(* The footnotes for this chapter will open in a "new window" so the user can conveniently flip back and forth between notes and text)




   If the propertied elite can enforce basic socio-political decisions--such as denying employment in the labyrinthine corporate bureaucracy to large numbers of qualified people on irrational ethnic grounds when the basic laws do not support such discrimination--the experience of history would suggest that they would go farther and also deal themselves enormous tax advantages. For down through history the dominant classes, groups, factions, clans, interests or political elites have always been scrupulously prudent in avoiding taxes at the expense of the lower orders. The aristocracy of France before the French Revolution, for example, gave itself virtually total tax exemption. The burden of supporting a profligate royal court with its thousands of noble pensioners was therefore laid upon commoners, thus supplying not a little fuel for the onrushing tidal wave of blood. 1

   It would be foolish to contend that there is a propertied elite in the United States and then not be able to show that this elite accords itself fantastic tax privileges down to and including total exemption. And, true enough, the large-propertied elements in the United States see to it that they are very lightly taxed--many with $5 million or more of steady income often paying no tax at all for many years while a man with a miserable $2,000 income, perhaps after years of no income, denies his family medical or dental care in order to pay tax!

   Taxes "are a changing product of earnest efforts to have others pay them. In a society where the few control the many, the efforts are rather simple. Levies are imposed in response to the preferences of the governing groups. Since their well-being is equated with the welfare of the community, they are, inclined to burden themselves as lightly as possible. Those who have little to say are expected to pay. Rationalizations for this state of affairs are rarely necessary. It is assumed that the lower orders will be properly patriotic." 2 And, as anyone may ascertain any day, aggressively expressed patriotism increases markedly in intensity, readily crossing the borderline into spontaneous violence, the further one looks down the socio-economic and cultural scales into the lower middle class and downward.

   There is a fundamental view, widely shared and often overtly expressed in schools and in the mass media, that the American socio-political system is, if not completely fair, as fair to everybody as the ingenuity of man can devise. This belief is monumentally false, as analysis of the tax structure alone discloses. 3

What Is to Be Proved

   Prosecutors at the opening of a case in the law courts customarily state to judge and jury what they intend to prove. In adopting this procedure here, let it be said that it will be proved beyond the shadow of a doubt:

   1. That the American propertied elite with the connivance of a malleable, deferential Congress deals itself very substantial continuing tax advantages at the expense of the vast majority of the population.

   2. That the national tax burden is largely shouldered, absolutely and relatively, by the politically illiterate nonmanagerial labor force rather than by big property owners or by upper-echelon corporate executives (who are often tax free).

   3. That the resultant tax structure is such that it intensifies the abject and growing poverty of some 25 to 35 per cent of the populace (about whom latter-day pubpols theatrically wring their hands), and grossly cheats more than 95 per cent in all.

   Quite an order, the judicious reader will no doubt say to himself. But let such a reader armor himself in skepticism and let us consider the proof.

Some Preliminary Remarks

   While the American propertied element is not ordinarily completely tax exempt it is subject in general to extremely low taxes. In many salient areas it is absolutely tax exempt, like prerevolutionary French aristocrats. This happy condition derives, as Eisenstein often points out, from special obscurely worded congressional dispensations. The situation, far from being mixed or a matter of shading, is absolutely black arid white. The United States is widely supposed to have a graduated tax system, based on ability to pay, but there is very little actual graduation in the system and what graduation there is turns out to be against the impecunious.*

   (* I prefer the somewhat pretentious-sounding "impecunious" to the simpler "poor man" because it is semantically cleaner, less streaked with the crocodile tears of latter-day politicians and professional social workers. A poor mian, after all, is only a man without money and is often very little different in cultural attainment or outlook from many beneficiaries of multiple trust funds. He does not wear a halo; worse, he is never likely to. The recreations of a bayou Negro are little different from those of many denizens of Fifth and Park Avenues; each hunts, fishes, copulates, eats, sleeps, swims and boats and neither is much of a reader, thinker or patron. The main social difference between them is money and its lack. The defensive idea of some sociologists that there is a "poverty culture," insuring the continued poverty through generations of its participants even though they were given trust funds, must be rejected as untenable. What is called the "poverty culture" is merely the reactive creation of impecunious people rejected for one reason or the other, often arbitrary, from the labor force as unsuitable. But if they were given an ample regular income without the performance of any labor, like members of the trust-fund cult, they would quickly emerge from this "culture," perhaps to comport themselves like. "Beverly Hillbillies" or Socialites.)

   It is not being urged that the results to be shown were obtained through some centralized secret plot of bloated capitalists and paunchy cigar-smoking politicians. For it would indeed take a confidently jocund group of autocrats to deliberately plan the existing tax structure-what conservative tax-expert Representative Wilbur Mills, Democrat of Arkansas, in a bit of judicious understatement has called a "House of Horrors." The late Senator Walter George of Georgia (never regarded as a friend of the common man) called the present scale of exemptions "a very cruel method by which the tax upon the people in the low-income brackets has been constantly increased."4 Senator Barry Goldwater of Arizona, no liberal, radical, or starryeyed reformer, said "the whole tax structure is filled with loopholes"; Senator Douglas of Illinois, a liberal and a professional economist, asserted that the loopholes have become "truck holes." 5 Referring to the fantastic depletion allowance, conservative Senator Frank Lausche of Ohio, no extremist or reformer of any kind, said: "It is a fraud, it is a swindle, and it ought to be stopped." 6

   One is, therefore, in fairly sedate baby-kissing company if one says (perhaps overcautiously) that the tax structure is a pullulating excrescence negating common sense, a parody of the gruesomely ludicrous, a surrealist zigzag pagoda of pestilent greed, a perverse thing that makes the prerevolutionary French system seem entirely rational. One takes it that Congressman Mills had something like this in mind with his "House of Horrors."

   Representative Mills in further explication of his "House of Horrors" characterization said the tax laws are "a mess and a gyp," with some taxpayers treated as coddled "pets" and others as "patsies."

   But the tax laws would have been no surprise or cause for consternation to someone like Karl Marx with his doctrine that government is inherently the executive committee of a ruling class. Indeed, they document that dictum--if not to the hilt--then a good distance up the blade.

   One can apply to the present American system the exact words of French Finance Minister Calonne in 1787 on the soon-to-be-destroyed French system; "One cannot take a step in this vast kingdom without coming upon different laws, contradictory customs, privileges, exemptions, immunities from taxation, and every variety of rights and claims; and this general lack of harmony complicates administration, disturbs its course, impedes its machinery, and increases expense and disorganization on all sides." 7

   To refer to this system, then, as another but bigger Banana Republic is not merely a bit of misplaced literary hyperbole.

   The American tax system is the consequence of diligent labors by diversified parties of major property interest working down through the years to gain their ends. Two congressional committees of seemingly over-easy virtue have been their target. A public demoralized by a variety of thoughtfully provided distractions, and liberally supplied with Barnum's suckers and Mencken's boobs, would not know what takes place even if it were fully attentive because it could not understand the purposely opaque syntax of the tax code, the inner arithmetic or the mandarinic rhetoric of the tax ideologists.

   Has the result been spontaneously achieved in hit-or-miss fashion or is it intentional? As there are always those observers who want to interpret all human actions blandly, and who decry any suggestions of conniving or underhandedness, let it be said that on every hand in the tax laws there is clearly revealed (1) intent to deceive and (2) self-awareness of intent to deceive. First, those laws are demagogically sugar-coated in various ways--with entirely illusory and deceptive rates up to 70 or 91 per cent, with a variety of homespun seeming concessions to ordinary people and with numerous items of sentimental bait such as apparent (but only apparent) concern for the handicapped. Next, many seeming concessions to weakness, such as age, are actually supports for financial strength. The opacity of the language, often putting skilled lawyers at odds, alone testifies to intentional deceptiveness. Also, the couching of special bills of benefit to only one person or corporation in general terms, without naming the unique beneficiary, testifies to the same intent. A comparison of the verbiage of the tax laws with the language of the Constitution shows entirely different mentalities at work--devious in the first instance, straightforward and to the point in the second.

   The deviousness does not, as some profess to believe, reflect modern complexity of conditions. It is the deviousness that induces much of the complexity. The writers of the tax laws evidently consider the broad populace--and, what is worse, the rational critic--as yokels at a country fair, to be trimmed accordingly.

   In referring to the broad public it may seem that I have suddenly enlarged the scope of this inquest from a very small to a very large group. But we are confronted here with something of a puzzle: How could nearly 99 per cent of a large population be put into such a wringer by some 1 per cent or less, as though the 99 per cent were the victims of a particularly brutal military conquest? How could such an apparently free population be reduced to the financial status of peasant slaves?

   A variety of factors has conspired to this end, but the populace has been handled by a smooth governing technique. In a process that has unfolded partly by sincere stealth, partly by sincere subterfuge, partly by convenient self-deception and partly by barefaced sincere chicanery, the people have been led to accept the tax laws by being offered many apparent advantages over each other in pseudo-exemptions and pseudo-deductions. But the bitter mixture to which the electorate has step by step acquiesced, under the plea partly of necessity and partly of undue advantage, it has finally been forced to swallow with the compliments of Congress--a lesson in adroit political manipulation as well as practical morality.

   The tax laws, as drawn, appear to be a loaded gun pointed at the rich and affluent. But this is a tricky gun; as the ordinary man pulls the trigger in high glee he shoots himself! For the true muzzle of the weapon, as in a fantastic spy film, points backward.

   As Congress now may appear to be cast as the villain of this opus (which is really without a villain), it should be conceded that there are many excellent public servitors in that body, functioning far beyond any reasonable call of duty. But Congress collectively is very different from congressmen and senators individually. Congress tends to function according to the least common denominator, the worst element in it. Congress, indeed, torn between different factions as it settles toward the least common denominator, becomes very much like a crazy king who doesn't know his own mind. The will of this king is reflected in the laws.

Tax-Free Fortune Building

   Until the passage of the income-tax amendment to the Constitution in 1913, and the subsequent estate tax, the big industrial proprietors were virtually tax free, subject after the Civil War mainly to minor local real estate taxes. The biggest fortunes--among them Du Pont, Mellon, Rockefeller--were all largely amassed in the tax-exempt era. Corporation lawyers, such as Rockefeller's Joseph H. Choate, fought with every legal and political means at their disposal against the imposition of even a token income tax, which they correctly sensed might be the opening wedge to heavier taxes.

   What it became, finally, was a siphon gradually inserted into the pocketbooks of the general public. Imposed to popular huzzas as a class tax, the income tax was gradually turned into a mass tax in a jiu-jitsu turnaround. Thus it provided the pubpols with the present stupendous sums for reckless overspending in the areas of defense (Over-Kill) and the letting of lucrative construction contracts in the sacred names of education, medicine, housing and public welfare. Consequently, as far as disposable moneys at their fingertips are concerned, the pubpols are now on a basis of approximate parity with the finpols. Whereas in 1939 only 4 million people paid income taxes, and in 1915 only 2 million did, today more than 46 million do so--truly a case of turning the tax tables on the lowly!

   Nearly all of the revenue, moreover--86 per cent of it--comes from the lower brackets, from the initial rate that all must pay, which is the lion's share of the $41 billion taken from individual incomes in 1960. The so-called "progressive" rates leading into the high brackets contribute only 14 per cent. 8 The politicians will never willingly give up this Golconda.

   Differently put, the less than 1 per cent of the individuals who own upward of 70 per cent of productive property throw only 14 per cent into the tax caldron as their distinctive, differentiated contribution, while their own publications metronomically salute them as pillars of society. It is truly a piece of sleight-of-hand that would have been the envy of the French Bourbons. In the United States, as it has been said, if you steal you will be hailed as a great man, provided you steal everything in sight.

   To get this one-sided tax burden off the backs of the common people will, one suspects, require a political upheaval of first-class dimensions. Nothing less would do it. For the pubpols, with the constant self-sustaining threat of defensive warfare on the one hand (neither Vietnam, Lebanon, Guatemala, Cuba nor the Dominican Republic attacked the United States) and the convenient excuse of profitable open-ended welfare on the other (the Great Society), can now work an oscillating double-pronged assault on the patriotic low-income man. It should always be remembered that the higher incomes pay for little of all this. They merely increase.

   In general, the higher the income in the $10,000 and upward class of income receivers, comprising no more than 10 per cent of all taxpayers, the more lucrative tax privileges and absolute exemptions are progressively enjoyed. As one moves into the top 1 per cent of income receivers (the $25,000-plus class) the exemptions become still greater until in the top 2/10ths of 1 per cent (the $50,000-plus class) the exemptions and disparities become boldly and, in a presumably enlightened age, ludicrously profligate. The greater the income, the greater the legal tax exemption--up to 100 per cent. Conversely, the smaller the income the greater the proportion of taxes it pays, mainly through tax-loaded prices of goods and services among very small incomes.

   Taxation is a complex subject and will be dealt with here in as compressed and clear a fashion as possible. 9

Four Types of Tax System

   The United States, broadly, has four separate tax systems: federal, state, county and municipal. Including the counties and municipalities, there are thousands of separate tax jurisdictions. While all of them together gather in much money for local uses and abuses, separately they are of small importance and are mentioned here only as a means of dismissing them. The federal per capita tax collection in 1962, for example, was close to $450, whereas all state and local taxes were about $230, so that about two-thirds of all taxes collected are federal. 10

   The biggest nonfederal tax is on local real estate and personal property, to which everybody contributes something either as occupant-owner or as residential-business tenant. Depending on the region, the realty tax varies; although wherever it is low, local services are attenuated. A tax growing in use in states and municipalities and almost as productive of revenue is the sales tax, which levies up to 5 per cent on most retail purchases and, obviously, hits the poorest man hardest. This tax will, no doubt, be increasingly relied upon to squeeze money from the patriots.

   Some states and municipalities also, aping the federal government, have income, excise and special-purpose or use taxes. Excise and most special-purpose taxes--gasoline, liquor, cigarette, business, documentary, etc--are like the sales tax in that they hit the rank-and-file buyer directly.

   But, as we have seen, the biggest tax-gathering jurisdiction, singly and collectively taken, is the federal, which imposes income, estate, excise and customs taxes. The latter two are percentage taxes on retail purchases and, except when placed on luxury goods, hit the common man hardest.

   This exposition will largely confine itself to the federal income and estate taxes, for with respect to most other taxes the unmoneyed man pays exactly the same as the rich man although the proportion of income paid by the impecunious man is always astronomically higher.

The Sales Tax Steal

   In order to make this clear initially, we may note that a man who pays sales taxes of $60 a year out of a $3,000 income has paid 2 per cent of his income on this tax. He would incur such an outlay at 5 per cent, enough to buy a good deal of medicine or dental care, on purchases amounting to $1,200. As the same amount of purchases by a man with $100,000 income incurs a tax of only six-hundredths of 1 per cent, the lower income-receiver pays at a rate more than 3,300 per cent higher in relation to income!

   In order to incur a recurrent sales tax that would be 2 per cent of his income (at a 5 per cent rate) the $100,000-a-year man would have to buy $40,000 of sales-taxable goods--hard to do unless he buys a Rolls-Royce or a seagoing vessel every year.

   But the disparity is often greater even than this, difficult though it may be to believe. The lower income is almost always in already taxed dollars. For on a $3,000 income an individual has already paid $620 in income taxes at the pre-1964 rate, $500 at the post-1964 rate. The $500,000 income, however, is often tax-exempt or, owing to the diversity of its sources, is taxed at a small fraction of the cited 88.9 per cent pre-1964 or 60 per cent post-1964 rates.

   As in all these tax matters there are always further ramifications, let us in this instance pursue one, allowing readers to work out the ramifications of others. Whatever is paid in sales taxes in one year is deductible on the federal return the next year and has an in-pocket value to the taxpayer at whatever percentage tax bracket he is in. The individual with $3,000 taxable income is in the 16.6 per cent bracket as of 1966, which means that the following year his sales tax of $60 will be good for $10.00 against his federal taxes. But the $100,000 man who paid $2,000 sales tax on $40,000 (improbable) sales-taxable purchases is in the 55.5 per cent bracket and will on his return receive a federal tax credit worth $1,110. The leveraging influence of the higher brackets greatly reduces the impact of sales taxes on his purse. if he, like the low-income man, bought goods sales-taxed at only $60, he would get a tax credit of $33.30, or more than three times that of the low-income man.

  But a married man with four children and a gross income of $5,000, and who paid no federal tax, would get no compensatory reduction in any federal tax at all. Those low-income people, in other words, who have no federal tax to pay, are hit flush on the jaw by the sales tax. A married couple with one child and $2,000 of gross income ($40 per week), not uncommon in the American economy, might pay 5 per cent of sales taxes on $1,000 of goods, clothing and medicine. This would be $50, or more than a week's pay. If one traces indirect taxes they pay through prices and rent, one sees that they pay many weeks' income in taxes.

