(* 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-politicaldecisions--such as denying employment in the labyrinthine corporate bureaucracy tolarge numbers of qualified people on irrational ethnic grounds when the basic lawsdo not support such discrimination--the experience of history would suggest thatthey would go farther and also deal themselves enormous tax advantages. For downthrough history the dominant classes, groups, factions, clans, interests or politicalelites have always been scrupulously prudent in avoiding taxes at the expense ofthe lower orders. The aristocracy of France before the French Revolution, for example,gave itself virtually total tax exemption. The burden of supporting a profligateroyal 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 elitein the United States and then not be able to show that this elite accords itselffantastic 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 lightlytaxed--many with $5 million or more of steady income often paying no tax at all formany years while a man with a miserable $2,000 income, perhaps after years of noincome, denies his family medical or dental care in order to pay tax!

   Taxes "are a changing product of earnest efforts to haveothers pay them. In a society where the few control the many, the efforts are rathersimple. 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, inclinedto burden themselves as lightly as possible. Those who have little to say are expectedto pay. Rationalizations for this state of affairs are rarely necessary. It is assumedthat the lower orders will be properly patriotic." 2 And, as anyonemay ascertain any day, aggressively expressed patriotism increases markedly in intensity,readily crossing the borderline into spontaneous violence, the further one looksdown the socio-economic and cultural scales into the lower middle class and downward.

   There is a fundamental view, widely shared and often overtlyexpressed in schools and in the mass media, that the American socio-political systemis, 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 customarilystate 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 ofa malleable, deferential Congress deals itself very substantial continuing tax advantagesat the expense of the vast majority of the population.

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

   3. That the resultant tax structure is such that it intensifiesthe abject and growing poverty of some 25 to 35 per cent of the populace (about whomlatter-day pubpols theatrically wring their hands), and grossly cheats morethan 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 completelytax exempt it is subject in general to extremely low taxes. In many salient areasit is absolutely tax exempt, like prerevolutionary French aristocrats. Thishappy condition derives, as Eisenstein often points out, from special obscurely wordedcongressional 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 graduatedtax system, based on ability to pay, but there is very little actual graduation inthe 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 obtainedthrough some centralized secret plot of bloated capitalists and paunchy cigar-smokingpoliticians. For it would indeed take a confidently jocund group of autocrats todeliberately plan the existing tax structure-what conservative tax-expert RepresentativeWilbur Mills, Democrat of Arkansas, in a bit of judicious understatement has calleda "House of Horrors." The late Senator Walter George of Georgia (neverregarded as a friend of the common man) called the present scale of exemptions "avery cruel method by which the tax upon the people in the low-income brackets hasbeen constantly increased."4 Senator Barry Goldwater of Arizona,no liberal, radical, or starryeyed reformer, said "the whole tax structure isfilled with loopholes"; Senator Douglas of Illinois, a liberal and a professionaleconomist, asserted that the loopholes have become "truck holes." 5Referring to the fantastic depletion allowance, conservative Senator Frank Lauscheof Ohio, no extremist or reformer of any kind, said: "It is a fraud, it is aswindle, and it ought to be stopped." 6

   One is, therefore, in fairly sedate baby-kissing company ifone says (perhaps overcautiously) that the tax structure is a pullulating excrescencenegating common sense, a parody of the gruesomely ludicrous, a surrealist zigzagpagoda of pestilent greed, a perverse thing that makes the prerevolutionary Frenchsystem seem entirely rational. One takes it that Congressman Mills had somethinglike this in mind with his "House of Horrors."

   Representative Mills in further explication of his "Houseof 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 consternationto someone like Karl Marx with his doctrine that government is inherently the executivecommittee of a ruling class. Indeed, they document that dictum--if not to the hilt--thena good distance up the blade.

   One can apply to the present American system the exact wordsof 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 everyvariety of rights and claims; and this general lack of harmony complicates administration,disturbs its course, impedes its machinery, and increases expense and disorganizationon all sides." 7

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

   The American tax system is the consequence of diligent laborsby diversified parties of major property interest working down through the yearsto gain their ends. Two congressional committees of seemingly over-easy virtue havebeen 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 knowwhat takes place even if it were fully attentive because it could not understandthe purposely opaque syntax of the tax code, the inner arithmetic or the mandarinicrhetoric of the tax ideologists.

