowhere. Behind the scenes, the leaders of private equity firms pumped millions of dollars into a lobbying campaign that scuttled the move to make them play by the same rules as everyone else.

When President Obama later proposed a similar reform, Schwarzman leveled an outrageous charge: “It’s a war,” Schwarzman told a nonprofit board. “It’s like when Hitler invaded Poland in 1939.”

Schwarzman later apologized for comparing the president to Hitler, but the repeal of the private equity loophole didn’t go anywhere that time either. Game, set, match for private equity. And no surprise: the ruling class is now so powerful that it can brazenly flaunt its wealth—wealth it owes in part to middle-class taxpayers—at a shindig like Schwarzman’s party without fear of losing its privileges.

As should be clear by now, Congress, at the direction of those at the top, has created two different tax systems: one for the wealthy and one for everyone else. America’s founders, who were very well aware of how the aristocracy rigged the system to guarantee its own perpetuation, up to and including the king, would shudder. We all know the importance of luck in having wealthy parents. But under the twisted U.S. tax system, it’s especially important for tax purposes. If you are among the privileged and your company rakes in billions of dollars over the years, essentially tax-free, the basis for those tax freebies may be passed along to the next generation.

Such is the case with Carnival Cruise Lines, a Miami-based company whose glitzy megaships have names like
Carnival Fantasy, Ecstasy, Elation,
and
Paradise.
Over the six years from 2005 to 2010, Carnival, the world’s largest cruise carrier, racked up $13 billion in profits. The company’s tax bill for the six years? Chump change of $191 million. And that included U.S. income tax, foreign income tax, and local income tax. The overall tax rate came in at 1.4 percent. Carnival’s ships may sail out of Miami and be inspected by the U.S. Coast Guard, but its finances hardly touch our shores. Middle America has not fared nearly so well, thanks to a Congress that likes to sock it to ordinary people, the same people who are and will be hammered even more as lawmakers and the elite target them to be a scapegoat for the ballooning deficits. While corporate profits have continued to climb, the wages of working people remain frozen in time. In 2008, according to IRS data, 10 million working individuals and families filed tax returns reporting incomes between $30,000 and $40,000. Their effective tax rate: 6.8 percent—nearly five times the Carnival rate.

This helps explain how members of the Arison family, who started Carnival, have held membership in that exclusive club of global billionaires for two decades.

Ted Arison was born in Tel Aviv in 1924 and moved to the United States in 1952. In 1972 he formed a joint venture to establish a shipping business. His partner was Meshulam Riklis, who was born in Turkey but also grew up in Tel Aviv. Riklis, too, moved to the United States, where he eventually became an early-day corporate takeover artist, working alongside the legendary junk bond king Michael Milken.

The Arison-Riklis arrangement lasted only two years until Arison bought out Riklis in 1974. From that point on, he maintained tight control of what would become the company’s flagship brand, Carnival Cruise Lines. He systematically added ships, amenities like gambling, and passengers. Each of his ships was a floating casino featuring slot machines, roulette, “Big Six” wheels, and tables for craps and blackjack. In 1987 Arison took the company public, and a hefty chunk of the proceeds from the sale of stock went to Arison personally. His take, according to U.S. Securities and Exchange Commission (SEC) records, was a special dividend of $81 million.

Carnival has long been a master at avoiding U.S. income taxes. The fine print in a document filed by Carnival with the SEC allowed that:

The company is not subject to United States corporate tax on its income from the operation of ships, and the company does not expect such income to be subject to such tax in the future. This exemption from United States corporate income tax will remain in effect under current United States law for as long as the company retains its status as a controlled foreign corporation.

Even better for Arison and his family was yet another provision in the SEC public offering document that said: “The company intends to distribute dividends to all shareholders in at least such amounts as are necessary to enable the principal shareholders to pay the income taxes imposed on them with respect to those earnings.”

Translation: whatever taxes Arison or his family incurred would be covered by a payment to them from the Carnival Corporation.

Imagine such a deal: when you receive your W-2 from your employer next January, ask if the company would write you a check to cover the taxes withheld from your paycheck! This perk, of course, doesn’t exist for 99 percent of us.