  The sales tax clearly is a heavy levy directly on the least pecunious citizens.

Tax-Exempt Corporations

  Corporations as well as individuals apparently pay income taxes.

  In 1965, for example, the official statistics tell us that every dollar received by the government came from the following sources: individual income taxes, 40 cents; corporation income taxes, 21 cents; employment taxes, 14 cents; excise taxes, 12 cents; miscellaneous taxes, 11 cents; and borrowing, 2 cents." Corporations on the face of it appeared to contribute 21 per cent of federal revenues, and individual income-tax payers 40 per cent, Of these collections, 44 cents went for "national defense."

  But corporations do not really pay any taxes at all (or very, very rarely) surely a novel and (to most people) no doubt a thoroughly wrongheaded, erroneous and even stupid assertion. For are there not daily allusions to corporation taxes and don't official statistics list corporation taxes? Corporations, however, are no more taxed than were the aristocratic prerevolutionary French estates.

  The evidence is plain, in open view; there is nothing recondite about the situation. All taxes supposedly paid by corporations are passed on in price of goods or services to the ultimate buyer, the well-known man in the street. This is not only true of federal and state taxes (where levied) but it is also true of local real estate and property taxes paid in the name of corporations. The corporations, in nearly all cases, merely act as collection agents for the government.

  The scant exceptions to this rule are those corporations (none of the large ones and very few of any) that are losing money or that make a considerably below-average rate of return on invested capital. The money-losers pay no income tax at all, and may be forced to absorb local property taxes. Those making a below-average return may be required to pay some taxes, the payment of which does indeed contribute to the low return.

  A glance at the income account of any large corporation shows that before share earnings are computed, every outlay has been deducted from total sales. The General Motors income account for 1964, for example, shows that the foreign and domestic income taxes are computed on the basis of income after deduction of all costs, salaries, wages, charges, depreciation, obsolescence, interest on debt and managerial expense accounts and bonuses. Now, after the deduction of federal income taxes, there remained the net income available for preferred and common dividends and for reinvestment. This was the net return or profit, more than 20 per cent on invested capital.

  The money for every cent of it, close to $17 billion, came from sales of products. All this money, obviously, had to be absorbed in prices apportioned among millions of sales units, mainly cars. The car buyers obviously paid the income tax as well as a federal excise tax. In many cases, they paid local sales taxes as well.

  But, the ever-present casuist will object, if the company did not have to pay income taxes at 48, 50 or 52 per cent, it would have had this much more available for dividends. The argument is that prices would remain the same, tax or no tax. Instead of refuting such a contention by citing long and involved economic analyses one may simply consider the figures on rate of return on invested capital either for one corporation or for all corporations over a period of decades.

  This rate of return does vary in response to a complex multiplicity of factors but, pari passu and mutatis mutandi, it remains fairly fixed within certain maximal-minimal secular limits. It averages out. Rates vary from industry to industry and company to company and the average, median or mode for all companies does no more than tell the general story, which is that the average rate of return on invested capital is not significantly affected by taxes. The taxes are largely absorbed in price as an item of cost, and prices rise as corporate taxes are imposed. That prices don't instantly fall when taxes are reduced derives from the fact that corporations are slow in passing on tax benefits. But removal of the taxes would in time bring prices down; rates of return would remain about the same.

  No heretical or offbeat argument is offered here. For it is commonly recognized by knowledgeable persons that corporations pay no taxes. The Wall Street Journal, for example, trenchantly observes that the corporation income tax is "treated by corporations as merely another cost which they can pass on to their customers." Tax or no tax, the customers pay for everything including a fairly stabilized average rate of return on invested capital.

  In further support of the point, the late Representative Daniel Reed, sponsor of the Eisenhower dividend credit, held that "inordinately high" consumer prices prevailed partly because "all products are increased in price in the exact proportion of taxation"; and the former Republican Speaker of the House, Representative Joseph Martin of Massachusetts, reminded listeners that "any graduate economist can tell us that corporations compute profits after taxes, and not before, and their price scales are adjusted accordingly." 13

  There are some economists who contend that not all corporations are able to pack taxes into prices but instead force workers to absorb some of them in unduly low wages. Here the workers partly subsidize the customers. But the corporation, if it can help it, does not allow any tax to come out of its resources or its return on capital. The so-called "corporation tax," then, is a misnomer and a deception on a gullible public, which itself pays all corporation taxes. The corporation tax is a disguised sales tax.

  Indeed, at least two-thirds of American corporations even add payroll taxes to their prices. 14 These consist largely of their legally designated proportion of Social Security taxes, which they are theoretically supposed to pay out of their own pockets. These taxes, in greater part, are paid half by the employee individually and directly, and the balance by consumers, who are themselves mainly employees. It would hardly be erroneous, then, to say that employees pay nearly all of Social Security, The only way to make employers pay for them is to deduct from dividend checks or retained profits. Even if this were done, the companies would simply, by inner bookkeeping shifts, transfer money now earmarked for payroll taxes (and passed on in price) to money available for dividends. A greater sum would be made available for dividends and retained profits so that after any deductions for employees' Social Security the same amount would go to dividend recipients. Rate of return would remain the same.

  There is really no way of forcing a successful profit-making corporation to pay taxes other than by levying on its capital, thereby reducing it at least as fast as retained earnings build it up. But this action is ruled out under our legal system as confiscatory. It is absolutely taboo. So it is clear that the existent legal system forever protects the going corporation from taxation, like a nobleman's estate. But this system could be altered by a simple constitutional amendment: "Capital may be taxed directly."

  While undermining the growth power of corporations, for good or ill, and giving politicians another weapon, such a law would profoundly alter our economic system by -making it possible to shift the tax burden at least in part to corporations. This would no doubt induce many tax ideologists to protest that thrift and virtue were being taxed; for "thrift" is the ideological code word for inherited corporate wealth, "virtue" the code word for wealthy man. Would that one could be as thrifty as third-generation inheritors?. While the power of the finpols would no doubt be curtailed by such taxation, that of the pubpols would be relatively enhanced. Whether this would be all to the good is questionable. One might be willing to take one's chances with a Franklin Roosevelt, Adlai Stevenson or John F. Kennedy but be doubtful about taking them with a Lyndon B. Johnson, Barry Goldwater or Richard Nixon. For statesmen are few, "practical" politicians are many, in the world of pubpolity.

  The dim feeling that this kind of out-of-pocket tax is now paid by corporations is part of what makes the average man feel fairly complacent about the tax situation. But that federal taxes are no impediment to corporations we can see by observing their rates of return. General Motors in 1964, for example, enjoyed a rate of return of 22.8 per cent on invested capital. Although some rates of big companies exceeded that of General Motors, ranging up to 38.2 per cent, industry medians ranged from 8.6 per cent in textiles to 16.3 per cent in pharmaceuticals, the highest. Smith Kline and French Laboratories had a rate of return of 31 per cent.

  Various annual series on rates of return by industries are available and should be consulted with a view to ascertaining that income-tax rates do not significantly affect rate of return. 16

  What is not realized by most people is that nearly all investment down through the years consists of corporate reinvestments in varying proportions of their post-tax profits. According to one estimate, from 1919 to 1947, of gross capital formation in the amount of $770 billion in the United States only 2 per cent was contributed by individual savings invested in common stocks. 17

  But aren't corporate people always decrying corporate taxes? If the corporations don't pay taxes, why should they object? Their objections are made on grounds other than that they pay the taxes, although they claim this is the issue. Taxes packed into the price of goods and services obviously reduce the purchasing power of individual buyers and place much purchasing power into the hands of government officials who (1) have in mind the purchase of other kinds of goods and (2) can if they wish have purchases handled by sophisticated hard-to-please purchasing agents. The government cannot be gulled unless it wants to be gulled or unless it has faithless employees. Again, the government may buy mountains of cement and heavy equipment but it cannot be induced to buy chewing gum, fashions and millions of automobiles.

  Corporations obviously prefer the less sophisticated, happy-go-lucky types of purchasers to the pubpols who, beyond any orders they place, may also require extraneous payments for their patronage such as campaign contributions and retainers. In one way or another, the pubpols exact kickbacks for their massive tax-supported business.

  In any event, corporations rarely pay any taxes but merely act as collection agents for the government. This fact is shown most formally and precisely in the case of the utility companies, which are always trumpeting to the world how much they pay in taxes. Because these companies hold a franchised monopoly, they are subject to rate regulation, usually within states but in some cases nationally; but by reason of many court rulings against confiscation of capital they are legally entitled to a certain minimum generous return on invested capital--at least 7 per cent. Taxes therefore may not be allowed to intrude upon rate of return but, as they are imposed, must be followed by increased consumer rates. Thus the users (the customers) pay all federal income and other taxes of the utility companies.

  The point here is that the situation is the same with the non-utility companies, except that they don't have their prices set by a regulatory commission. The market, subject to monopolistic manipulation, supplies whatever limitation there is.

Landlords and Business Partnerships

  It is the same with the revenues of landlords and of business partnerships. Unless they happen to be running at a loss or doing less well than average, all their taxes--local, state and federal--like other costs, are packed into the price of goods or services they sell. The buyer pays the taxes.

  Where a landlord owns an apartment building his tenants obviously must pay his taxes as well as all other costs in order to leave him with a profit. Yet it is the landlord who constantly laments about the taxes, which he collects for the government, and the tenants who live lightheartedly unawares. If anyone is to lament about taxes paid, it is obviously they; but they are inattentive to the actual process.

Multiple Taxation

  The Eisenhower Administration became very indignant about multiple taxation, holding it to be, if not unconstitutional, at least unfair. It felt stockholders were most unfairly treated in this respect, and puckisbly devised a system of dividend credits (4 per cent of dividends discount on the tax itself) that gave very little to many small stockholders but a great deal to a few big ones. A small dividend-received credit remains in the tax laws, but the theory on which it is based--unfair double taxation--is false from beginning to end. For stockholders as such have not, directly or indirectly, paid any tax prior to receiving their dividends. Again, multiple taxation has long prevailed on every hand.

  The way these dividend credits worked in 1964 was as follows: Any person receiving dividends could deduct up to $100 of dividends received ($200 for a married couple). Up to $200 of dividends, in short, were tax free for a married couple, and so remained in 1965 and 1966. Beyond this, 2 per cent of all dividends received from domestic taxpaying corporations were deducted directly from the tax total. If a man had $1 million of dividend income, he could deduct a flat $20,000 from his final tax. But a married couple receiving $500 of dividends beyond the tax-free base could deduct only $10.

  The dividend credit, in other language, was of significant value only to very wealthy people. Before the Eisenhower law was revised, it had twice the value of 1964.

  Expressing his indignation, in the 1952 presidential campaign Eisenhower complained that there were more than a hundred different taxes on every single egg sold, and he was probably correct. 18

  But this serves only to point up the fact that it is the rank-and-file consumer who pays most taxes. When, for example, one buys a loaf of bread one pays fractional multiple taxes--the farmer's original land tax; the farmer's income tax (if any); the railroads' real-estate, franchise and income taxes; storage warehouse taxes for the ingredients (income and realty); the bakery's income and realty taxes; the retailers' income and realty taxes; and, possibly, a climactic local sales tax. If all these and many more taxes did not come out of the price of the bread, there would be no gain for anyone along the line of production. So it is the buyer of the bread as of other articles and services who pays the taxes.

How to Get Rich by Not Paying Taxes

  By way of introducing an always sharp exposition Philip M. Stern points out that in 1959 five persons with incomes of more than $5 million each, when the public supposed such incomes paid 90 per cent tax, paid no federal tax at all. One with an income of $20 million paid no tax. Another with an annual income of nearly 82 million had paid no tax at all since 1949. In 1961, seventeen persons with incomes of $1 million or more and thirty-five others with incomes of $500,000 or more paid no taxes whatever. In 1960 a New York real estate corporation with $5 million of income paid no taxes but showed, instead, a bookkeeping loss of $1,750,000. And various persons with huge investments in tax-free bonds regularly pay no tax whatever on their aggregate incomes. Not only is this sort of thing continuing, year after year, but the number of tax-free big incomes is multiplying like the proverbial rabbits.

  The United States, very evidently, has gone a long way toward aping prerevolutionary France, where court-favorites were given complete tax exemption. Corporations, like noble French estates, are not taxed.

Techniques of Government

  In order to bring about these results, politicians have drawn lessons from history and developed techniques for treating their demoralized constituents more as adversaries, to be manipulated, than as a consenting public. And they use the very strivings, selfishness and divisiveness among people to bend them to their own dubious purposes.

  When Jack Dempsey was the world's heavyweight boxing champion he went on an exhibition tour of the hinterland. As a feature, a goodly sum was offered to any man who could stay in the ring for three rounds with him. In a certain region of the Tennessee hills the champion was challenged by the local strong man, who had beaten men for miles around in boxing and wrestling and who could bend iron bars with his bare hands. A large local crowd turned out at the arena to see the outside smart-aleck get a dose of real country medicine.

  "Look out for this fellow, Jack. He's awfully strong and could hurt you," said one of his handlers to the champion as they watched the strong man jump into the ring.

  "Watch him walk into my right," said the champion coolly, according to newspaper men who reported the event.

  Need one continue?

  As they squared off, the champion flatfooted, the strong man suddenly rushed. The champion's left glove flicked stingingly into his face and was instantly followed by a powerful right cross to the jaw. The strong man, without ever having landed a blow, sank unconscious to the floor. The audience sat bewildered. They had just seen a champion against a novice.

  Dempsey figures in this story as the politician, the controlling element, and the strong man symbolizes the people. The governmental method used by Dempsey was that of letting them come to you and then belting them.

  This method alone does not work with large groups. With them it is necessary to play either on their inherent divisiveness or to divide them arbitrarily in order to rule. This Napoleonic method is well exemplified in the tax laws, which divide and subdivide the populace into many bits and shreds. It is Napoleonic because the general strategy of the little Corsican was to strike successively each section of divided forces with his full, massed force.

  Government uses these methods, it should be noticed, when the public is reluctant or unwilling. Apart from taxation, it is used to good effect in conscription. Let us briefly examine it there in order better to understand the tax outcome, which otherwise, in the absence of a hostile conquering force, is inexplicable.

  Most men are instinctively reluctant to serve in the armed forces, where one may be killed or maimed. We know this because, if they were not, all they would have to do is to join at any of the many recruiting stations scattered around. Most of them must be ordered to serve.

  If, as in World War II, the government wants some thirteen million men it is obviously difficult to order them forward all at once, risking the political ire of such a multitude. Again, government at no time possesses the manpower to force thirteen million to obey. The FBI, resourceful though it is, could hardly cope with this situation.

  The government here brings into play two tactics--Dempsey's lethal punch and the doctrine of divide-and-rule.

  First the government divides the manpower into classes--by ages and by marital and parental status. It then summons first those who are politically and psychologically weakest, the single youths aged eighteen to twenty-one who don't even have the vote. Excepting the few true-blue patriots and excitement-hunters who rush to the recruiting offices, all others, thankfully feeling they have been excused from danger, cheer in approval and tell the bewildered youngsters they are only doing their patriotic duty; older men and women hurry off, like often-criticized Germans, to better-paying jobs in munitions plants. Next to be summoned are single men aged twenty-one to twenty-five, while married men approvingly urge the victims on. For the government gets much assistance from that part of the populace it is not at the moment corralling. Any of those who have shown strong signs of not wishing to go are shouted down by their fellow men, shamed. Some who have watched and cheered the process meanwhile have rushed off to get married to the first unattached female they could find; for the government, it seems, has a soft spot in its heart for married men--whom it is not calling.

  But now, with a considerable force in training under arms, the government has enough men to deal handily with any late-showing dawdlers. Moreover, the men under arms feel scant sympathy for those who have not been called. The conscript army would, in fact, relish an order to go and get them at bayonet point. As in a wrestling match, the weight has been shifted. Where at first the forward-thrust of weight was with those not called, who chivvied the tender youths into service, this weight has now shifted to the youths under arms who now regard others as slackers and are ready to kill on command. The slackers are summoned--first the battle-shy married men and then those stalwarts with children up to a dozen and beyond.

  On the battle line, finally, one finds single men eighteen to forty-five and married men with a dozen or more children--men wearing glasses, with fallen arches, flat feet, no teeth and leaky hearts. As the rule was finally explicated by the soldiers themselves in World War II, "if you can walk, you're in." They are now all, as the soldiers themselves pronounced, "dogfaces," nobodies. (They were that, too, in civilian life but didn't know it.)

  Most of the populace initially acquiesced in this process because it seemed that somebody else was going to be soaked. On this basis they gave their full-hearted consent to the process that finally snared them.