   Has the result been spontaneously achieved in hit-or-miss fashionor is it intentional? As there are always those observers who want to interpret allhuman 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) intentto deceive and (2) self-awareness of intent to deceive. First, those laws are demagogicallysugar-coated in various ways--with entirely illusory and deceptive rates up to 70or 91 per cent, with a variety of homespun seeming concessions to ordinary peopleand with numerous items of sentimental bait such as apparent (but only apparent)concern for the handicapped. Next, many seeming concessions to weakness, such asage, are actually supports for financial strength. The opacity of the language, oftenputting skilled lawyers at odds, alone testifies to intentional deceptiveness. Also,the couching of special bills of benefit to only one person or corporation in generalterms, without naming the unique beneficiary, testifies to the same intent. A comparisonof the verbiage of the tax laws with the language of the Constitution shows entirelydifferent mentalities at work--devious in the first instance, straightforward andto the point in the second.

   The deviousness does not, as some profess to believe, reflectmodern 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 suddenlyenlarged the scope of this inquest from a very small to a very large group. But weare confronted here with something of a puzzle: How could nearly 99 per cent of alarge population be put into such a wringer by some 1 per cent or less, as thoughthe 99 per cent were the victims of a particularly brutal military conquest? Howcould such an apparently free population be reduced to the financial status of peasantslaves?

   A variety of factors has conspired to this end, but the populacehas been handled by a smooth governing technique. In a process that has unfoldedpartly by sincere stealth, partly by sincere subterfuge, partly by convenient self-deceptionand partly by barefaced sincere chicanery, the people have been led to accept thetax laws by being offered many apparent advantages over each other in pseudo-exemptionsand pseudo-deductions. But the bitter mixture to which the electorate has step bystep 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 lessonin adroit political manipulation as well as practical morality.

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

   As Congress now may appear to be cast as the villain of thisopus (which is really without a villain), it should be conceded that there are manyexcellent public servitors in that body, functioning far beyond any reasonable callof duty. But Congress collectively is very different from congressmen and senatorsindividually. Congress tends to function according to the least common denominator,the worst element in it. Congress, indeed, torn between different factions as itsettles toward the least common denominator, becomes very much like a crazy kingwho 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 Constitutionin 1913, and the subsequent estate tax, the big industrial proprietors were virtuallytax free, subject after the Civil War mainly to minor local real estate taxes. Thebiggest fortunes--among them Du Pont, Mellon, Rockefeller--were all largely amassedin 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 impositionof even a token income tax, which they correctly sensed might be the opening wedgeto heavier taxes.

   What it became, finally, was a siphon gradually inserted intothe 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. Thusit provided the pubpols with the present stupendous sums for reckless overspendingin the areas of defense (Over-Kill) and the letting of lucrative construction contractsin the sacred names of education, medicine, housing and public welfare. Consequently,as far as disposable moneys at their fingertips are concerned, the pubpolsare now on a basis of approximate parity with the finpols. Whereas in 1939only 4 million people paid income taxes, and in 1915 only 2 million did, today morethan 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--comesfrom the lower brackets, from the initial rate that all must pay, which is the lion'sshare 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 Thepoliticians will never willingly give up this Golconda.

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

   To get this one-sided tax burden off the backs of the commonpeople will, one suspects, require a political upheaval of first-class dimensions.Nothing less would do it. For the pubpols, with the constant self-sustainingthreat of defensive warfare on the one hand (neither Vietnam, Lebanon, Guatemala,Cuba nor the Dominican Republic attacked the United States) and the convenient excuseof profitable open-ended welfare on the other (the Great Society), can now work anoscillating double-pronged assault on the patriotic low-income man. It should alwaysbe 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 upwardclass 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-plusclass) the exemptions and disparities become boldly and, in a presumably enlightenedage, ludicrously profligate. The greater the income, the greater the legal tax exemption--upto 100 per cent. Conversely, the smaller the income the greater the proportion oftaxes it pays, mainly through tax-loaded prices of goods and services among verysmall incomes.

   Taxation is a complex subject and will be dealt with here inas 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 arethousands of separate tax jurisdictions. While all of them together gather in muchmoney for local uses and abuses, separately they are of small importance and arementioned here only as a means of dismissing them. The federal per capita tax collectionin 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 personalproperty, to which everybody contributes something either as occupant-owner or asresidential-business tenant. Depending on the region, the realty tax varies; althoughwherever it is low, local services are attenuated. A tax growing in use in statesand municipalities and almost as productive of revenue is the sales tax, which leviesup 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-purposetaxes--gasoline, liquor, cigarette, business, documentary, etc--are like the salestax 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, exciseand customs taxes. The latter two are percentage taxes on retail purchases and, exceptwhen placed on luxury goods, hit the common man hardest.