Ted Arison renounced his U.S. citizenship in 1990 to further insulate himself personally from the U.S. income tax, and he returned to Israel. Years earlier, his son Micky, a fixture in Miami, had assumed day-to-day control of the business empire, which also includes the Miami Heat, the National Basketball Association team. The elder Arison died in 1999. Son Micky and daughter Shari inherited their father’s tax freebies, meaning a second generation of the Arison family continues to enjoy the benefits of a company that pays only token taxes, thanks to a beneficent Congress.

Along the way, Micky and Shari also secured their very own slots on
Forbes
magazine’s global list of billionaires. For 2012, the total is drawn from fifty-eight countries. He is number 223. She is number 288.

POOF! THE DISAPPEARING TAX ACT

Corporations, like the very wealthy, have also seen their taxes go down over the years. In 1952 corporate taxes accounted for 32 percent of the federal government’s overall tax collections. The corporate share in 2011 was 7.9 percent. When World War II started for the United States in 1941, corporate taxes amounted to 1.9 percent of the nation’s gross domestic product (GDP). By war’s end in 1945, that figured had gone up to 7.2 percent. It would never reach that level again. In fact, during the first decade of the twenty-first century, when the United States was waging not one but two wars, in Iraq and Afghanistan, the ruling class and their allies in Congress not only held corporate tax rates down but forced them lower even as they continued a policy of non-enforcement of the tax laws.

As a result, corporate tax collections added up to a meager 1 percent of GDP in 2009—the lowest level since the Great Depression. This at a time when corporate profits topped $1 trillion for the fifth consecutive year—double what they were as recently as the 1990s. Those who make the rules had achieved the perfect formula: the more money a corporation rakes in, the lower its U.S. tax bill. Underlying this formula is a condition that most people recognize: in a global economy, higher profits do not mean more jobs. More often than not, they mean just the opposite.

Further increasing the tax burden on the middle class, the number of corporations that pay little or no corporate income tax has exploded. They are large and small, closely controlled and owned publicly. Their one common trait is that they operate in multiple countries. Companies whose businesses are solely in the United States are treated most unfairly compared to the multinationals. They often pay taxes at the maximum rate or close to it, since they have few opportunities to move their cash around the globe’s assorted tax havens, unless they are willing to engage in flagrant tax avoidance, bordering on evasion, which is a crime.

The more prominent corporate tax avoiders have been publicly identified in the news media. The familiar names include General Electric Company (GE), which ranks number six on the current Fortune 500 list, its interests ranging from jet engines to financing, from health care to appliances. SEC documents show that in the three years from 2008 to 2010, GE reported no corporate tax owed in one year and in the other two years taxes well below the prevailing rate. The Boeing Company, the airplane manufacturer and defense contractor, has siphoned far more money out of your pockets and the pockets of other taxpayers by way of government contracts than it pays in taxes itself. In the three years from 2009 to 2011, the company reported owing no federal income tax. In 2011 Boeing ranked number three on the list of the largest government contractors at $8.4 billion.

Wells Fargo—one of the big banks that “originated, purchased, and securitized billions of dollars in home loans each year,” in the words of a 2011 Senate report—helped bring down the economy and destroy the lives of millions of working people before it picked up a TARP (Troubled Asset Relief Program) bailout. For the years 2008 to 2010, Wells Fargo earned the coveted top spot on the list of twenty-five companies that avoided paying the most taxes. Its winning number: $17.96 billion in tax breaks, according to Citizens for Tax Justice (CTJ), a Washington public-interest group that compiles the rankings yearly. Exxon Mobil Corporation, the global energy giant, came in at number six on the CTJ list at $4 billion off its tax bill. Actually, it was a little better than that. Exxon Mobil claimed a tax benefit of $838 million, while it paid $15.8
billion
in income taxes to other countries. Wells Fargo Bank reported $49 billion in profits from 2008 to 2010. Like Exxon Mobil, it too received a tax benefit—of $651 million.

Boeing, Exxon Mobil, GE, and the others have lots of company. A study of corporate tax returns for the years 1998 to 2005 conducted by the Government Accountability Office (GAO), the investigative arm of Congress, found that in any given year the number of large, foreign-controlled domestic corporations that reported no income tax liability was sometimes as high as 72 percent. In short, seven of every ten big corporations operating in the United States under foreign ownership paid no taxes. As for large corporations owned by U.S. citizens, an astonishing 55 percent reported that they owed no federal income tax.