  A similar technique is used with respect to the imposition of unfair taxes. For it always appears in reading the tax laws that somebody else is going to be soaked, or at least soaked more than the reader. Does it not clearly appear that some are going to be soaked up to perhaps 91 per cent? On $1 million of income, that is $910,000, leaving the bloody no-good bastard only $90,000 or about twenty times too much. Three cheers for Congress!

  The tax laws divide people into many more groups than the conscription laws. There are, first, the single, the married, the married with children and the heads of households; next come minor students, adults and persons over sixty-five. Those over sixty-five retired and unretired, with and without income, blind or still with vision. But this is only the beginning. People are divided also according to sources of income. The basic division is between earned and unearned income, the latter of many varieties. But there is also taxable and non-taxable income, foreign and domestic income, etc.

  While to the general public the basic division appears to be between single and child-blessed married persons, the true basic division is between earned and unearned income. It is invariably true that earned income is taxed most heavily, unearned or property-derived income most lightly down to nothing at all.

  But the average taxpayer is quickly made to feel that he is getting away with something at someone else's expense, that he is, as Mr. Stern says, a "tax deviate." The way the laws are drawn most of us are forced into being tax deviates. The only persons who cannot qualify are single persons with earned incomes, some seven million individuals. They are the low men on the tax totem pole.

  The government encourages everyone to feel he is getting away with something by advising all to be sure to take all the deductions--exemptions they are entitled to on the Labyrinthian tax form. And they are many. After correctly filling out this form the average taxpayer has the delicious feeling that he has once again outwitted a grasping bureaucracy. But he has only succumbed to Jack Dempsey's strong right hand. He has, literally, walked into the punch.

  It is much like participating in a crooked card game in which, one is assured, everyone is cheating. So why not take what comes one's way? But where an ordinary player is allowed to "get away" with $200, favored players somehow get away with $200,000, $2 million or even $20 million. The small players pay for this in the end.

  Thus, as Mr. Stern ably shows, the variations from the posted schedules in what is paid increase very steeply as one rises in the tax brackets. Whereas the income below $5,000, calling for 20.7 per cent of tax., actually pays on the average 9 per cent ("What a steal!" we may imagine the simple man saying to himself), the income of 81 million and more calling for a viciously punitive 90.1 per cent on the schedule (if it is taxable at all) actually pays on the average only 32.3 per cent, and the incomes over $5 million pay only 24.6 per cent. The demagogic arrangement of the rates conceals this.

  Whereas the average under-$5,000 income receiver, who probably had to work hard for his paltry dollars, saved $274 by his allowable deviation from the posted rate, the average multi-millionaire taxpayer saved $5,990,181 below the apparent rate. While the small man was allowed to cut small corners by an apparent 50 per cent, perhaps to his intense satisfaction with a benign Congress, the recipient of $1 million cut big corners by 66 per cent, and the $5-miillion man by 75 per cent!

  Put in other terms, bow much trouble would a person go to in order to chisel $274 and how much to chop out $5,990,181?

The Con-Game Pattern

  What the many tax-deviation opportunities provided by Congress for the small payer are is what is known in the underworld as "the come on" or bait. It is especially used in the "con game," the essence of which consists of an approach to a formally respectable person with an offer of great gain to be made by engaging in an operation that is safe but frankly shady. In the end the person being "conned" is tricked through his own illicit greed.

  The tax laws, with their many deductions and exemptions, are thus (cynically?) set up in the precise pattern of the "con game." One is invited to step in and chisel on the government by availing oneself of the many small opportunities strewn about for chiselers. One takes up the invitation--or challenge--like Dempsey's strong man. One walks very confidently right into the punch.

  Somewhat of an improvement over the "con game," however, most of the victims do not even suspect that it is they who are being unmercifully fleeced in the big delayed thrust.

Four Cases in Point

  Mr. Stern dramatically shows what happens to four men who each received $7,000 annual income. A steel worker paid $1,282 in federal taxes after all deductions (not considering all the indirect taxes he has already paid in the market through prices). A man who got all his income from dividends paid only $992.30. Another who sold shares at a profit of $7,000 paid only $526. A fourth who got his income from state and municipal government bonds paid no tax at all. The latter, incidentally, might have had the same tax-exempt status if he had invested in oil or mineral royalties. It hardly pays, as anyone can see, to work for wages. The tax laws thus grossly discriminate, at all times and in all directions, against salaried and wage workers. Grossly, grossly, grossly. . . .

  The higher professionals are similarly brutally discriminated against--perhaps most brutally.

  Let us take a busy, highly skilled, unmarried brain surgeon, his fees his sole source of income. If his income was $100,000 after all expenses, then his tax prior to 1964 was $67,320; after 1964 was $55,490. Another man, who sold (possibly inherited) shares at a profit of $100,000 since acquisition, paid only $22,590. A third, who got his income from state and municipal government bonds or possibly from oil or mineral royalties, paid no tax at all. Indeed, in some cases of remote participation in profitable mineral or cattle operations one may make a profit and have the government owing one money in tax credits!

  All higher professionals with ample earned incomes are subject to the full force of the graduated tax laws, with the exception of persons in the entertainment field who may incorporate themselves, sell themselves as it "package" and come under the low-tax capital gains provisions.

  Again, two men may each make $300,000, one by laboriously writing a best-selling novel, the other by inventing a trivial machine--perhaps, as Mr. Stern says, a new kind of pretzel-bender. The novelist must pay three times the tax of the machine maker.

The Question of Tax Exemption

  Should there, first, be any absolute tax exemptions, as of the French nobility? In a national poll the majority answer to this question would probably be "No." But what of religion? Ah, yes, most people would probably murmur, that surely ought to be exempt because it is "a good thing." If one so agrees, the principle of total exemption is accepted, and can be applied elsewhere, as indeed it is. Actually, religion in any event could not be taxed by any government. What the so-called religious exemption boils down to in operation is the grant of tax-free status to beneficiaries of ecclesiastical investments. This is obviously something different from religion. While most of the more than 200 sects own very little property and rank-and-file clergy, even in wealthy churches certainly are paid little, the managers of the heavily propertied ecclesiastical establishments gain from this provision, which splits them from the rest of the populace as accessories before the fact. The high-living upper ecclesiastics of the tax-favored churches are usually thick-and-thin pro-government men, upholding the pubpols in whatever they do. Naturally, they tell their communicants they ought to be glad to pay one-sided taxes and walk into cannon fire.

  The leading property-holding church is the Catholic Church, although most Catholics are quite poor. An unusual feature of the Vietnam war, as widely noted, was the strong opposition to it of many American clergy. But, said, the New York Times, "The main exception to the general trend, of course, is the American hierarchy of the Roman Catholic Church, which has largely been silent or, in the case of several leaders such as Cardinal Spellman of New York, supported the war effort. The position of the American Catholic hierarchy, however, contrasts sharply with the peace efforts of Pope Paul." 19

  Cardinal Spellman, indeed, on television declared "My country right or wrong" in a strengthened version of Stephen Decatur's "In her intercourse with foreign nations may my. country always be in the right, but my country right or wrong." Spellman was, evidently, a churchpol.

  The Catholic Church similarly, in return for its retention of properties and privileges, was a strong supporter of the Hitler regime, even as tens of thousands of French, English and American Catholics fought to the death against German and Italian Catholics to depose him. 20 It has supported the dictator Franco in Spain, supported Mussolini in Italy. It supports, indeed, any government that gives its large investments tax exemption.

  The pubpols of all nations, in short, get something in return--thick-and-thin support--for the clerical tax exemption when it becomes substantial. And what the higher clergy doesn't pay, others must.

  But although churches under American tax laws may and do operate businesses tax free, in competition with tax-collecting businesses, a university that does this is not tax exempt. Very evidently if a business does not have taxes levied on it, it is in a competitively favorable position pricewise. As the Catholic Church uniquely among churches does not issue financial statements, one does not really know how many investments and businesses it owns. In other cases the ownership is known. The tax base is constantly being narrowed by exemption of church property which, untaxed, is increasing.

  The principle of total exemption now being established as the pipe organs thunder their approval, it can be extended to whatever else is designated as especially worthy. After religion, what is most worthy? Obviously, it is education. Anything that is educational now becomes tax exempt, and as "education" is a word very elastic in referential meaning it is found, in practice, to cover political propaganda. Organizations and radio stations that emit rightist political propaganda, such as those of oilmen H. L. Hunt and Hugh Roy Cullen, now become tax exempt. And so it goes.

  What else is worthy of substantial exemption? As a sagacious Congress has decreed, the powerful oil industry, like religion and education, deserves from 27-1/2 per cent to 100 per cent tax exemption.

  Meanwhile, for every exemption and deduction granted, in the low as well as high brackets, for every narrowing of the tax base, the tax squeeze must become more stringent elsewhere; for the government must get whatever money it says it needs. If the government granted complete tax exemption to everybody except one person it is evident that this one person would have to supply the government with all the revenues it required!

The Baited Trap

  In order to set the public up for the big tax swindle, the proceeds of which accrue only to the wealthy elements, the government must dangle before it various obvious injustices in which it participates as a beneficiary. The public is, thus, "conned" into a baited trap.

  The first, as noted, is the religious exemption (which turns out to be of generalized service as well to propagandists, investors in local government bonds and oil men). But it sounds good to the rank-and-file, who see it as some kind of blow against vicious atheists and freethinkers (all, oddly, created by an all-powerful God).

  But, among those paying taxes, the next division takes place between single and married people. In con men's language this is known as "sweetening" the "set up," and is only the beginning of the process. As married people constitute more than 60 per cent of the adult populace, Congress obviously has a majority on its side in discriminating against the single. One should notice again the use of the principle of divide and rule.

  Taxwise, the apparent remedy of the single is to get married, but as a practical matter everybody is married who feels able to be married. Those disabled from marriage for one reason or another are simply taxed more heavily.

  Thus, under the 1965 tax law, as under previous laws, the taxable income of the single person incurs an initial tax at a much lower sum.

  The tax of a single person using the tax tables begins at $900 of actual income, that of a married couple at $1,600. On the first $500 of taxable income (1966), after all deductions, the single person pays 14 per cent; the married couple pays 14 per cent on the first $1,000. Whereas the married couple pays $140 on the first $1,000 of taxable income (after all deductions) the single person pays $145. The disparity gains force as one ascends the tax ladder. On a taxable income of $8,000 the single person incurs a tax of $1,630, the married person only $1,380. On $20,000 the single person pays $6,070, the married person $4,380.

  While what the average married person saves on the lower brackets compared with the single person is not enough to maintain a spouse, as one ascends the brackets one finds the tax saving alone can maintain one very well. Congress does not favor marriage through taxes by very much, as will appear, but it does favor marriages by rich people.

  Congressional tax favors wherever they fall, do not actually fall according to the stated category but invariably fall according to the category of greater wealth.

  This becomes apparent in the $50,000-bracket, where the single man pays $22,590 on taxable income (after all deductions) but the married man pays only $17,060, an advantage of $5,530, enough to support his wife. But at $100,000 of taxable income the wealthy man gets more than ample support for his wife, for he pays $45,180 while the single man pays $55,490. Even a girl with a healthy appetite can be maintained very well on the differential of $10,310.

  Before proceeding, the reader should be warned not to pay too much attention to the fact that $50,000 incomes pay $22,590 and $17,060 of taxes respectively for single and married persons. These seem like rather substantial rates. But this is on taxable income. We have yet to come to wholly nontaxable incomes.

  Mr. Stern argues that taxes ought to be the same for married and single persons. But married people and parents apparently feel there is something onerous about their condition, for which they require a tax concession. Congress lets on that it agrees, gives them a minor concession and then belts them down to the floor by fantastically widening the concession for wealthy people!

  Married people get a deduction not enjoyed by the single if they have children. Each child is good for a deduction of $600, which to many seems fair, as children are expensive. But the expense of maintaining children is not proportionately as great in the upper brackets, where the deduction broadens in value with the formal tax rate--the usual story.

Valuable Wives

  In the upper income stratosphere, wives (or husbands for wealthy women) are extremely valuable, as Stern shows in detail.

  Here is the cash asset value of a spouse at different taxable income levels under pre-1964 law (it is only slightly less now):

         Taxable Income         Asset Value of Spouse 

          $10,000.00                 $11,818.25
           25,000.00                 131,931.75
           75,000.00               1,000,000.00
          100,000.00               1,891,875.00
          445,777.78               5,996,994.00

  But at $1 million of income, the capital value of a spouse, oddly, begins to decline, as follows:

          Taxable Income         Asset Value of Spouse

       $1,000,000.00              $2,7166,153.75 
       $1,399,555.55 and higher          Zero 
     Under $2,889.00                     Zero

  The point about capitalizing a wife in these ways is that one can compute at going rates of return what a wife is worth to one in yearly retained income The wife capitalized at a value of $1 million at 4 per cent is worth $40,000 a year in income to her husband; the $6,996,994--wife is good for $279,877.66. But in the tax bracket below $5,000 a wife is worth in tax benefits only 73 cents per week, no bargain. 21

Tax Support for Rich Children

  A married man with a taxable income of $8,000 under the tax law as of 1965 paid $1,380 (against $1,630 for a single man). If the married man had four children his tax liability was reduced to $924. Under the law four children have gained a married man $456 or $114 per child over the childless married man, But the married man in the $50,000 bracket, who without children paid $17,060 tax, with four children and the same income pays $15,860 tax, a gain for him of $1,200 or $300 per child. His children are worth in tax benefit about three times what the children of the $8,000 man were worth.

  Whose Congress writes this sort of a law? Is it a Congress that represents the $8,000-a-year man or the $50,000-a-year man? As I can't ask this question after showing each such disparity, let it be said here that as one crosses the income-mark of about $15,000 the tax laws boldly and brazenly always progressively favor the richer and always absolutely favor unearned income over earned income.

  While the tax laws subsidize only very slightly the wives and children of the poorer man at the expense of single people, they do absolutely subsidize those of the wealthier. Here is a flat statement of incredible fact: The upkeep of wives and children of the wealthy is subsidized generously by the existing tax laws. It would, in other words, cost a wealthy single man nothing additional if he suddenly married an impecunious widow with four children. He would retain as much in-pocket spending money as he had before marriage and might also gain a fine ready-made family. If a single man earning $8,000 a year and itemizing deductions did this he would gain only $820 compared with a gain of $7,030 for the $50,000-a-year man. Most families live on far less than a $50,000-a-year bachelor would get in annual tax reduction by marrying a hungry widow with four children.

  But the lower taxpayers, while computing their paltry marital and children's deductions, perhaps feeling pity for the single persons, get the feeling of "getting away" with something, or at least of getting some concession from the government because they are married and have children. Actually, however, they are only being "conned" by a wily Congress.

  In any case, whatever encouragement the tax deduction gives to the birth rate is distinctly against the general interest at a time of obvious overpopulation and a seemingly intractable unemployment rate of 4 per cent. By all present signs at least 4 per cent of children born, and perhaps more, will not be able to get jobs.

  There are many other ways of dividing the formidable army of taxpayers, throwing first this one and then that one a sop, always under a sentimental camouflage. A single person, incidentally, who is contributing less than half to the support of a disabled or aged relative gets no tax rebate. Unless a person is more than half dependent, which would exclude almost everybody, he cannot be deducted.

Other Ways of Income Splitting

  The treatment of married people is known as income splitting, producing two incomes that are taxed at lower rates.

  One can, once the principle is established, carry out this process of income splitting further, producing three, four or more smaller incomes, less taxed, instead of one that is large and subject to much tax. These ways are all practiced by the wealthy.

  While the tax laws basically divide the populace between the single and the married and between the childless and parents, its greatest discrimination is with respect to earned income as against unearned or property-derived income.

  This salient feature is carried forward in the extension of income splitting.

  One way of income splitting is to allot partnerships in businesses to children, thus giving them a taxable income. If the partnership can be split many ways, among children, grandparents and other dependents, into smaller incomes, substantially smaller taxes will be encountered all around. Retained income for the family group will be much larger.

  Another way, as we have seen, is to establish trust funds, and the use of trust funds has grown enormously. While trust funds have many aims, one of the objectives they serve is to split assets and incomes among many people, often among many trust funds for the same person.

  But the income of such a recipient is not limited to the trust funds. He may also draw salary, have low-tax capital gains and tax-free income from government bonds or oil-mineral royalties. He may, indeed, draw every kind of income there is, taxable and nontaxable.

  Does anyone actually do this? They do much better! As President Roosevelt observed in a message to Congress in 1937 "one thrifty taxpayer formed 64 trusts for the benefit of four members of his immediate family and thereby claimed to have saved them over $485,000 in one year in taxes." But that is ancient history. More recently the Stranahan family, the leading owner of Champion Spark Plug Company, created more than thirty trusts and thus saved $701,227.48 in three years, according to Mr. Stern.