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

The Sales Tax Steal

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

   In order to incur a recurrent sales tax that would be 2 percent 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 seagoingvessel every year.

   But the disparity is often greater even than this, difficultthough 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 thepre-1964 rate, $500 at the post-1964 rate. The $500,000 income, however, is oftentax-exempt or, owing to the diversity of its sources, is taxed at a small fractionof 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 ramificationsof others. Whatever is paid in sales taxes in one year is deductible on the federalreturn the next year and has an in-pocket value to the taxpayer at whatever percentagetax bracket he is in. The individual with $3,000 taxable income is in the 16.6 percent bracket as of 1966, which means that the following year his sales tax of $60will 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 percent bracket and will on his return receive a federal tax credit worth $1,110. Theleveraging influence of the higher brackets greatly reduces the impact of sales taxeson 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-incomeman.

  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 taxat 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 $2,000of gross income ($40 per week), not uncommon in the American economy, might pay 5per 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 pricesand rent, one sees that they pay many weeks' income in taxes.

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

Tax-Exempt Corporations

  Corporations as well as individuals apparently pay income taxes.

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

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

  The evidence is plain, in open view; there is nothing recondite aboutthe situation. All taxes supposedly paid by corporations are passed on inprice 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 trueof 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 ofthe large ones and very few of any) that are losing money or that make a considerablybelow-average rate of return on invested capital. The money-losers pay no incometax at all, and may be forced to absorb local property taxes. Those making a below-averagereturn may be required to pay some taxes, the payment of which does indeed contributeto the low return.

  A glance at the income account of any large corporation shows thatbefore 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 anddomestic income taxes are computed on the basis of income after deduction of allcosts, salaries, wages, charges, depreciation, obsolescence, interest on debt andmanagerial expense accounts and bonuses. Now, after the deduction of federal incometaxes, there remained the net income available for preferred and common dividendsand for reinvestment. This was the net return or profit, more than 20 percent on invested capital.

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

  But, the ever-present casuist will object, if the company did nothave to pay income taxes at 48, 50 or 52 per cent, it would have had this much moreavailable for dividends. The argument is that prices would remain the same, tax orno tax. Instead of refuting such a contention by citing long and involved economicanalyses one may simply consider the figures on rate of return on invested capitaleither for one corporation or for all corporations over a period of decades.

  This rate of return does vary in response to a complex multiplicityof factors but, pari passu and mutatis mutandi, it remains fairly fixedwithin certain maximal-minimal secular limits. It averages out. Rates vary from industryto industry and company to company and the average, median or mode for all companiesdoes no more than tell the general story, which is that the average rate of returnon invested capital is not significantly affected by taxes. The taxes are largelyabsorbed 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 thatcorporations are slow in passing on tax benefits. But removal of the taxes wouldin time bring prices down; rates of return would remain about the same.

  No heretical or offbeat argument is offered here. For it is commonlyrecognized by knowledgeable persons that corporations pay no taxes. The Wall StreetJournal, for example, trenchantly observes that the corporation income tax is"treated by corporations as merely another cost which they can pass on to theircustomers." Tax or no tax, the customers pay for everything including a fairlystabilized 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 pricein the exact proportion of taxation"; and the former Republican Speaker of theHouse, Representative Joseph Martin of Massachusetts, reminded listeners that "anygraduate economist can tell us that corporations compute profits after taxes, andnot before, and their price scales are adjusted accordingly." 13

  There are some economists who contend that not all corporations areable to pack taxes into prices but instead force workers to absorb some of them inunduly 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 returnon capital. The so-called "corporation tax," then, is a misnomer and adeception on a gullible public, which itself pays all corporation taxes. The corporationtax is a disguised sales tax.

  Indeed, at least two-thirds of American corporations even add payrolltaxes to their prices. 14 These consist largely of their legally designatedproportion of Social Security taxes, which they are theoretically supposed to payout of their own pockets. These taxes, in greater part, are paid half by the employeeindividually and directly, and the balance by consumers, who are themselves mainlyemployees. It would hardly be erroneous, then, to say that employees pay nearly allof Social Security, The only way to make employers pay for them is to deduct fromdividend checks or retained profits. Even if this were done, the companies wouldsimply, 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 bemade available for dividends and retained profits so that after any deductions foremployees' Social Security the same amount would go to dividend recipients. Rateof return would remain the same.