  But a certain Dr. Boyce, misled by the logic of the tax laws, in one day established ninety identical trusts to hold a mere $17,000 of stocks and bonds. The $100 dividend exemption left them each tax exempt. Appealed to the tax court, the plan was found "preposterous." "Straining reason and credulity," the learned court said, "it ought to be struck down forthwith." And, as Mr. Stern remarks, "It was."

  Another device for income splitting, thus obtaining lower taxes, is to establish many corporations in place of one. In one of many instances a finance business split into 137 corporations to avoid $433,000 of taxes annually, and a retail chain divided itself into 142 corporations to avoid $619,000 annually. 22 The surest way of keeping money today is to steer a proper course through the crazy-quilt tax laws.

Additional Tax Dodges

  A man who is sixty-five or over, in the best of health, gets an additional deduction of $600 whether his income is $1,000, $10:000, $100,000 or $1 million, although most people over sixty-five have little income at all beyond meager Social Security. But if he is in chronic poor health, unable to work except spasmodically, and under sixty-five, even if he is sixty-four--no extra deduction. A blind person gets an extra exemption of $600, suggesting to the reader of tax instructions that he lives under a Congress with a heart. But if a person retains his sight and is stone deaf, without hands, has had a stroke or is paralyzed from the waist down he does not get this compassionate exemption.

  Whenever such a disparity is pointed out to Congress it usually gladly, in the name of consistency and equity, spreads the inequity to include others. We may, therefore, soon see Congress giving an exemption to all disabled or physically handicapped people, thereby further narrowing the tax base.

  The point here is not whether a person is handicapped but whether he has income. What value is an extra exemption to a blind, disabled or aged person who has no income" The only person such an exemption could benefit would be one with an income. And all such special exemptions are taken by persons with incomes--often very substantial incomes. They are props to financial strength, not supports of weakness.

  Just how much good the exemptions for over age sixty-five do may be seen by considering the income statistics for 1962, the latest year available. Of 7.4 million male income recipients over sixty-five years old, 18.6 per cent got less than $1,000 gross; 34 per cent, from $1,000 to $2,000; 18.4 per cent, from $2,000 to $3,000; and 9.9, from $3,000 to 84,000--80.9 per cent under $4,000 gross. Of 7,491,000 female recipients 56.2 per cent got less than $1,000; 30 per cent, from $1,000 to $2,000; and 6.7 per cent, from $2,000 to $3,000--92.9 per cent under $3,000 gross. 23 Much of this income was from tax-free Social Security, which averaged $74.33 per month in October, 1965.

  In other words, exemptions for persons over sixty-five can be of significant advantage only to affluent persons, property owners, retired corporation executives on large pensions with big stock bonuses and upper professionals who have managed to save and invest. Like marital income splitting and deductions for children, it is of significant advantage only if one has a large, preferably unearned income.

  For a man in the 70-per-cent tax bracket each such exemption is worth in cash 70 per cent. For a person with zero income it is worth zero. In order to benefit slightly from the extra exemptions for being over sixty-five and blind, a single person using the standard deduction must have in excess of $2,000 taxable income. If he receives $4,001, he will pay tax on $1,800 (standard deduction plus three exemptions) or $294. But, having saved $80 by being blind, he will then be in a minority income group of less than 20 per cent of over-aged males! He will, despite the smallness: of his income, be in a small, highly privileged income group. If it is a woman with an income of $3,001, she will pay $146--but she will then, despite the smallness of her income, be in a restricted group of less than 8 per cent of overaged females!

  The tax deductions for the aged, blind and retired are of significant benefit only if one belongs to a small group of persons with taxable incomes higher than 81.8 per cent of the males and 92.9 per cent of the females actually do have. The ones most benefited are the affluent aged, blind and retired.

  These income statistics for the aged throw a curious light on the propaganda about the United States as a land of opportunity, the richest country in the world and the home of the individual-success system. Under this system, most people, economically, appear to be failures at the end of the road. And were it not for Social Security, the figures in each of the income brackets cited would, on the average, be about $900 less.

  Some hidden hand, force or influence appears to cause most people, after a lifetime of effort, to show up very patently as losers. Could prices, taxes and overpersuasive advertising, as well as individual shortcomings, have anything to do with the result? With only 19.1 per cent of over-age males having a gross income above $4,000 and 7.1 per cent of retired females above $3,000, economic success does not appear to have crowned the efforts of most survivors in the most opulent land ever known to history.

  In drawing the tax laws Congress is no more being sentimental than when it temporarily exempts the father of twelve from battle duty. Although individual congressmen no doubt have their personal points of view on all of this, collectively Congress in drawing the tax laws is absolutely indifferent to whether one is poor, married, has children or has personal disabilities. But it is not indifferent if one has property or a well-paid position. Then it is most enthusiastically on one's side.

  Congress, as we have noted, likes students. It likes them so much that if one is able to gain a scholarship or fellowship he need pay no tax at all on it, an educational exemption, up to $300 a month for thirty-six months and even if the scholarship adds considerably to family income. Scholarships are awarded by many endowed colleges and special bodies, but many corporations now earmark scholarship funds given, for example, to the National Merit Scholarship Fund. Some funds are not earmarked, but the earmarked funds are for the children of emplovees (usually executives) of the company. The granting of the scholarship has the hidden effect of giving the father an untaxed pay raise and the corporation a pre-tax deduction, paid by consumers and small taxpayers. The father will not now have to pay his own taxed money for tuition. And in known cases students of lower standing in test examinations and lower academic standing have drawn earmarked scholarships while students of higher standing have drawn none, even as the public supposes the scholarships are awarded on the basis of strictly on-the-record merit.

  For nonabilitv factors are taken into consideration in this quarter, too, as in the hiring of people of negative ethnicity. 24

Divide and Prevail

  My object in going into this small stuff is to make this point: Congress is not really sentimental at all but is just busy dividing the taxpayers into separately manageable little bands of over-reachers, each of whom feels particularly and unwarrantably virtuous about some feature of his status--that he is married, has children, has a student in school, contributes to a church, has one out of many possible disabilities, is over sixty-five or was never arrested while robbing the Bank of England on a bicycle ridden on a high wire with a monkey on his back.

  A congressman might deny this, might hold that the body is really sentimental, and point out that payments under Social Security and the Railroad Retirement Act are tax exempt entirely. But every recipient of Social Security and retirement provisions is not automatically entitled to special sympathy. A number of them are survivors from among many who have succumbed before them and as such, someone might argue, ought to pay a special tax--or at least be taxed equally with others. A long-employed utility-company executive, no risk competitor, who retires at age sixty-five with a pension of $40,000, a rather standard figure for his industry, plus owning accumulated stock, money in the bank and a large home, may draw the maximum Social Security payment, tax free, plus the special exemption for over age sixty-five. Upper-bracket officials of long service in their personally owned corporations as well as lower-bracket wage-earners are equally under Social Security and get the same tax exemption whether they need it or not.

  When the average man retires, his income drops sharply. But when an executive or owner who has worked over the years for his own company retires, his income from stocks, bonds, pensions, annuities, etc., does not decline. Yet he gets untaxed Social Security payments as well as the poorer man, showing again the equality of the law in all its majesty..

Untaxed Income

  While the average man, chuckling to himself, is stooping over picking up the sops a cynical Congress has laid out for him, his pocket is being emptied from behind. As he has elected to trade punches with the champion, let us see how he fares.

  Ninety per cent of people, more or less, own no stock and receive no dividends. But people who own stock receive the first $100 of dividends tax free; a husband and wife each owning stock get $200 tax free. However, so-called dividends from mutual savings banks and building and loan associations, usually received by low-income people, do not qualify for this strange deduction.

  Furthermore, dividends paid in stock or in "rights" to subscribe to stock pay no tax at all even though the company has taken money from earnings with which to increase invested capital. This feature of the laws explains the popularity of the stock dividend: It is tax free.

  The stockholder is in a more favored tax position than even this shows because most companies do not pay out all their earnings in dividends. The dividend payout rate varies among companies from zero to 80 or 90 per cent but averages at about 44 per cent.

  What this betokens is that accrued earnings, not paid out, are credited to the capital account and amount to so much untaxed money at work for the stockholder.

  Let us imagine that someone owns 100 shares in a company that earns an average of $10 a share but pays out an average of $5 a share in dividends. The stockholder receives $500, deducts $100, and puts $400 into his gross taxable income. But the $500 not paid out is at work for him in the company, growing each year. It is tax-free unearned capital. But if a wage worker receives a $500 bonus at year-end and the employer deposits it in a bank for his account, the $500 must be reported as taxable income and will be taxed. Not to pay a tax on it would be a violation of law, and punishable.

  Some companies, although they are big earners, pay no dividends at all. Known as "growth companies," they grow by leaps and bounds. If a man invests $10,000 in such a growth company and it grows at 10 per cent a year (rather modest for a growth company) the investment will be worth $16,105 at the end of five years and $20,600 in a little more than seven years. On all this accrual he has paid no taxes, yet is becoming wealthier and wealthier.

  If he decides to take his profit at $20,000 he will pay a maximum of 25 per cent (he might pay less) on $10,000, or $2,500. But he need not do this at all, need never sell and never pay a tax.

  When he eventually dies, his heirs will not be liable at all for a capital gain tax even if the original investment of $10,000 has grown to $50 million. Nor need they even pay estate taxes if he has prudently placed it in trust funds for their benefit. While his heirs may receive from him stock worth $50 million, his estate tax may be zero so that all along there has been incurred no income tax, no capital gains tax and no estate tax.

  But if he split the original investment of $10,000 among four trust funds, at his death four beneficiaries would have estates worth $12.5 million each, on which there had never been paid income taxes, capital gains taxes, gift taxes or estate taxes. All would be completely legal.

  This road to wealth is not only theoretically possible but is actually traveled in various degrees by many of the rich, as their final accountings show. They die stripped of assets.

  The amount of untaxed undistributed profits of corporations each year is very large. In 1950 it was $16 billion. It was $16.5 billion in 1955, lowered to $10.8 billion in 1958, rose to $15.9 billion in 1959. Since then it has ranged between $13.2 billion to $16.8 billion in 1963. 25 Since 1946 it has always been each year more than $10 billion. Like money in the bank, the beneficiaries pay no tax on any of it. It is this feature that enables major stockholders to become constantly richer, tax free.

  Retained corporate profits, mostly reinvested, have exceeded dividends Since 1962 and in 1965 totaled $25.6 billion against $18.9 billion of dividends. They also exceeded dividends in every year from 1946 through 1959, with the exception of 1958, often by a very wide margin; in 1947 and 1948 they were more than double the dividend payout. 26

  From 1945 through 1965 total corporate dividends paid out amounted to $226.9 billion compared with $296.2 billion of profits retained, as shown by the immediately preceding source. The actual payout rate has been a shade more than 44 per cent. Retained profits and increased earnings on them have been among the more solid reasons for the increase in market value of stocks.

  Not to pay dividends is an accepted maxim of tax economists. In the words of one tax advice service, "paying dividends is clearly a tax waste." 27

  The retention and reinvestment of corporate profits is the royal road to tax avoidance and financial expansion, at home and abroad. Abroad it is the basis of what is known as American economic imperialism. It requires, of course, the maintenance of a vast "defensive" military establishment largely paid for by the less affluent lower taxpayers. The aggrandizing foreign investments, like the domestic investments, are largely made by corporations with tax-free money!

  Under the Eisenhower Administration, as we have observed, the dividend tax credit passed in 1954 enabled big stockholders to make a killing while small stockholders gained very little, the usual pattern of the tax laws. With fewer than 1 per cent of all families holding more than 70 per cent of all stock by value, it is clear that very few could be advantaged by this law. As Mr. Stern shows, a man who had a tax bill of $2,020 and had received dividends of $500 would reduce his tax by $20 under the Eisenhower law. But for 306 top taxpayers, with an average dividend income of nearly a million dollars, we have noted the dividend credit meant an average $40,000 in cold cash for each. Quite a difference. 28

Tax-Exempt Medicine--for the Rich

  As the wealthy person has more money available, he can always purchase more tax-deductible medical services than the average man. A married taxpaver is limited to a maximum $20,000 medical deduction, a great deal even for a rich man, and to the excess over 1 per cent of taxable income for drugs and medicines.

  But if the taxpayer has an employer who pays his medical and hospital expenses, these are exempt from taxes, which is very handy for the company executives who often enjoy this "fringe benefit." For the ordinary taxpayer any wages paid as "sick pay" are exempt up to $100 a week after a waiting period, but not many figure in such arrangements. Those persons retained by companies that make this a practice obviously enjoy a differential tax advantage over most taxpayers.

  Corporation executives often enjoy free medical services, for themselves and their families, from fulltime company medical departments. This amounts to so much tax-free medicine, which is charged to consumers in price and to general taxpayers. High public officials, it must be noted, also often come in for such free medical services at various of the up-to-date governmental military hospitals. Former high officials also participate through the courtesy of incumbents, whom they publicly back when controversy rises.

  If he has no organization he can charge for the medical services, the rich man does have up to $20,000 of medical attention each year as a tax-free deduction from spendable income, thus reducing his taxable income. In the 70-per-cent bracket this is worth $14,000, cash.

  Most persons in the country never enjoy the services of a doctor until they are in extremis or a doctor must be called in to pronounce them dead. This is because they cannot afford a doctor and instead rely on the nearby pharmacist in all poorer neighborhoods referred to as "Doc." Their prescriptions are whatever proprietary drugs he recommends. The pleasant-sounding medical deduction, then, is of no service to the many persons without money to spare for doctors and medicine.

Lucrative Charities

  One may deduct up to 30 per cent of gross adjusted income for contributions to charities, and if contributions exceed 30 per cent in any one year they may be spread over five years. As most taxpayers manifestly cannot make contributions on such a scale, the provision is obviously of service only to the wealthy.

  While the contributions may be made to existing bodies, most of the wealthy prudently decide to make them to their own charitable foundations, which are run as helpful adjuncts to their other affairs.

  Oddly enough, one's financial power in society increases as one "gives" money to a personally owned foundation, proving that it is more profitable to "give" than to receive. If a certain man has a million-dollar taxable income (he has made all deductions), he is liable for $660,980 in taxes under the 1965 or nearly 70 per cent flat. But he can still make a charitable contribution for a deduction of $300,000. If he does, his tax will be only $450,980, a tax saving of $210,000. But as he has "given" $300,000 it looks as though he is deprived of $90,000 more than if he had paid straight tax.

  But what he has "given" he has given to his own foundation, and he can invest this money in stocks of his own companies and thereby maintain profitable control. Again, the earning power of this $300,000 (at least $15,000 a year) is now tax free itself, greatly increasing its effectiveness. It will recoup his $90,000 out-of-pocket cost in at most six years and thereafter show a tax-free profit. He has more income to dispose of now in "philanthropic" patronage than if he had retained his taxed earnings and invested or spent them, for the proceeds of such retained money would be taxed.

  What does his foundation contribute to? It contributes, as actual cases show, to laboratories seeking cures for various diseases. Surely this is entirely worthy, and so it is. But what do the corporations make that he controls? They may make medicines that are sold at a profit for the cure of various diseases, and any discoveries made by the laboratories to which his taxfree foundations "give" money will be utilized by his medicine-making corporations in making further profits. But few such discoveries will be available to impecunious people. It usually takes money to buy medicines.

  "Charity" under our tax laws can be highly profitable. It can be monetarily more profitable, indeed, than noncharity.

Big Killings via Interest

  Interest received, except from tax-exempt bonds, is taxable, Every man who gets interest from a bank account, a mortgage or on a federal or corporate bond is liable for taxes on it.

  Interest paid out, on the other hand, is 100 per cent deductible. The man who buys an automobile or household appliance on the installment plan may deduct the interest paid before computing his income tax, just like the man who deducts for the payment of $100,000 of interest a year on a margined stock-market account. For the latter, the interest is deductible as an expense of doing business, and in the 70-per-cent bracket is worth to him $70,000. His true interest outlay is only 30 per cent of the face amount.

  All such big interest payments are of major advantage to the big operators in stocks, real estate and oil lands who borrow a great deal in order to contrive their killings, which are sometimes sure things--as in the case of the metropolitan realty operators who "mortgage out."

  Where interest paid as a deduction most obviously divides the population, placing another large number in the role of sucker and an apparent large number among the advantaged, is in the matter of home ownership. While tenants, in the form of rent, pay all costs, including mortgage interest and taxes of the owner, the home owner may deduct on his federal tax return interest he pays on his mortgage and his local real estate taxes. On a $30,000 house in which he has a $10,000 equity the home owner may pay 5 per cent perhaps on a $20,000 mortgage, or $1,000; his taxes may be $500; and he may reasonably figure 3 or 4 per cent for depreciation, repairs and maintenance, or $900-$1,200. His rent, then, exclusive of heating, is minimally $2,400. But if he is married and has a $10,000 taxable income he may first deduct the interest payment of $1,000 and then the real estate tax of $500. At the 22 per cent rate for that bracket the deduction is worth $330, bringing his actual rent down to $2,070 or $172.50 per month. A tenant would have to pay considerably more per month plus some entrepreneurial profit to the owner; he would probably have to pay from $225 to $275 per month, possibly more.

  While this seems to give home owners a bit of an edge over tenants (I have omitted items like cost of insurance), Congress is not especially fond of home owners either. It has much bigger game in mind. With home owners sitting contentedly chewing their little tidbit, knowing they are slightly better off taxwise than tenants, the interest deduction meanwhile has opened some large gaps in the tax laws through which profit-hungry elements churn like armored divisions through Stone Age club-wielders.

  First, for the wealthy man with many houses and country estates, both the realty tax and interest deductions amount to windfalls. If a million dollars of such residential property is mortgaged up to half at 5 per cent, there is a total interest charge of $25,000. But in the 70-per-cent bracket only $7,500 of this represents an out-of-pocket payment. Whatever the realty tax bill is, only 30 per cent of it represents an out-of-pocket payment. The same situation applies with respect to personally owned cooperative luxury apartments; the general taxpayers defray up to 70 per cent of the interest and realty tax outlay.

  The interest and realty tax deductions, then, are extraordinarily valuable to holders of extensive properties.

  But this is only the beginning of the story.

  Metropolitan real estate operators, as we have observed, use interest as a ]ever with which to "mortgage out" and then obtain tax-free income.

  Here, in other words, is the real milk of the interest deduction coconut. Whereas the average home owner is getting away with peanuts at the expense of tenants, both tenants and home owners in the end must make up out of other taxes they pay, mainly in the form of prices, what the big operators have been able to avoid paying on their profits.

  Congress, although not loving home owners, is surely infatuated with big real estate and stock-margin operators. And why not? It is these chaps who have the money to kick in for campaign funds, always a matter of concern to the officeholder.

  One may agree that the ordinary citizen is entitled to complain. He knows he is in some sort of squeeze. But, politically illiterate, he clearly does not realize its nature nor does he see that he won't get out of it by obtaining some petty advantage over the single the childless, the tenants and other fellow rank-and-file citizens. He cannot understand that it is the very type of person he likes as a legislator that is his undoing. For he prefers "con men" to seriously honest men.

Tax-Exempt Bonds

  One of the biggest tax-exemption loopholes consists of state and municipal government and school bonds. Here, whether one draws $1,000 or $50 million of income, one pays absolutely no tax ever.

  Very few people invest in such bonds and nearly all who do are very rich. Tax-exempt bonds are, clearly, a rich man's investment vehicle and are provided for this very purpose.

  In the last available Treasury report issued about such bonds, the top 1/10 of 1 per cent of the population owned 45 per cent of all outstanding, the top 3/10 of 1 per cent owned 66 per cent and the top 1-1/2 per cent owned 87 per cent. 29 In short, no down-to-earth people own such bonds.

  How many such bonds are outstanding? As of 1963 there were $85.9 billion outstanding compared with only $17.1 billion in 1945 . 30 One can see they are very popular with their buyers. At an average interest rate of 3 per cent, this amounts to $2.577 billion of untaxed annual revenue falling into the hands of wealthy individuals and a few banks and insurance companies.

  The ordinary man would not find such investments attractive, as he can get from 4 to 5 per cent on savings. The advantage enters through the leverage exerted by the tax-free feature as one ascends the formal income brackets.

  As Mr. Stern has worked it out, for a person with a taxable income of $4,000 a 3 per cent tax-free bond is equal to a stock yielding 3.75 per cent; for a person in the $20,000-$24,000 bracket to 4.8 per cent; for a person in the $32,000-$36,000 bracket to 6 per cent; but to a person in the $88,000-$100,000 bracket it is equal to 10.7 per cent on a stock.

  On $140,000-$160,000 income it is equal to 15.8 per cent on a stock, on $300,000-$400,000 income to 30 per cent on a stock and on everything above $400,000 it is equal to a blessed, flat, cold 33 per cent on a stock! Such a percentage return in a tax jungle is obviously worth reaching for.

  As these bonds are secured by a lien on all the real estate taxes in their respective jurisdictions, they are absolutely without risk as to capital or payment of interest. In order to make as much taxable money, a high-income person would obviously have to invest in very risky enterprises that paid dividends of at least 33 per cent on invested capital. Not many established companies do this.

  While some persons, like Delphine Dodge, put all their holdings into such securities, the average wealthy man puts only part of his fortune in them, thus reducing his total tax bill. A possible diversified portfolio and the taxes paid on it -might be as follows:

     Investment                    Income             Tax

$100 million tax-free          $3 million (cash)      None
$100 million oil              $15 million (cash)      None
$100 million growth stocks    $15 million (accrued)   None
   earning 15 per cent but
   reinvesting all; no
   dividend payout

Total Investment              Total cash income      Total tax
$300 million                   $18 million             None

                            Total accrued income
                                $15 million

                              Total real income       Total tax
                                $33 million             None

  But such a man's chauffeur, if single and receiving $6,000 a year, would have paid a tax of $1,130 a year at 1965 rates.

  Not only is it possible, but it actually happens, that the house servants--chauffeurs, cooks, maids, gardeners--of some ultra-wealthy people pay income taxes and the employers pay none at all, year after year. For this, as one must understand, is a democracy where the lowly pay taxes but many of the rich do not.

  In passing, very few Americans can afford to hire servants, and there are in fact few servants in the United States, which some naive souls take as proof of how "democratic" the country is. According to the 1960 census, there were only 159,679 private household workers "living in" in the entire country; they had a median wage of $1,178, were of a median age of 51.6 years a only 26.4 per cent of them were nonwhite. As some large estates harbor huge staffs of servants it is evident that this number distributes among a very small percentage. of rich families. Private household workers "living out" numbered at that time 1,600,125, had a median wage of $658, were of a median age of 44.2 years and were 57.3 per cent nonwhite. This latter group obviously makes up the part-time help of some of the urban middle class.

  Even suburban families with two or three children in the $25,000 income-bracket find they cannot pay for a servant after taxes, educational and medical costs, car operation and ordinary running expenses. And even part-time servants in the United States are now a luxury confined to an extremely small group of people.

The Expense-Account Steal

  A corporation that rewards its top executives opulently, so that after personal deductions each has $500,000 of taxable income a year, is cognizant that each Must pay, if married, an income tax of $320,980 or 60-plus per cent. According to one line of doctrine this "reduces incentive" to work like crazy for the dear old company; another doctrine feels it has little dampening effect on executive performance. 31

  As the ascendant view, Congress concurring, is that incentives to make the United States ueber alles are reduced by high taxes on executive salaries, ways have had to be devised for putting additional but refreshingly tax-free money into the hands of discouraged upper corporate executives, among whom some of the big hereditary stockholders are included. The two major additional ways are (1) expense accounts and (2) cut-rate stock options. Many corporation executives derive most of their take-home pay from these two sources, insouciantly allowing the government to clip their direct-cash salaries up to 70 per cent.

  In conducting a business, as anyone can see, an executive naturally incurs nonpersonal expenses for travel, hotel rooms, meals and tips away from home. If a good customer is casually present at mealtime the custom has also been long established of inviting him for a meal and perhaps a convivial drink or two.

  But controversy over expense accounts does not relate to these facts of ordinary business life, which may be termed "proper expenses." The controversy centers on "improper expenses," which are a much-criticized way of directing tax-free revenue into the hands of a corporation executive or representative, either giving him money he would not otherwise have had or relieving him of paying for luxurious recreation and diversion out of his own pocket and thereby reinforcing his personal finances while he has fun, fun, fun.

  The controversy over expense accounts has succeeded in removing some of the more ludicrously blatant abuses, but in essentials the expense account remains a perfectly legal tax-evading racket. In the 1930's, for example, wealthy people formed special corporations to operate their yachts, racing stables and country estates; the operating cost was deducted as a business expense, thus reducing taxable income. One woman caused her personal holding company, which ran her country estate, to hire her husband at a generous salary to manage the place. His ample salary was a deductible expense before taxes! 32

  In such cases standard corporate methods were applied to personal finances. And why not? If a corporation can do it, why not it profit-seeking individual? A spouse, from an accounting point of view, is clearly a deductible expense.

  But, despite a narrowing of some expense-account latitude, the field is still rather wide open to free and fancy improvisation.

  Almost institutional now are the business convention and regional sales meeting for industry and company go-getters. Here the tab for the milling throng is picked tip by the company or companies as a deductible expense. Everything is "on the house"--meals, cigars, wine and liquor, music, entertainment and fancy-free girls. The amount of business transacted at such affairs would be hard to detect with an electron microscope. Anthropologists have compared them with primitive saturnalian festivals, a lusty change of pace from the austere rigors of higher business life.

  At one such hilariously confused affair the comely profit-oriented wife of a conventioneer, having heard to her innocent astonishment from some of the call girls in the powder room about the high fees they were getting, got herself on the payroll as a part-time nymph without informing her husband. She was duly installed in a hotel room and a blind date was arranged for a certain hour. As she melodiously called "Come in" to the knock on the door at the appointed time, in walked her own husband.

  Those sheltered readers who may consider this story farfetched and untrue are not aware of what has long been known to close observers of High Society: Some socialite women function as professional prostitutes--a fact finally recognized by the New York Times (August 14, 1967; 24:1) in its allusion during a survey of contemporary prostitution "to the socially prominent woman who grants her favors for up to $500 in a suite in one of New York's best hotels."

  From a pecuniary point of view there are distinct advantages to plying this trade at this social level. At $500 per seance, and with only one such choice seance per week, such a practitioner would gross $26,000 per year tax free. For the politicians have yet devised no way of levying a tax on this traffic or bringing it into the range of reportable income. The quest for tax-exempt income naturally turns the thoughts of some pecuniary-minded women in this direction.

  Proper business expenses would be those defrayed by a salesman in traveling about to call on customers, or an executive on a plant-inspection tour. But such outlays on expense accounts are minor.

  The larger expenses are incurred in providing elaborate entertainment for actual or potential customers, unnecessary entertainment for colleagues and business peers when the sole business topic is ordinary shop talk, and in providing executives with a wide range of recreational expenses. It is a succession of Roman holidays financed by the public.

  As to lavishly entertaining customers, if it is done by individuals for their own account, the cost is tax deductible up to 70 per cent, which makes the government (i.e., the general public pay for it up to 70 per cent. If the bill is paid by a corporation, all of it is deductible as it cost of doing business, paid for in prices.

  Under the entertainment feature, corporations make lavish gifts to customers, particularly at Christmas time. A very minor gift is a case of whiskey, and corporation liquor purchases have been estimated at more than $1 billion annually. 33 Corporate gifts in general, involving Cadillacs and jewels, are estimated to exceed 82 billion. 34 The public bears such costs in price directly. Here is a big patronage sewer.

  The Internal Revenue Bureau has fought many of the weirdest claims for deductions but has often lost in the tax courts to corporate-minded judges. The owner of a large dairy and his wife were allowed to deduct the $16,443 cost of a six-month African safari as an "ordinary and necessary" business expense because the showing of movies of their trip resulted in presumably beneficial advertising for the dairy. A well-known actress was allowed to deduct the cost of expensive gifts to her agent, dialogue director and dress designer. As she was in the upper brackets, the cost of the gifts was borne almost entirely by the government; she would, had she not made the gifts, have had to pay out most of this money to the government--that is, the general public. As it was, she garnered for herself some personal good will with it. 35

  President John F. Kennedy proposed some mild curtailments in expense-account deductions but was largely over-ruled by Congress. Under his scheme the government would have picked up an estimated additional $250 million in taxes and would no longer have allowed deductions at public expense for theater and sports tickets, night clubs and the maintenance of yachts, hunting lodges and Caribbean hideaways.

  Congress allowed such expenditures to remain tax deductible but stipulated that the maintenance of facilities like yachts, hunting lodges and tropical resorts would be disallowed unless they were used more than half the time for business purposes, not a difficult provision to comply with. Making it a bit more annoying, Congress now required itemizing of expenses; previously itemizing was not necessary. But itemized lists are not difficult to supply.

  Furthermore, country club dues could continue to be deducted only if more than half of club use was for business purposes (not difficult to show as business associates and customers are about all the average business member knows.). The heavy dues and expenses of membership in the big metropolitan clubs, when in showdowns claimed as business clubs, are all deductible.

  Under the new law, for business entertaining to be deductible, there must be some "possibility of conducting business affairs" and there may not be present "substantial distractions." This appears to rule out theater parties, sports events and nightclubs though it does allow entertaining in luxury restaurants and at-home dinner parties. But there may be participation even in the presence of distracting events "directly preceding or following a substantial and bona fide business discussion," which opens the door wide again to sports events, bullfights, theaters, nightclubs and the like. As in the shell game, now you see it, now you don't.

  "Some skeptics," says Stern, "foresee this major exception resulting in the strategic scheduling of 'substantial and bona fide business discussions' at such select times as the eve of the Rose Bowl game, or the Kentucky Derby--or even the heavyweight title fight."

  As one threads one's way back and forth through the yes-and-no fine print it becomes evident that anything goes for which the shadow of a claim can be made, including all-expense trips to Caribbean resorts, gifts of Cadillacs and objets d'art to key customers and the placing at the disposal of executives of fully serviced, chauffeured cars for business and personal use.

  Said one businessman, a member of a coterie of business acquaintances whose companies picked up their lunch bills serially: "I haven't paid for my lunch in thirty-one years." Credit cards are largely paid for by corporations; hence their wide use.

  The basic intent of the improperly used expense account is to pay most of the recreational-entertainment bill of executives and some of the recreational bill of customers, and to siphon directly tax-free money into the pockets of upper sales personnel who are given expense accounts, no questions asked, of up to $700 to $900 per week. 36 They pay no tax on such largesse.

  There is really no point in picking one's way through what is paid via the expense account and what is not paid: Basically, the whole recreational bill is put on the shoulders of the public, thereby relieving the beneficiaries of this considerable out-of-pocket expense.

  Expense money may serve in lieu of salary and has the advantage of being nontaxable. In one case an unmarried president of a small eastern corporation was paid a salary of $25,000 on which he paid $8,300 taxes. He wanted no more because his company paid his apartment rent, club dues and expenses (meals and drinks), entertainment expenses and an occasional trip abroad "to study business methods overseas and improve his firm's competitive position." He thus had the equivalent of a $98,000 salary on which income taxes would have been $62,600, nearly eight times what he actually paid! 37

  Where a man has a stipulated expense account it is, of course, understood that he does not have to spend it all. Some of it is "keeping money," tax free. After all, who knows the difference?

  One of the subjects faced by Congress in slightly revising the expense-account provisions was the business-mixed-with-pleasure trips of corporate husbands and wives. These latter are an indispensable feature of many business affairs and are fully tax deductible. When the ordinary citizen takes his wife out for a trip or entertainment he foots the bill fully; but for a man on the expense-account circuit she is fully deductible, a pleasant feature of corporate matrimony.

  Whereas before Kennedy on a business-mixed-with-pleasure trip the whole cost was deductible, even if a brief conference in Europe or the Caribbean were followed by a prolonged vacation, under the new law when a trip lasts more than a week and where the pleasure component is greater than 25 per cent, only a partial deduction of transportation costs will be allowed unless it can be shown that the pleasure component was the prelude or the aftermath to portentous discussions. Then, apparently, the sky is the limit. While the percentage stipulated seems very precise it cannot, in fact, be applied.

  What if a business executive and his wife (he can't do without her presence) journey to Rome where there is a business conference of half a day about a possible oil deal of $250 million? Now the man and his wife tour the Mediterranean for three to six weeks. Does one now measure the pleasure component by time, by intensity or by magnitude of outlay? If it is the latter, then it is a flea-bite in relation to the magnitude of the possible deal; if it is by time, then close to 99 per cent of the component has been pleasure. If the whole trip cost $12,000, how can this be reasonably questioned as an adjunct to a possible $250-million deal? The fact is, of course, that big deals can be, and have been, arranged with the expenditure of just 10 cents for a phone call. A large deal does not necessarily require expense outlays commensurate to its size, does not need to be arranged in a palace in the presence of dancing girls, whirling dervishes and musical clowns at a Lucullan feast. These are thrown in because they are diverting--and are at public expense.