  There is really no way of forcing a successful profit-making corporationto pay taxes other than by levying on its capital, thereby reducing it at least asfast as retained earnings build it up. But this action is ruled out under our legalsystem as confiscatory. It is absolutely taboo. So it is clear that the existentlegal system forever protects the going corporation from taxation, like a nobleman'sestate. But this system could be altered by a simple constitutional amendment: "Capitalmay 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 economicsystem 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 virtuewere being taxed; for "thrift" is the ideological code word for inheritedcorporate wealth, "virtue" the code word for wealthy man. Would that onecould be as thrifty as third-generation inheritors?. While the power of the finpolswould no doubt be curtailed by such taxation, that of the pubpols would berelatively enhanced. Whether this would be all to the good is questionable. One mightbe willing to take one's chances with a Franklin Roosevelt, Adlai Stevenson or JohnF. Kennedy but be doubtful about taking them with a Lyndon B. Johnson, Barry Goldwateror 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 bycorporations is part of what makes the average man feel fairly complacent about thetax situation. But that federal taxes are no impediment to corporations we can seeby observing their rates of return. General Motors in 1964, for example, enjoyeda rate of return of 22.8 per cent on invested capital. Although some rates of bigcompanies exceeded that of General Motors, ranging up to 38.2 per cent, industrymedians 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 availableand should be consulted with a view to ascertaining that income-tax rates do notsignificantly affect rate of return. 16

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

  But aren't corporate people always decrying corporate taxes? If thecorporations don't pay taxes, why should they object? Their objections are made ongrounds 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 purchasingpower of individual buyers and place much purchasing power into the hands of governmentofficials who (1) have in mind the purchase of other kinds of goods and (2) can ifthey 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 faithlessemployees. Again, the government may buy mountains of cement and heavy equipmentbut it cannot be induced to buy chewing gum, fashions and millions of automobiles.

  Corporations obviously prefer the less sophisticated, happy-go-luckytypes of purchasers to the pubpols who, beyond any orders they place, mayalso require extraneous payments for their patronage such as campaign contributionsand retainers. In one way or another, the pubpols exact kickbacks for theirmassive tax-supported business.

  In any event, corporations rarely pay any taxes but merely act ascollection agents for the government. This fact is shown most formally and preciselyin the case of the utility companies, which are always trumpeting to the world howmuch they pay in taxes. Because these companies hold a franchised monopoly, theyare 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 legallyentitled to a certain minimum generous return on invested capital--at least 7 percent. Taxes therefore may not be allowed to intrude upon rate of return but, as theyare 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-utilitycompanies, except that they don't have their prices set by a regulatory commission.The market, subject to monopolistic manipulation, supplies whatever limitation thereis.

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 theirtaxes--local, state and federal--like other costs, are packed into the price of goodsor services they sell. The buyer pays the taxes.

  Where a landlord owns an apartment building his tenants obviouslymust 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 collectsfor the government, and the tenants who live lightheartedly unawares. If anyone isto lament about taxes paid, it is obviously they; but they are inattentive to theactual process.

Multiple Taxation

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

  The way these dividend credits worked in 1964 was as follows: Anyperson receiving dividends could deduct up to $100 of dividends received ($200 fora married couple). Up to $200 of dividends, in short, were tax free for a marriedcouple, and so remained in 1965 and 1966. Beyond this, 2 per cent of all dividendsreceived from domestic taxpaying corporations were deducted directly from thetax 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 beyondthe tax-free base could deduct only $10.

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

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

  But this serves only to point up the fact that it is the rank-and-fileconsumer who pays most taxes. When, for example, one buys a loaf of bread one paysfractional multiple taxes--the farmer's original land tax; the farmer's income tax(if any); the railroads' real-estate, franchise and income taxes; storage warehousetaxes 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, therewould be no gain for anyone along the line of production. So it is the buyer of thebread 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 pointsout that in 1959 five persons with incomes of more than $5 million each, when thepublic supposed such incomes paid 90 per cent tax, paid no federal tax at all. Onewith an income of $20 million paid no tax. Another with an annual income of nearly82 million had paid no tax at all since 1949. In 1961, seventeen persons with incomesof $1 million or more and thirty-five others with incomes of $500,000 or more paidno taxes whatever. In 1960 a New York real estate corporation with $5 million ofincome paid no taxes but showed, instead, a bookkeeping loss of $1,750,000. And variouspersons with huge investments in tax-free bonds regularly pay no tax whatever ontheir 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 apingprerevolutionary 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 lessonsfrom history and developed techniques for treating their demoralized constituentsmore as adversaries, to be manipulated, than as a consenting public. And they usethe very strivings, selfishness and divisiveness among people to bend them to theirown dubious purposes.