  Clarence B. Randall, former chairman of the Inland Steel Company, is a sharp critic of the expense-account racket, which he rightly sees as adding nothing of value to the economy and as conveying a damaging image abroad of the American businessman's way of life. 38 But he is a minority of one in the business community, as far as the record shows.

  The New York pleasure-belt, extending roughly from 34th to 59th Streets and First to Eighth Avenues, is largely supported by expense-account deductions--that is, by the general public. This was made evident when leading restaurateurs and theatrical producers, supported by their congressmen, protested to Congress that they would go out of business if the Kennedy proposals became law. A host of expensive shops would also presumably go under.

  Although all these establishments are regarded as play areas of the rich, not many rich people would patronize them if they had to pay for them with their own money. For a wealthy man, often in mortal fear of being considered a sucker, is more apt to overrate than to underrate the value of a dollar. If he spends, he prefers that it is other people's money.

  This whole area, where the mere serving of a meal may be a ceremony rivaling the High Mass of the Catholic Church, is underwritten by the general public in the price paid for goods and in lost tax money made up by the lower brackets.

  New York City is the Mecca of the nation's big retail establishments, which send buyers there by the hundreds. These buyers, man and wife, are ordinarily royally entertained, providing many a tale for telling at the home-town country club. If, however, no entertaining whatever were done, tax deductible or not, would the nation's total of business suffer? Would the buyers refuse to buy and the customers at home go unappeased?

  While it is true that all this may make business more pleasant and exciting, it would make everything more pleasant and exciting if such tax-supported antics were available to everyone. If two scholars have lunch and incidentally discuss the number of commas in Chaucer's writings, should not the lunch be tax deductible? If a physician or lawyer takes acquaintances to dinner, should the cost not be tax deductible on the ground that they might some day become patients or clients? What if two philosophers meet to discuss the cosmos? This is obviously a large matter, larger than a merger of all companies into one. Should they not be tax exempt for life? Does not the government really owe them billions in view of the magnitude of their task? Why should not the ordinary office worker's lunch be tax deductible? Is not the lunch an "ordinary and necessary" expense ancillary to carrying on business?

  Should not, by the same line of reasoning, everybody's outlays for anything--food, housing, clothing, chewing gum, tobacco, entertainment--be tax deductible? Is not clothing an "ordinary and necessary" expense for attending to one's job? Could one show up for work clad only in a pair of slippers?

  If business expenses, proper and improper, are all deductible, why should not all personal expenses be similarly deductible under the principle of equality under the law?

The Stock-Option Racket

  A far more lucrative way of deriving income and evading taxes is by means of executive stock options, which have become increasingly used since World War II.

  The essence of the stock-option scheme is that it allows its designated beneficiaries, few in number, to purchase stock at steeply reduced rates. Some price is arbitrarily set at which a favored group of executives, often including large hereditary owners, may buy stock after a certain date. The benefiting executives are supposed to scheme harder in order to enhance the underlying value of the company, thus giving themselves profits. Naturally, if the economy were sinking, no matter how hard they schemed the value of the company would not increase; it increases only as the company participates in an expanding economy, which has nothing to do with the efforts of the executives (with some exceptions).

  The way it works is as follows:

  Certain high-salaried executives are told that they may within three years buy a block of stock in the company, if they wish, at $5O a share. It is now selling at $45. After three years, let us say, the stock has risen to $125. As they each decide to buy the allotted number of shares, usually running into many thousands, they pay $50 for a stock worth in the market $125, or $75 per share instant profit. If they now sell this stock they pay a maximum 25 per cent tax on the gain or they may retain the stock and pay no tax at all.

  But what if the stock fails to advance or declines? This is too bad and in that case the options, with nothing lost, are not exercised and expire. But in many cases of record, when this has happened, the board of directors simply voted that the option price be reduced, from perhaps $45 to $20. This made it possible to buy the stock at a discount of $25, and the purchase of sufficient additional shares might be allowed to permit as great a profit as if the stock had advanced to $125 under the original option.

  The option plan clearly allows its preferred beneficiaries to buy stock at a discount and hold on to it, paying no tax, or to sell it and pay a relatively low tax on the increment. An executive need not, indeed, put any of his own money into the deal at all because most issues listed on the Stock Exchange are good for a bank loan at 50 per cent of their market value at any time. If the option price is at least 50 per cent of the market price, a bank will put up all of it, gladly, and the executive need then, after holding the shares a few months, simply sell them to lift off the low-tax capital gain. Smooth, smooth, smooth. . . .

  But stock options always dilute the equity of stockholders, large and small. In the case of large stockholders, these sometimes participate in the option plans themselves, thus experiencing no dilution of equity; but in some cases large stockholders concur without participating, apparently feeling it is worth it to them to get this tax-favored extra compensation into the hands of aggressive higher executives.

  If a group of executives elect to keep their stock, as did the leading executives of General Motors over the years, they may in time become independently wealthy. Alfred E. Sloan and others of the well-known executives in Du Pont-controlled General Motors from the 1920's to the 1950's were big stock-option men.

  There is no risk involved in exercising these options. It is all as difficult as shooting fish in a barrel. And much of the gain involved stems from the reduced or nonexistent tax. If these acquisitions of value were taxed at the same rate as the corporate salary, it would be virtually impossible for big corporation executives to become tycoons on their own account, as a few have become. It is the tax-exempt feature, paid for all the way by the public, that enables them to emerge as financial kingpins, ,vithout performance of any commensurate service.

  Specific cases under these general observations fully support everything that has been said.

  International Business Machines (IBM) in 1956 granted to Thomas J. Watson, Jr., the president, a ten-year option to buy 11,464 shares at $91.80. Five years later Mr, Watson exercised the right to buy 3,887 shares, when the market price was $576. Had he sold at this price his instant profit would have been $1,882,085.40, taxable at 25 per cent. If he was in the 75-per-cent bracket, his tax saving over direct income amounted to $950,000.

  The president of a manufacturing company was enabled to buy 30,000 shares at $19 while the stock sold at $52, an instant no-risk profit of $990,000. The president of an electric company bought 25,000 shares at $30, while the stock sold at $75, an instant no-risk profit of $1,125,000. The president of a drug company bought 27,318 shares at $7.72 while the stock sold at $50, an instant no-risk profit of $1,100,000.

  What is made from stock options often exceeds regular salary by a wide margin. Charles H. Percy, head of Bell & Howell and more recently Republican senator from Illinois, in the 1950's got $1,400,000 in option benefits, twice his salary; L. S. Rosensteil of Schenley Industries made $1,267,000, 2-1/4 times regular salary; and W. R. Stevens of Arkansas-Louisiana Gas Company got option benefits ten times regular salary. It would take a separate book to list all such option benefits.

  As salaries are taxed at standard graduated rates, it is only natural for corporate officials to prefer compensation in some untaxed or low-taxed form.

  But the potential gain of outstanding options, as yet unexercised, is tremendous. For U.S. Steel executives it was recently $136 million, for Ford Motor executives $109 million and for Alcoa officials $164 million. 39

  There are various arguments on behalf of the option system, all of which fall apart under analysis. 40

  One is that the options attract and hold high-powered executives. But one firm gave more than half its optional stock to nine executives averaging more than sixty years of age and thirty-five years of service.

  Watson of IBM at the time of his option purchase already held more than $40 million of the stock, which he had largely inherited. Would he have left the company without the option allotment? Was the option necessary to make him feel a proprietary interest?

  Actually, the option scheme was only a method of passing to him a large bundle of additional no-tax or low-tax money.

  Another argument is that the options enable companies to compete for executive talent. But as more and more companies come to have option plans no competitive advantage actually accrues.

  A third argument is that executives with a big option stock interest will make the company boom. But, as Stern shows, even as a company's position is deteriorating, its stock often rises sharply in price under buying in speculation on a recovery, enabling officials to cash in on options. In a comparison between the performance of companies with and without option plans, more companies without option plans did well than companies with option plans. 41

  Still another argument is that the option plan enables officials to become stockholders and thus have a strong personal interest in the company. But many officials sell out their option stock as quickly as they can and in fact hold no continuing ownership in the company. They are simply profit-hungry.

  It is further contended that the options make company officials work harder to make a good showing. But there have been cases, as with Alcoa, where the stock has moved down in price and the option price has thereupon been moved down. The option plan has often worked profitably for insiders whether the stock goes down or the company deteriorates.

  Again, it has been charged that company officials, in order to kite the price of the stock in the market and thus make possible an option "killing," have reduced necessary company outlays in order to show misleadingly high and entirely temporary profits.

  Objections to the option schemes, particularly to their tax shelter, far outweigh any alleged public advantages, as one can see by reading Mr. Stern's analysis. The option schemes are simply a method of passing tax-free or low-tax money into favored hands and are often voted into effect by their own direct beneficiaries. But they always dilute the equity, reduce it, of nonparticipating stockholders. When an option plan is introduced into a company the book value of all nonparticipating stock is shaved or clipped, much as gold and silver coins used to be clipped by money dealers before governments introduced the milled edge.

  In some cases minority groups of stockholders have successfully gone to court to have option plans of big companies either set aside or modified. This has been done in American Tobacco, Bethlehem Steel and General Motors, among others. A General Motors option plan in one instance was set aside by court order on grounds of fraud. 42 But most small stockholders cannot afford to go to court and many big stockholders go along with the option plan on the ground that if officials were not able to chisel in this way they would find some other arcane and possibly more subversive way of nibbling into the property.

  As, in theory, a purely money-oriented person, a top big-corporation official is by definition pretty much of a tiger. The stockholder wants him to be a fierce hunting tiger vis-à-vis the world in general but a tame tiger toward his masters. Yet a tiger, as many cases in corporate history show, has a strong tendency to direct himself toward the fattest and nearest carcass, the company itself. The option scheme partly deflects this purely theoretical tiger by giving him at least a piece now and then of this rich carcass which he is supposed to guard and enhance.

  Well paid, the top company official is supposed to be a faithful servant, dedicating himself to his master. But history knows of many cases of well-paid servants who for their own profit undercut their master's interest. Companies in the corporate jungle have been looted by psalm-singing, God-fearing paid officials.

  Options, among other things, are held to be cheaper for corporations, although not for stockholders, than straight bonuses. On this point one must disagree with Mr. Stern, who believes that the corporation pays some tax. Whatever a corporation pays out in cash bonus is so much paid out of net return or added on to price; it is not merely an additional cost of operation reducing a true taxable income. On a stock option the corporation has no out-of-pocket expense at all. But while not costly to the corporation, the stock option is costly over the long term to the nonparticipating stockholders.

  Something to notice about the stock option is that it is one of the valuable perquisites of company control. Earlier it was noted that control of a company may be exercised with from 5 to 100 per cent ownership. Whatever the percentage of ownership, control is control. The bigger the ownership stake, of course, the more is the retention of control assured. But a 5 per cent control is as effective as 100 per cent.

  Among the advantages of controlling a company are these: (1) Dividend payout rates may be determined, and for large stockholders the smaller the payout rate and the larger the tax-free reinvestment rate the richer they become by evading taxes on dividends. (2) Cut-rate stock-option plans may be adopted, with the controllers participating and, indeed, increasing their degree of control by diluting the equity of nonparticipants. (3) In making outside investments with company money, properties personally acquired for song can be unloaded on the big company at a high price, thereby making concentrated personal profit but spreading the inflated price among many other persons. (4) Personally beneficial expense-account features can be arranged such as renting a tax-deductible permanent luxury suite in some tropical hotel which, when not used for allowable business purposes, may be used for extracurricular pleasures. (5) Relatives to whose support one might be expected to contribute may be placed on the payroll, often at a substantial figure, thus allowing others and the public to pay for their support. And this is only the beginning.

  Control, of and by itself, is valuable because it is a means of directing tax-favored revenues toward oneself.

Depletion and Depreciation Allowances

  We have not yet touched upon some of the more spectacular congressionally sanctioned large-scale special tax dispensations.

  One of these is the oil depletion allowance. And at the outset it must be made clear that this depletion allowance applies to far more than oil. While it began with oil it now includes all the products of the earth except, as Congress finally stipulated, "soil, sod, dirt, turf, water, mosses, minerals from sea water, the air or similar inexhaustible sources." But it does include farm crops, trees, grass, coal, sand and gravel, oyster shells and clam shells, clay and, in fact, every mineral and naturally occurring chemical or fiber on land.

  The percentage depletion, according to the Supreme Court, is an "arbitrary" allowance that "bears little relationship to the capital investment" and is available "though no money was actually invested." 43

  But as more than 80 per cent of depletion benefits accrue to the oil and natural gas industries, the discussion can be confined to them.

  Dating back to 1919 but with many tax-evading embellishments added since then, the depletion scheme works as follows:

  1. The original investment by a company or individual in drilling a well--and under modern discovery methods three out of five wells drilled are producers--is wholly written off as an expense, thereby reducing an individual's or corporation's tax on other operations toward zero. Investment in oil drilling, in other words, offsets other taxable income. If an ordinary man had this privilege, then every dollar he deposited in a savings account would be tax deductible. The law permits, in short, a lucrative long-term investment to be treated as a current business expense.

  2. As this was an investment in the well there is to be considered another outlay, or development cost, for the oil that is in the well. This cost is purely imaginary, as the only outlay was in drilling the well, but it is nevertheless fully deductible.

  3. There remains a continuing, recurrent deduction, year after year, for making no additional investment at all!

  The way these steps are achieved is through a deduction of 27-1/2 per cent (the figure was arrived at in 1926 as a compromise between a proposed arbitrary 25 per cent and an equally arbitrary 30 per cent) of the gross income from the well but not exceeding 50 per cent of its net income. If after all expenses, real and imaginary, a well owned by a corporation has a net income of $1 million, the depletion allowance can halve its ordinary liability to a corporation tax and it may maintain prices as though a full tax was paid. Through controlled production of some wells as against others, the tax rate can be reduced still further so that leading oil companies can and have paid as little as 4.1 per cent tax on their net earnings. 44 Some pay no tax at all although earnings are large. Oil prices are "administered" by the companies; they are noncompetitive.

  As Eisenstein sets forth this triple deduction, "For every $5 million deducted by the oil and gas industry in 1946 as percentage depletion, another $4 million was deducted as development costs. For every $3 million deducted as percentage depletion in 1947, another $2 million was deducted as developmerit costs. 45 The process continues, year after year, through the life of the well. Income often finally exceeds investment by many thousands of times.

  A widowed charwoman with a child, taking the standard deduction which leaves her with $1,500 of taxable income pays taxes at a much higher rate, 14 to 16 per cent, than do many big oil companies and oil multimillionaires in the great land of the free and the home of the brave.

  This depletion deduction "continues as long as production continues, though they may have recovered their investment many times over. The larger the profit, the larger the deduction." 46

  "For an individual in the top bracket, the expenses may be written off at 91 per cent while the income is taxable at 45.5 per cent. For a corporation the expenses may be written off at 52 per cent while the income is taxable at 26 per cent." 47 A company may work this percentage a good deal lower and even to nothing.

  We have noted that the Supreme Court has called the depletion allowance "arbitrary"--that is, as having no basis whatever in reason. Eisenstein examines in detail all the excuses given for permitting the depletion and in detail shows them all to be without a shadow of merit. Instead of reproducing any of his analysis here, I refer the interested reader to his book. The depletion allowance is a plain gouge of the public for the benefit of a few ultra-greedy overreachers and is plainly the result of a continuing political conspiracy centered in the United States Congress.

  What it costs the general public will be left until later.

  Even more sweeping results are obtained by means of legally provided accelerated depreciation, long useful in real estate and under the Kennedy tax laws applicable up to 7 per cent annually for all new corporate investments. In brief, whatever a corporation invests in new plant out of its undistributed profits it may take, up to 7 per cent of the investment, and treat it as a deductible item. On an investment of $100 million this would amount to $7 million annually.

  Because Stern traces, step by step, the process by which accelerated depreciation operates in the real estate field to eliminate taxes entirely the reader is referred to his book. 48

  But the results in real estate alone, as related by Stern, are as follows:

  In 1960, the following events occurred:

  --Eight New York real estate corporations amassed a total of $18,766,200 in cash available for distribution to their shareholders. They paid not one penny of income tax.

  --When this $18,766,200 was distributed, few of their shareholders paid even a penny of income tax on it.

  --Despite this cash accumulation of nearly $19 million, these eight companies were able to report to Internal Revenue losses, for tax purposes, totaling $3,186,269.

  --One of these companies alone, the Kratter Realty Corporation, had available cash of $5,160,372, distributed virtually all of this to its shareholders--and yet paid no tax. In fact, it reported a loss, for tax purposes, of $1,762,240. Few, if any of their shareholders paid any income tax on the more than $5 million distributed to them by the Kratter Corporation. 49

  All of this was perfectly legal, with the blessing of Congress.

  According to a survey by the Treasury Department, eleven new real estate corporations had net cash available for distribution in the amount of $26,672,804, of which only $936,425 or 3.5 per cent was taxable. 50

The Great Game of Capital Gains

  Capital gains are taxed, as we have noted, at a maximum of 25 per cent, although this rate is lowered corresponding to any lower actual tax bracket; but up to and including people in the highest tax brackets the rate is only 25 per cent. Thus, capital gains are a tax-favored way of obtaining additional income by the small number of people in the upper tax brackets.

  Something to observe is that 69 per cent of capital gains go to 8.7 per cent of taxpayers in the income group of $10,000 and up; 35 per cent go to the 0.2 per cent of taxpayers in the income group of $50,000 and up. 51 The cut-rate capital gains tax, like many of these other taxes, is therefore obviously tailored to suit upper income groups only.

  The total of capital gains reported to Internal Revenue for 1961, for example, was $8.16 billion. Of this amount $465 million of gains were in the $1 million and upward income group; $1.044 billion in the $200,000 to $1 million income group; $1.63 billion in the $50,000-$200,000 income group; $1.6 billion in the $20,000-$50,000 income group; and $1.3 billion in the $10,000-$20,000 income group. Only $2 billion was in the less than $10,000 income group. 52 It is, plainly, people in the upper income classes who most use this way of garnering extra money.

  What is involved in ordinary capital gains is capital assets--mainly stocks and real estate.

  The theory behind the low-tax capital gain is that risk money for developing the economy is put to work. If the capital gains tax were applied for a limited period, say, to new enterprises, giving new employment, the theory might be defensible. But, as it is, it applies to any kind of capital asset, to seasoned securities or to very old real estate. Most capital gain ventures start nothing new.

  There is some risk in buying any security, even AT&T. The risk here is that it may go down somewhat in price for a certain period; but there is absolutely no risk that the enterprise will go out of business. The theory on which the capital gains tax discount is based is that there is total risk; yet most capital gains are taken in connection with basically riskless properties. There would be some risk attached to buying the Empire State Building for $1; one might lose the dollar in the event a revolutionary government confiscated the property. But the amount of risk attached to paying a full going market price for the building is in practice only marginal. One might conceivably lose 10 per cent of one's money if one sold at an inopportune time. But one would not risk being wiped out.

  In real estate, capital gains serve as the icing on a cake already rich with fictitious depreciation deductions. Depreciation is supposed to extend over the life of a property. Yet excessively depreciated properties continue to sell at much higher than original prices. When so much capital value is left after excessive depreciation has been taken, there must be something wrong with the depreciation schedule. What is wrong with it is that it is granted as an arbitrary and socially unwarranted tax gift to big operators. It is pure gravy.

  Depreciation for tax purposes in real estate is taken at a much more rapid rate than is allowed even by mortgage-lending institutions.

  First, a certain arbitrary life is set for a building, say, twenty-five years. But a bank will usually issue a mortgage for a much longer term. On such a new building in the first year a double depreciation--8 per cent--may be taken, but on an old building with a new owner a depreciation rate of one and a half may be taken in the first year. The depreciation taken in the first year and subsequently generally greatly exceeds the net income, leaving this taxless. The depreciation offsets income. For a person in high tax brackets it is, naturally, advantageous to have such tax-free income.

  In a case cited of a new $5 million building the tax savings to an 81-percent bracket man amounted to nearly $1 million in five years.

  The book value of this building, by reason of accelerated depreciation deductions of nearly $1.7 million, was now $3.3 million. The owner was offered $5 million for the building, the original cost. He decided to accept this offer. The tax deductions he had already taken had saved him 81 cents on the dollar and the tax rate he would get on his "book profit" would cost him only 25 cents on the dollar. The seller's net tax gain was $942,422.78. 53

  The new owner of the building could resume the depreciation cycle again on the basis of the $5 million cost and the old owner could go and start the process again with some other building. Real estate operators repeat this process endlessly. Many buildings in their lifetime have been depreciated many times their value. Best of all, the land remains.

  Depreciation charges, deducted from before-tax profits, are an increasingly important way of concealing true earnings, as the Wall Street Journal notes (August 29, 1967; 18:3-4). "These funds don't show up as profits in corporate earnings reports, but are regarded by many investors as being nearly as good as profits . . . such funds can be put into new facilities that eventually may bring bigger sales, earnings and dividends for stockholders.

  "At no time during the 1948-57 period did depreciation funds amount to more than 80 cents for each dollar of after-tax earnings, Government records show," the Journal said. "In some of the earlier years, in fact, depreciation cash came to less than 40 cents per dollar of earnings. But in 1958--the year that the price-earnings ratio climbed so sharply--depreciation for the first time in the post-World War II era approximately equaled the after-tax earnings total. Through the Sixties, depreciation funds remained relatively high, so that for every dollar of corporate earnings there was nearly another dollar of cash for expansion programs or other such programs."

  Depreciation, in brief, amounts to a second line of profit, not acknowledged as such and now approximately equaling the acknowledged profit.

  While this tax-deductible depreciation feature is not present with the purchase of stocks, the leverage of a loan at interest, as in the case of the real estate mortgage, is often present. For at least half the purchase price of the stock may be financed with a broker's loan at the standard rate of annual interest. The percentage of profit in relation to the input of investment becomes very great.

  If 1,000 shares of stock are purchased at $50 a share, with a bank supplying half the money, the investor's share is $25,000. The interest he pays on the $25,000 of bank money is itself deductible. If the stock in six months doubles in value and is sold, the price realized is $100,000. As the bank loan is paid off and the initial investment is recovered there remains a profit of $50,000 or 200 per cent. On this there will be paid a capital gains tax of $12,500, leaving the profit after taxes at 150 per cent (or 300 per cent at a yearly rate).

  It isn't usual that a stock doubles in value in six months, but many have done so. A post-tax profit of 150 per cent in as much as five years will amount to 30 per cent tax-free per year, which is not in itself a poor return. Compared with 5 per cent from a bank or a high-grade bond, which is taxable, it is an excellent return, making chumps out of most ordinarily thrifty citizens.

  Whether the owner is using only his own money or is borrowing some, he is obtaining a tremendous tax advantage over the ordinary citizen.

Individual Tax Bills

  A completely different sort of tax privilege, far less widely known and not even suspected by most persons, is gained by having one's Congress pass a special bill giving one special tax exemptions. Many such special bills are enacted, all reading as though they applied in general.

  Actually, when they are incorporated after secret committee sessions into the tax laws the experts in the Treasury Department have no inkling of what they may mean. In order to ascertain their meaning they must wait until a certain return comes in, citing the relevant section of the law as authority for some unusual step being taken. Then it is seen, in a flash, that the return fits the law as neatly as a missing piece fits into a jigsaw puzzle.

  One such case among many described by both Eisenstein and Stern concerned Louis B. Mayer, the movie mogul. The experts in the Treasury Department were mystified upon first reading Section 1240 of the Internal Revenue Code of 1954, written in the customary opaque tax language. They had not the remotest idea of what it meant. What it said was:

  Amounts received from the assignment or release by an employee, after more than 20 years' employment, of all his rights to receive, after termination of his employment and for a period of not less than 5 years (or for a period ending with his death), a percentage of future profits or receipts of his employer shall be considered an amount received from the sale or exchange of a capital asset held for more than 6 months if (1) Such rights were included in the terms of the employmerit of such employee for not less than 12 years, (2) Such rights were included in the terms of the employment of such employee before the date of enactment of this title, and (3) the total of the amounts received for such assignment or release is received in one taxable yeaer and after the termination of such employment.

  Stern supplies a translation into English of this paragraph in its generality. But what it meant specifically was the following: Louis B. Mayer, and only Louis B. Mayer, may receive all future profits in the company to which he will be entitled after retirement in one lump sum and this lump sum will be taxed at 25 per cent as a capital gain even if it is not in any sense a capital gain.

  Had Mr. Mayer received these profits after retirement as they were generated he would have had to pay maximum taxes on them each year. The special bill for his benefit--Section 1240--gave him $2 million of pin money. 54

  How did it come to be enacted? His attorney was Ellsworth C. Alvord, who appeared before the Senate Finance Committee not as Mr. Mayer's lawyer but as a spokesman for the United States Chamber of Commerce. And the section was so drawn as to be of no use to anyone else, although since then other measures have been passed that enable certain large lump-sum settlements of pension or income rights to be treated as capital gains.

  A ludicrous sidelight of this and other tax sections is that the states sometimes copy the federal tax laws, as California copied the tax law of 1954. But much of what they copy has no possible applicability to any tax situation that may arise because some sections are specially tailored to a single situation. Sub-section 2 of Section 1240, which reads "such rights were included in the terms of the employment of such employee before the date of enactment of this title" made it applicable only to Mr. Mayer, who alone had such particular terms before the passage of the bill. Unless one can show one had a contract containing such provisions before the passage of the bill one cannot cite the section on one's tax return.

  It should never be thought that the leaders of Congress do not know what they are doing.

  Many such special sections exist in the tax laws. of benefit only to a single individual or estate (one-shotters) or of continual benefit to certain industries; and Stern discusses a number of them. To obtain such special tax sections for oneself one must, obviously, have a "friend at court," somebody who has the king's ear.

  Many companies get such special tax laws, of benefit only to them; and otherwise illegal gains from mergers of various corporations or banks are covered either by one-shot or multiple-shot laws. Sometimes one company is able to squeeze itself into provisions especially tailored for another, but not often. 55

Low Estate Taxes

  Not much will be said here about estate taxes other than to point out that entirely illusory rates are posted here as elsewhere. Many very rich men's estates pay little or no tax. The public supposition that the big estates are being dismantled by estate taxes, often repeated in newspapers, is entirely false.

  According to the rate schedule in the law, estates exceeding $60,000 are now taxed from 3 per cent for the first $50,000 to 77 per cent for amounts over $10 million. Offhand, one might suppose that a man who left $100 million net would pay a tax of $67,566,150. But no taxes like this are ever paid and, as we noted earlier, John D. Rockefeller Sr. and Jr. and Henry Ford I paid low estate taxes.

  Some persons, below the top levels of wealth, do indeed pay full estate taxes. But this is because they have either through personal peculiarity or unusual moral standards refused to seek and follow the advice of an experienced tax lawyer. Usually it is a personal peculiarity that leads them in this direction, according to what lawyers say. They are unable to understand the steps outlined for them to take or fear they are in danger of losing something.

  An anecdote of record about the late Somerset Maugham, the well-known and affluent writer, will illustrate the point. It was explained to Maugham that if he took certain steps to divest himself of nominal control over his assets for the benefit of his children, with whom he was not on good terms as such are generally understood, his estate under English law would almost entirely escape taxes.

  "I won't do it," Maugham said as the situation was explained, "because I am too aware of what happened to King Lear."

  It is mainly, among the law-cognizant, persons with a strong feeling of alienation who do not avail themselves of the many profitable loopholes in the estate-tax law. Henry Ford, it appears, was one such, and only the last-minute recourse to the Ford Foundation saved control of the company for his family. Ford was obviously either a tenaciously grasping person, indifferent to his family, or simply could not understand the ins and outs of the law, which one assumes were thoroughly explained to him by able lawyers. We know he did not want the government to get his money.

  Ford, of course, did not have the advantage of the marital deduction, which was passed the year after his death. Had it been in existence a half of about a billion dollars would have been, right off, tax free. As matters now stand, one half of the taxable value of all estates where there is a surviving spouse is tax exempt.

  A $100 million net estate, instead of paying $67,566,150 under the posted rates, therefore seemingly pays only $32,566,150. This is quite a bit but it isn't anything like the posted 70 per cent; it is 32.5 per cent.

  Even this 32.5 per cent is illusory under the various leveraging amendments to the estate-tax law and, to make a long story short, we may simply show in this table what the real against the posted rates are: 56

                         Scheduled      Actual Average     Percentage
                          Rates           Tax (1958)       of Discount
   Gross Estate         (Per Cent)        (Per Cent)      (approximate)

$500,000-$1 million       29-33             15.3               50
$1-$2 million             33-38             18.2               50
$2-$3 million             38-42             19.3               50+
$3-$5 million             42-49             21.2               50+
$5-$10 million            49-61             23.2            50-60
$10-$20 million           61-69             24.4               60+
$20 million and higher    69-77             15.7               80+

  One may obtain the actual rate for any year by averaging the actual payments in each bracket as reported by the Treasury Department. From year to year the actual rates vary slightly.

  So, when one reads in a newspaper about high estate taxes one is reading something untrue. The maximum actual estate tax by percentage is about the same as the income tax on an individual $10,000-$20,000 income.

  Similar low actual rates prevail on large incomes as shown by the Chase Manhattan Bank in 1960 in its bimonthly news letter, as follows:

    Adjusted Gross   Scheduled Rates   Actual Rates      of
        Income         (Per Cent)       (Per Cent)    Discount

Under $3,000              20              19             5
$ 10,000-$ 14,999         25              20            20
$ 20,000-$ 24,999         36              23            35+	 
$50,000-$ 99,999          55              38            33+
$200,000-$499,999         80              42            48
$1,000,000 and up         87              38            57.5

  But a man with a family will not ordinarily pay anything even like the actual rates on a $100 million estate. For, being sensible and knowing that he must some day die, he has long before death begun transferring assets to his wife and children. Let us suppose he has two children.

  He can transfer $100,000 a year to each of them at a gift-tax cost of $15,525 each or 15.5 per cent, with the sums held in trust. In thirty years $9 million will have been transferred. He can make his own law firm trustees.

  He can transfer an equal amount, at once or gradually, to his family-controlled foundation, entirely tax free up to 30 per cent of annual income.

  He can increase his transfers at slightly higher gift-tax rates. Whatever he transfers brings the actual estate tax lower.

  But he can do even better than this. He can transfer to members of his family, at extremely low gift-tax rates, properties of grossly understated value whose true value he alone knows. Such, let us say, would be mineral-bearing but unexploited lands, since privately surveyed and "proven." If such land had been acquired at $100,000 it could be transferred for purely nominal taxes, and this big asset would be in the hands of his heirs long before his death. Times of downswings in the market, as during the Depression, are a good time to make corporate gifts. Overdepreciated real estate or foreign property, with a low book value but a high actual value, is another good thing to transfer by gift. The heirs can sell it at full value without paying any capital gains tax.

  At no stage need he lose practical control over any of his properties, leaving aside his moral authority over his family. Many of those who do not avail themselves of these provisions apparently feel they have no moral authority over their heirs or believe their heirs will take these properties and leave them in the lurch, as Mr. Maugham publicly feared. While such a possibility, may exist in some families, even it can be guarded against by a knowledgeable tax lawyer.

  The value of wives here is again outstanding, as in the case of the marital deduction in the upper brackets.

  It might be asked what value it is to a man that half his estate escapes any taxes if his wife gets that money. But the first advantage is that she halves the tax. He must be interested in this feature because he could avoid all taxes by simply leaving all the money to the public in some form. As he usually doesn't do this, one must conclude that he is interested in preserving the fortune for some reason.

  What he leaves to his wife can be left in a life trust, he naming the ultimate beneficiary but giving her the right to change this. By doing this he has clearly reduced the taxable amount by one half. His children ultimately take from the mother's estate, so at least two-thirds of the fortune is preserved. But much better than this can be done by means of lifetime distributions in the form of trusts and by taking advantage of other provisions in the fine print of the law.

  And through the use of trusts, assets can be kept intact for at least three generations. The dead man can assert his will for at least 100 years. If the final recipients, having full control over the property, now replace it in trust according to family doctrine, the holdings can be preserved in trust for another three generations. If it is a series of multiple trusts that have been established, the tax rates can be very, very low.

  While the Constitution forbids the entailment of property as in England it is nevertheless practically possible to practice serial entailment, as Cleveland Amory reports many of the old Boston families have done. Serial entailment is achieved if the third-generation recipient, loyal to family teaching, replaces the property in trusts.

  Estates, in fact, are not broken up by the tax laws; they grow larger through the generations, assuring the presence of an hereditary propertied class. This fact has many implications, one of which is that latecomers in the game of grabbing property face a shrunken hunting ground.

  The whole point is this: Plenty of escape hatches exist in the estate-tax law for those who wish to avail themselves of them. Some, like Henry Ford, do not, and prefer to clutch nearly every last dime they own until the undertaker forces open their hands. For the heirs of such, the tax outlook is rather bleak, although by no means so hopeless as often reported. There is always the foundation escape hatch, and the foundation, all else failing, can give remunerative employment to members of the family, who become philanthropols or, somewhat paradoxically, philanthropist-politicians.