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

  "Look out for this fellow, Jack. He's awfully strong and couldhurt you," said one of his handlers to the champion as they watched the strongman 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 suddenlyrushed. The champion's left glove flicked stingingly into his face and was instantlyfollowed by a powerful right cross to the jaw. The strong man, without ever havinglanded a blow, sank unconscious to the floor. The audience sat bewildered. They hadjust 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 Dempseywas that of letting them come to you and then belting them.

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

  Government uses these methods, it should be noticed, when the publicis 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, whichotherwise, 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 theywould 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 millionmen it is obviously difficult to order them forward all at once, risking the politicalire of such a multitude. Again, government at no time possesses the manpower to forcethirteen million to obey. The FBI, resourceful though it is, could hardly cope withthis situation.

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

  First the government divides the manpower into classes--by ages andby marital and parental status. It then summons first those who are politically andpsychologically weakest, the single youths aged eighteen to twenty-one who don'teven have the vote. Excepting the few true-blue patriots and excitement-hunters whorush to the recruiting offices, all others, thankfully feeling they have been excusedfrom danger, cheer in approval and tell the bewildered youngsters they are only doingtheir 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 agedtwenty-one to twenty-five, while married men approvingly urge the victims on. Forthe government gets much assistance from that part of the populace it is not at themoment corralling. Any of those who have shown strong signs of not wishing to goare shouted down by their fellow men, shamed. Some who have watched and cheered theprocess meanwhile have rushed off to get married to the first unattached female theycould find; for the government, it seems, has a soft spot in its heart for marriedmen--whom it is not calling.

  But now, with a considerable force in training under arms, the governmenthas enough men to deal handily with any late-showing dawdlers. Moreover, the menunder arms feel scant sympathy for those who have not been called. The conscriptarmy would, in fact, relish an order to go and get them at bayonet point. As in awrestling match, the weight has been shifted. Where at first the forward-thrust ofweight was with those not called, who chivvied the tender youths into service, thisweight has now shifted to the youths under arms who now regard others as slackersand are ready to kill on command. The slackers are summoned--first the battle-shymarried 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-fiveand 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 soldiersthemselves in World War II, "if you can walk, you're in." They are nowall, as the soldiers themselves pronounced, "dogfaces," nobodies. (Theywere that, too, in civilian life but didn't know it.)

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

  A similar technique is used with respect to the imposition of unfairtaxes. For it always appears in reading the tax laws that somebody else is goingto be soaked, or at least soaked more than the reader. Does it not clearly appearthat 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 twentytimes too much. Three cheers for Congress!

  The tax laws divide people into many more groups than the conscriptionlaws. There are, first, the single, the married, the married with children and theheads 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 stillwith vision. But this is only the beginning. People are divided also according tosources of income. The basic division is between earned and unearned income, thelatter of many varieties. But there is also taxable and non-taxable income, foreignand domestic income, etc.

  While to the general public the basic division appears to be betweensingle and child-blessed married persons, the true basic division is between earnedand 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 gettingaway with something at someone else's expense, that he is, as Mr. Stern says, a "taxdeviate." 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, someseven million individuals. They are the low men on the tax totem pole.

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

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

  Thus, as Mr. Stern ably shows, the variations from the posted schedulesin what is paid increase very steeply as one rises in the tax brackets. Whereas theincome below $5,000, calling for 20.7 per cent of tax., actually pays on the average9 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 centon the schedule (if it is taxable at all) actually pays on the average only 32.3per cent, and the incomes over $5 million pay only 24.6 per cent. The demagogic arrangementof the rates conceals this.

  Whereas the average under-$5,000 income receiver, who probably hadto work hard for his paltry dollars, saved $274 by his allowable deviation from theposted rate, the average multi-millionaire taxpayer saved $5,990,181 belowthe apparent rate. While the small man was allowed to cut small corners by an apparent50 per cent, perhaps to his intense satisfaction with a benign Congress, the recipientof $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 orderto chisel $274 and how much to chop out $5,990,181?

The Con-Game Pattern

  What the many tax-deviation opportunities provided by Congress forthe 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 whichconsists of an approach to a formally respectable person with an offer of great gainto be made by engaging in an operation that is safe but frankly shady. In the endthe 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 invitedto step in and chisel on the government by availing oneself of the many small opportunitiesstrewn about for chiselers. One takes up the invitation--or challenge--like Dempsey'sstrong 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 unmercifullyfleeced 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 throughprices). A man who got all his income from dividends paid only $992.30. Another whosold shares at a profit of $7,000 paid only $526. A fourth who got his income fromstate 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--perhapsmost brutally.