  In summary, it should be noticed that the rich, who contrary to Ernest Hemingway are different in other respects than that they simply have more money, live in a specially favored tax preserve which could not have taken form without considerable elitist prompting. Congress alone would not have had the Kafka-esque imagination to devise this labyrinth of fiscal illusion. The public itself did not demand these tax laws.

  All deductions and exemptions available to rank-and-file taxpayers in trifling amounts, as we have seen, have far greater weight when applied to the receivers of big incomes from property and its manipulation. Deductions for wives, children, general dependents, education, medicine and social investment have an in-pocket value up to the maximum of the tax rates for the rich. Beyond this are all the special tax dispensations provided especially for big property holders: accelerated depreciation, depletion allowances, expense accounts, low-tax capital gains, specially tailored exemptions, mortgage and interest leverages, tax-exempt bonds, multiple trust funds, light estate taxes, family partnerships, low-tax lump sum settlements of a large variety of fictitious capital gains, etc.

  It is very evident that, as government expense has gone up attendant upon fighting corporately profitable wars, the rich have decided to play very little part in defraying it.

  Results such as those depicted could have been attained only as the consequence of much elitist work, thought and conniving. Can anyone believe the results are accidental? Or that they are remotely equitable?

Taxpayer Terrorization

  While the tax rates gouge the general populace, the Internal Revenue Service in recent years, by all accounts, has been conducting a highhanded reign of terror against small delinquent taxpayers, often confused by the crazy-quilt tax forms. "Tax disputes more than any other have given many harassed citizens a glimpse of the other face of Uncle Sam when he scowls," writes Washington political columnist Jack Anderson. The face of Uncle Sam that many citizens now see closely resembles the skinflint depicted by hostile foreign cartoonists.

  While making advantageous settlements with delinquent large taxpayers, says Anderson, "the government was relentlessly pursuing a host of small tax debtors, poor but loyal Americans, many of whom were in debt for reasons beyond their control. Uncle Sam garnisheed their wages, seized their property, confiscated their bank accounts, and deprived them of their jobs, stripping them of almost everything they possessed except the mere clothes on their backs. . . . More than one hard-pressed taxpayer has found himself in trouble because of a trivial or unintentional error in an old return, the failure of an employer to withhold the correct tax, or a personal tragedy that cleaned him out of the money he set aside for Uncle Sam. The files at Internal Revenue are stuffed with complaints from taxpayers who say they have been hounded, bullied, and browbeaten by collectors whose methods would put a loan shark to shame. Many a widow's last mite has been snatched from her. Men have been stripped of their livelihood and, along with it, their only means of paying the government."

  A committee of twenty-two tax lawyers and accountants appointed by Chairman Wilbur Mills of the House Ways and Means Committee found many acts of "overzealousness" by tax agents that infringed "the vital rights and dignities of individuals." 57

  If a taxpayer subjected to arbitrary Internal Revenue rulings is affluent enough to be able to hire a lawyer he on the average, in appeals, has 85 per cent of the tax assessments sharply reduced or eliminated.

  "Only a small percentage of individuals whose deductions are disallowed, whether right or wrong, do use existing systems to challenge IRS auditors," writes William Surface. "Why not? 'The small taxpayer's first and usually last impulse is to quit,' says Senator Warren Magnuson of Washington. 'Just throw in the towel, pay the deficiency, no matter how unjust he believes it is, rather than face the tiers of faceless bureaucracy. The small taxpayer is faced with staggering disadvantages in his dealings with the Federal Government in comparison with large, corporate taxpayers.'"

  The bigger taxpayers proceed otherwise. About 10 per cent of those assessed additional taxes request an "informal conference" with the auditor's supervisor, and about half of those who do this win some concession. In 1965 a total of 26,301 corporations and individuals who were assessed additional taxes, or 1 per cent, appealed their cases to the Appellate Division, an autonomous body. No less than 85 per cent of the cases so appealed each year have their cases settled for about $200 million a year less than what IRS originally assessed. Beyond this there is the Tax Court, where an average of 8,500 appeals from IRS rulings are heard each year. "Four out of five cases that reach Tax Court are settled without trial for only 31 per cent of the amount that Internal Revenue had initially demanded." 58

  On this showing, IRS is clearly overzealous in many cases, and most people readily knuckle under in fear of being suddenly confronted, apparently, by an unbenign Uncle Sam. Anderson, Surface and various congressmen blame it on petty bureaucrats in IRS, with which judgment I emphatically disagree. IRS people are civil service employees, all of them small people. They only follow instructions from higher up. They act only in response to orders passed down along a chain of command from the White House and the Secretary of the Treasury. When they get very tough and arbitrary it is because they feel their jobs are in jeopardy if they do not make a good showing.

  It is true that underlings in all large organizations, governmental and corporate, often tend to be overzealous in carrying out very mild orders, thus giving the organization eventually a bad name. Mild orders from on high tend to gain strength as they are passed down, and at their point of final execution are often brutal.

  At times, with the approval of higher-ups, the Internal Revenue Service acts illegally. The Commissioner of Internal Revenue has admitted that for seven years, from July, 1958, to July, 1965, agents had made "improper" or questionable" use of electronic eavesdropping devices on 281 occasions. The information was elicited by the Senate judiciary Committee. One senator charged that electronic devices were used "during routine investigations of ordinary taxpayers"; the charge was denied. Planting of such devices by means of trespass, the Supreme Court ruled in 1961, is unconstitutional (illegal), violates the prohibition against unreasonable search and seizure, invalidating evidence so obtained. 59

  Whereas the Bourbons, drunk with power, proceeded forcibly against the peasants en masse to collect unfair taxes, in modern states, including the United States, the full force of sovereignty is brought to bear against single individuals. Intimidated in advance by any sort of authority, the ordinary citizen here is in no position, even under constitutional government, to invoke his rights. He does what many intimidated innocent people do in the courts: He pleads guilty to a lesser charge.

General Remarks

  What has been put down so far represents only part of the story of shoving the tax burden onto the patriotic labor force by the finpols and corp-pols with the consent of the pubpols, who in turn thoughtfully misapply (OverKill) at least 30 per cent of the tax money they do take in. This percentage of profitable misappropriation, largely on the excuse of "defense," more recently of "welfare," is put very conservatively; a thorough direct examination of what is obtained by the expenditures would probably show a larger percentage.

  A careful comparison of the fiscal situations in the United States and eighteenth-century France, which was under candid autocratic rule, shows that the American populace is being short-changed far more efficiently than was the French populace under Bourbon rule. Indeed, the American process is more effective because most of the people are not even aware they are being trimmed under the twin banners of anti-Communism and anti-Poverty; most rank and file citizens would be the first to deny it vehemently while bursting into strains of Yankee Doodle. The French were fully aware of the process because many of their taxes were collected by force, often after pitched battles between the peasants and the troops. The American process of making the labor force shoulder most of the tax burden takes place in much subtler ways, behind the formidable barriers of deceptive language, high-flown ideology, simple arithmetic and the full panoply of sovereignty arrayed against isolated individuals.

  In this atmosphere the withholding tax, levying on earned income before received, was nothing short of a pubpolic political inspiration.

The General Results

  What is not paid by the higher-ups must be paid by the rank-and-file. The government, despite all the tax loopholes, is never deprived of whatever revenue it says it needs, even for waging fierce undeclared wars of its own bureaucratic making. What revenue the government decides not to take from the influential finpols it must take from the poor and needy over which the pubpols weep and wail like the Walrus and the Carpenter did over the happy trusting oysters they had eaten.

  Stern has reported various shrinkages in the tax base and the attendant cost to the Treasury (which cost must be made up by the patriotic rank and file). 60

  Here these various shrinkages and costs are presented somewhat differently: first, those shrinkages and costs of advantage solely to the wealthy; secondly, those shrinkages and costs participated in and preponderantly of advantage to the wealthy; and, thirdly, those shrinkages and costs generally of advantage only to rank-and-filers.

Lump-Sum Tax Evasions of the Wealthy Only
                             Shrinkage of        Cost to
                                Tax Base         Treasury
                           (billion dollars) (billion dollars)
Depletion deductions            $ 3.7             $ 1.5
intangible oil and gas    
  drilling deductions                                .5
Excessive expense account
  Deductions                                         .3
Real estate depreciation                             .2
Dividend credits                                     .5
Capital gains deductions          6.0               2.4
Estate tax evasions              12.5               2.9
Interest on tax-free bonds        2.0               1.0
Undistributed corporate profit*  25.6 (1965)	12.8 (est.)

             Totals             $49.8              $22.1

*Stern does not include this significant item.

  The wealthier class of taxpayers, in brief, fails to pay $22.1 billion of taxes which it might properly pay. Nor is this all, because it participates in tax loopholes available to others.

Lump-Sum Tax Evasions in Which the Wealthy
Participate with the Less Wealthy Middle Classes
                                       Shrinkage of       Cost to
                                         Tax Base         Treasury
                                    (billion dollars) (billion dollars)

Extra exemptions for the aged and
  blind (most of these deductions per
  centagewise and in totality must go
  to those few with substantial income
  --the higher the income the greater
  the deduction)                         $ 3.2              $ .9
Nontaxable income from social secur-
  ity, unemployment and veterans'
  benefits, etc. (except for unemploy
  ment benefits, the wealthy partici-
  pate to some extent)                    11.9               3.6
Rent equivalent (deducted mortgage
  interest, etc.) on owned homes
  (greatest advantage to wealthy as
  residents and as real estate opera-
  tors)                                    6.5               2.0
Itemized deductions (most profitably
  used by wealthy)                        43.0               11.9
Income-splitting for married people
  (of most percentage and dollar
  value for wealthy persons)                                  5.0

            Totals                       $64.6              $23.4
Lump-Sum Tax Dodges in Which the Wealthy
Probably Have Little Participation
                                      Shrinkage of         Cost to
                                        Tax Base           Treasury
                                    (billion dollars) (billion dollars)

Fringe benefits (some participation by
  well-paid executives)                  $ 9.0               $3.0
Interest on life insurance savings         1.5                 .4
Sick pay and dividend exclusions
  (some participation by wealthy)           .9                 .3
Standard deduction                        12.0                2.6
Unreported dividends and interest
  (mostly small people)                    3.7                 .9

            Totals                       $27.1               $7.2

  According to this approximate computation, which would vary in detail from year to year, there is a total tax diversion from the Treasury of $52.7 billion a year. This diversion must be compensated for, with national budgets now rising above $100 billion, and it is compensated for at the expense of the smaller taxpayers, who pay more than $20 billion of corporate and other taxes in price and also pay most of income and excise taxes. The rates on the lower incomes are far higher than they would be if an equitable system of taxation existed.

  While the less pecunious classes are able to evade most of $7.2 billion (for which they nevertheless pay elsewhere), the more affluent classes (with the wealthy participating by individual proportions most extensively) evades paying $23.4 billion (for which most of their members pay elsewhere). The wealthiest class as a whole evades directly a total of $22.1 billion, which it unloads on the impecunious and less pecunious classes.

  What the extent of its participation is in the evasion of $23.4 by the middle group can only be surmised. If we estimate the participation at only $5 billion then we find the wealthiest have evaded $27.1 billion of taxes in addition to whatever they have merely generally pushed over on the lower orders.

  If anyone believes there is suggested here too high a figure of what is really owed in taxes by the wealthy, it should be recalled that the upper 10 per cent of the population owns all of the nation's productive private property while 1 per cent of the population owns more than 70 per cent of it. Such being the case one would not reasonably expect that a single employed person who is paid $1,000 in a year--about $20 a week--would be obliged to pay a tax of $12. Nor would one expect that a married man with a salary of $4,000 would be obliged to pay a tax of $350, a month's pay. But so they had to do in 1966 if they took the standard deductions.

  To shift the scene a bit, it may be recalled that national elections now require the spending by the political parties of more than $100 million. This is without considering the many costly local elections in off years or parallel with the national elections. The rising figures, often cited, are considered stupendous. These campaign funds are supplied by the wealthy and the propertied who, it should be clear, get a manyfold return on what they pay for. As the political parties (in default of effective popular participation) are to all practical purposes theirs, they obtain preferential treatment from government. So it has been all down through history. The United States is not an exceptional case. It is a typical historical case, contrary to what the Fourth of July orators would have one believe, except that the people have been subdued through their own ineptitude.

People in the Tax Net

  In 1940 there were filed 14,598,000 individual income tax returns. In 1961 61,068,000 were filed. The greatest increase took place in 1944 under the wartime tax laws; in 1945 the total stood at 49,751,000. 61

  Having brought this great additional throng into the tax net under the income tax, originally an upper-class tax, does anyone believe the pubpols will ever remove the net?

  By far most of these taxes are withheld from salaries and wages, earned income. In 1962 there was withheld $47.583 billion compared with $15.317 billion not withheld; in 1963 it was $51.839 billion against $15.205 billion.62 The income tax has been transformed largely into a permanent wage tax, a Gargantuan political joke on the workers.

  One often hears of tax-cheats, individuals and organizations, that are proceeded against unceremoniously by the government. As this chapter should make blindingly clear, however, the greatest tax cheat (perhaps in all history) is the United States government itself, which by means of the federal tax code stupendously cheats the vast majority of its trusting citizens on behalf of its political pets. Not only does the government do this but its prime beneficiaries daily boast to a bemused world that in the United States everyone enjoys full equality under the law. The government, of course (to give it its due), is staffed by the weird people put into office by an idiotic electorate, which is fittingly hoist by its own petard. The boobs are overwhelmed by boobs of their own choice!

The Chances of Reform

  What are the chances of reforming the tax laws?

  Here it must suffice to say that most experts see little prospect of reform. At most there will be further deceptive rearranging and ideological tinkering. And even if taxes were fairly apportioned, past gains would remain in the hands of the advantaged.

  A colossal historical inequity like the American tax structure, a mechanism subtly fastened on a people with a view to extracting from them the produce of their labors not necessary for subsistence, is never removed by means of elections or the passage of laws. At least, it never has been thus far in history. The beneficiaries, having gone to a great deal of trouble and expense to devise and maintain this structure, are not going to stand idly by and see it dismantled. They will use every considerable power at their command to defeat all substantial reforms.

  In history fantastic, capricious and arbitrary structures such as this have vanished only in some sort of climactic explosion--revolution, conquest or collapse. A far less onerous tax structure in the early American colonies was terminated not by reform but by revolution and war.

  These remarks, needless to say, are purely descriptive, intended to bring out the very serious purpose underlying these laws. This earnest purpose, which is to run a vast society in a certain way for certain hereditary beneficiaries and their retainers and emulators, cannot be lightly pushed to one side, particularly when it is well wrapped in the accepted ideology of freedom. Anyone who proposed such action at this time, indeed, would be very foolish, as the populace is hardly aware-and shows no signs of wishing to be aware--that it is fastened in a straitjacket only slightly less tight than in many other ideologically unhallowed societies that could be mentioned.

  Anyone who doubts that this is so may set about the task of tax reform. If he succeeds, these concluding observations will have been set at naught. And whether he fails or succeeds he will get a sound political education. 63

  (Note: The reader should not suppose that this chapter is a full treatment of the tax situation. It touches only the highlights and allots no space at all to many publicly costly ludicrous oddities such as the decision allowing Kathleen Winsor to pay 25 per cent capital gains taxes for the sale of her book Forever Amber because under a tax-court ruling she was not a professional writer and had written the book "primarily because she enjoyed the research and writing which went into its composition. . . ." The interested reader should refer to sources cited and pick up enlarged bibliographies from them. He will soon see that everything in this chapter is written in a spirit of understatement.

  As to the cause of it all, the socialist will murmur "capitalism." Yet the American tax structure has no intrinsic relationship to capitalism and can, indeed, be shown as functionally inimical to it. Other capitalist countries such as England, Western Germany or Japan do not have similar tax structures. The source of the tax structure is clearly the popular electoral system and an inept electorate, which places in office smoothtalking men of a disposition to trade tax and other favors in return for personal emoluments. This the legislators do, in stages and by bits and pieces, resulting in an increasingly peculiar tax structure that may be subtly undermining the capitalist system itself.

  Capitalists clearly would be paragons of unusual virtue if they did not, for inner competitive reasons, take full advantage of the fact that a politically inept public had placed into strategic offices men who are deviously accommodating on a quid pro quo basis. If capitalists--and a gullible public--were faced by a preponderance of true public men in office they would hardly seek to have written into the laws these various tax monstrosities. But the kind of electorate one finds in the existing political system is unable to insure the presence in office of a preponderance of true public men. Instead the electorate gives us people of the stripe of Senator Thomas Dodd, Congressman Adam Clayton Powell, Bobby Baker, the late Senator Robert Kerr, Judson Morhouse, Senator Everett Dirksen et al. The basic causes obviously lie out in the broad electorate.)

  The over-riding problem in the United States is not economic. It is political.