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

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

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

The Question of Tax Exemption

  Should there, first, be any absolute tax exemptions, as of the Frenchnobility? In a national poll the majority answer to this question would probablybe "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 soagrees, 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 oftax-free status to beneficiaries of ecclesiastical investments. This is obviouslysomething different from religion. While most of the more than 200 sects own verylittle property and rank-and-file clergy, even in wealthy churches certainly arepaid little, the managers of the heavily propertied ecclesiastical establishmentsgain from this provision, which splits them from the rest of the populace as accessoriesbefore the fact. The high-living upper ecclesiastics of the tax-favored churchesare usually thick-and-thin pro-government men, upholding the pubpols in whateverthey do. Naturally, they tell their communicants they ought to be glad to pay one-sidedtaxes and walk into cannon fire.

  The leading property-holding church is the Catholic Church, althoughmost 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 YorkTimes, "The main exception to the general trend, of course, is the Americanhierarchy of the Roman Catholic Church, which has largely been silent or, in thecase of several leaders such as Cardinal Spellman of New York, supported the wareffort. The position of the American Catholic hierarchy, however, contrasts sharplywith the peace efforts of Pope Paul." 19

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

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

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

  But although churches under American tax laws may and do operate businessestax free, in competition with tax-collecting businesses, a university that does thisis 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 uniquelyamong churches does not issue financial statements, one does not really know howmany investments and businesses it owns. In other cases the ownership is known. Thetax base is constantly being narrowed by exemption of church property which, untaxed,is increasing.

  The principle of total exemption now being established as thepipe organs thunder their approval, it can be extended to whatever else is designatedas 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 coverpolitical propaganda. Organizations and radio stations that emit rightist politicalpropaganda, such as those of oilmen H. L. Hunt and Hugh Roy Cullen, now become taxexempt. And so it goes.

  What else is worthy of substantial exemption? As a sagacious Congresshas decreed, the powerful oil industry, like religion and education, deserves from27-1/2 per cent to 100 per cent tax exemption.

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

The Baited Trap

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

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

  But, among those paying taxes, the next division takes place betweensingle 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 peopleconstitute more than 60 per cent of the adult populace, Congress obviously has amajority on its side in discriminating against the single. One should notice againthe use of the principle of divide and rule.

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

  Thus, under the 1965 tax law, as under previous laws, the taxableincome 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 ofactual 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 couplepays 14 per cent on the first $1,000. Whereas the married couple pays $140 on thefirst $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 $8,000the single person incurs a tax of $1,630, the married person only $1,380. On $20,000the single person pays $6,070, the married person $4,380.

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

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

  This becomes apparent in the $50,000-bracket, where the single manpays $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 taxableincome the wealthy man gets more than ample support for his wife, for he pays $45,180while the single man pays $55,490. Even a girl with a healthy appetite can be maintainedvery well on the differential of $10,310.

  Before proceeding, the reader should be warned not to pay too muchattention to the fact that $50,000 incomes pay $22,590 and $17,060 of taxes respectivelyfor single and married persons. These seem like rather substantial rates. But thisis 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 singlepersons. But married people and parents apparently feel there is something onerousabout their condition, for which they require a tax concession. Congress lets onthat it agrees, gives them a minor concession and then belts them down to the floorby fantastically widening the concession for wealthy people!

  Married people get a deduction not enjoyed by the single if they havechildren. Each child is good for a deduction of $600, which to many seems fair, aschildren are expensive. But the expense of maintaining children is not proportionatelyas great in the upper brackets, where the deduction broadens in value with the formaltax 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 incomelevels 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 cancompute at going rates of return what a wife is worth to one in yearly retained incomeThe wife capitalized at a value of $1 million at 4 per cent is worth $40,000 a yearin income to her husband; the $6,996,994--wife is good for $279,877.66. But in thetax 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 asof 1965 paid $1,380 (against $1,630 for a single man). If the married man had fourchildren his tax liability was reduced to $924. Under the law four children havegained a married man $456 or $114 per child over the childless married man, But themarried man in the $50,000 bracket, who without children paid $17,060 tax, with fourchildren and the same income pays $15,860 tax, a gain for him of $1,200 or $300 perchild. His children are worth in tax benefit about three times what the childrenof the $8,000 man were worth.

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

  While the tax laws subsidize only very slightly the wives and childrenof the poorer man at the expense of single people, they do absolutely subsidizethose of the wealthier. Here is a flat statement of incredible fact: The upkeep ofwives 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 suddenlymarried an impecunious widow with four children. He would retain as much in-pocketspending 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 wouldgain only $820 compared with a gain of $7,030 for the $50,000-a-year man. Most familieslive on far less than a $50,000-a-year bachelor would get in annual tax reductionby marrying a hungry widow with four children.

  But the lower taxpayers, while computing their paltry marital andchildren's deductions, perhaps feeling pity for the single persons, get the feelingof "getting away" with something, or at least of getting some concessionfrom 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 thebirth rate is distinctly against the general interest at a time of obvious overpopulationand a seemingly intractable unemployment rate of 4 per cent. By all present signsat 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 supportof a disabled or aged relative gets no tax rebate. Unless a person is more than halfdependent, which would exclude almost everybody, he cannot be deducted.

Other Ways of Income Splitting

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

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

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

  This salient feature is carried forward in the extension of incomesplitting.

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

  Another way, as we have seen, is to establish trust funds, and theuse of trust funds has grown enormously. While trust funds have many aims, one ofthe objectives they serve is to split assets and incomes among many people, oftenamong 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 governmentbonds 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 Rooseveltobserved in a message to Congress in 1937 "one thrifty taxpayer formed 64 trustsfor the benefit of four members of his immediate family and thereby claimed to havesaved 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, accordingto Mr. Stern.

  But a certain Dr. Boyce, misled by the logic of the tax laws, in oneday 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, asMr. Stern remarks, "It was."

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

Additional Tax Dodges

  A man who is sixty-five or over, in the best of health, gets an additionaldeduction 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 SocialSecurity. 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 persongets an extra exemption of $600, suggesting to the reader of tax instructions thathe lives under a Congress with a heart. But if a person retains his sight and isstone deaf, without hands, has had a stroke or is paralyzed from the waist down hedoes 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. Wemay, therefore, soon see Congress giving an exemption to all disabled or physicallyhandicapped people, thereby further narrowing the tax base.

  The point here is not whether a person is handicapped but whetherhe has income. What value is an extra exemption to a blind, disabled or aged personwho has no income" The only person such an exemption could benefit would beone with an income. And all such special exemptions are taken by persons with incomes--oftenvery 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 beseen by considering the income statistics for 1962, the latest year available. Of7.4 million male income recipients over sixty-five years old, 18.6 per cent got lessthan $1,000 gross; 34 per cent, from $1,000 to $2,000; 18.4 per cent, from $2,000to $3,000; and 9.9, from $3,000 to 84,000--80.9 per cent under $4,000 gross. Of 7,491,000female 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 significantadvantage only to affluent persons, property owners, retired corporation executiveson large pensions with big stock bonuses and upper professionals who have managedto save and invest. Like marital income splitting and deductions for children, itis 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 worthin cash 70 per cent. For a person with zero income it is worth zero. In order tobenefit slightly from the extra exemptions for being over sixty-five and blind, asingle person using the standard deduction must have in excess of $2,000 taxableincome. If he receives $4,001, he will pay tax on $1,800 (standard deduction plusthree exemptions) or $294. But, having saved $80 by being blind, he will then bein 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 percent of overaged females!

  The tax deductions for the aged, blind and retired are of significantbenefit only if one belongs to a small group of persons with taxable incomes higherthan 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 thepropaganda about the United States as a land of opportunity, the richest countryin the world and the home of the individual-success system. Under this system, mostpeople, economically, appear to be failures at the end of the road. And were it notfor Social Security, the figures in each of the income brackets cited would, on theaverage, 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, taxesand overpersuasive advertising, as well as individual shortcomings, have anythingto do with the result? With only 19.1 per cent of over-age males having a gross incomeabove $4,000 and 7.1 per cent of retired females above $3,000, economic success doesnot appear to have crowned the efforts of most survivors in the most opulent landever known to history.

  In drawing the tax laws Congress is no more being sentimental thanwhen it temporarily exempts the father of twelve from battle duty. Although individualcongressmen no doubt have their personal points of view on all of this, collectivelyCongress 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 ifone has property or a well-paid position. Then it is most enthusiastically on one'sside.

  Congress, as we have noted, likes students. It likes them so muchthat if one is able to gain a scholarship or fellowship he need pay no tax at allon it, an educational exemption, up to $300 a month for thirty-six months and evenif the scholarship adds considerably to family income. Scholarships are awarded bymany endowed colleges and special bodies, but many corporations now earmark scholarshipfunds given, for example, to the National Merit Scholarship Fund. Some funds arenot earmarked, but the earmarked funds are for the children of emplovees (usuallyexecutives) of the company. The granting of the scholarship has the hidden effectof 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 owntaxed money for tuition. And in known cases students of lower standing intest examinations and lower academic standing have drawn earmarked scholarships whilestudents of higher standing have drawn none, even as the public supposes thescholarships 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: Congressis not really sentimental at all but is just busy dividing the taxpayers into separatelymanageable little bands of over-reachers, each of whom feels particularly and unwarrantablyvirtuous about some feature of his status--that he is married, has children, hasa 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 bicycleridden on a high wire with a monkey on his back.

  A congressman might deny this, might hold that the body is reallysentimental, and point out that payments under Social Security and the Railroad RetirementAct are tax exempt entirely. But every recipient of Social Security and retirementprovisions is not automatically entitled to special sympathy. A number of them aresurvivors from among many who have succumbed before them and as such, someone mightargue, ought to pay a special tax--or at least be taxed equally with others. A long-employedutility-company executive, no risk competitor, who retires at age sixty-five witha pension of $40,000, a rather standard figure for his industry, plus owning accumulatedstock, 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 officialsof long service in their personally owned corporations as well as lower-bracket wage-earnersare equally under Social Security and get the same tax exemption whether they needit or not.

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

Untaxed Income

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

  Ninety per cent of people, more or less, own no stock and receiveno 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 dividendsfrom mutual savings banks and building and loan associations, usually received bylow-income people, do not qualify for this strange deduction.

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

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

  What this betokens is that accrued earnings, not paid out, are creditedto 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 earnsan average of $10 a share but pays out an average of $5 a share in dividends. Thestockholder 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. Itis tax-free unearned capital. But if a wage worker receives a $500 bonus at year-endand the employer deposits it in a bank for his account, the $500 must be reportedas taxable income and will be taxed. Not to pay a tax on it would be a violationof law, and punishable.

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

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

  When he eventually dies, his heirs will not be liable at all for acapital 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 fundsfor 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 trustfunds, 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 taxesor estate taxes. All would be completely legal.

  This road to wealth is not only theoretically possible but is actuallytraveled 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 yearis very large. In 1950 it was $16 billion. It was $16.5 billion in 1955, loweredto $10.8 billion in 1958, rose to $15.9 billion in 1959. Since then it has rangedbetween $13.2 billion to $16.8 billion in 1963. 25 Since 1946 it has alwaysbeen each year more than $10 billion. Like money in the bank, the beneficiaries payno tax on any of it. It is this feature that enables major stockholders to becomeconstantly richer, tax free.

  Retained corporate profits, mostly reinvested, have exceededdividends 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 exceptionof 1958, often by a very wide margin; in 1947 and 1948 they were more than doublethe dividend payout. 26

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

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

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

  Under the Eisenhower Administration, as we have observed, the dividendtax credit passed in 1954 enabled big stockholders to make a killing while smallstockholders gained very little, the usual pattern of the tax laws. With fewer than1 per cent of all families holding more than 70 per cent of all stock by value, itis clear that very few could be advantaged by this law. As Mr. Stern shows, a manwho had a tax bill of $2,020 and had received dividends of $500 would reduce histax by $20 under the Eisenhower law. But for 306 top taxpayers, with an average dividendincome 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 purchasemore tax-deductible medical services than the average man. A married taxpaver islimited 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 hospitalexpenses, these are exempt from taxes, which is very handy for the company executiveswho often enjoy this "fringe benefit." For the ordinary taxpayer any wagespaid 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 thatmake this a practice obviously enjoy a differential tax advantage over most taxpayers.

  Corporation executives often enjoy free medical services, for themselvesand their families, from fulltime company medical departments. This amounts to somuch 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 medicalservices at various of the up-to-date governmental military hospitals. Former highofficials also participate through the courtesy of incumbents, whom they publiclyback 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-freededuction from spendable income, thus reducing his taxable income. In the 70-per-centbracket this is worth $14,000, cash.

  Most persons in the country never enjoy the services of a doctor untilthey 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 pharmacistin all poorer neighborhoods referred to as "Doc." Their prescriptions arewhatever proprietary drugs he recommends. The pleasant-sounding medical deduction,then, is of no service to the many persons without money to spare for doctors andmedicine.

Lucrative Charities

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

  While the contributions may be made to existing bodies, most of thewealthy prudently decide to make them to their own charitable foundations, whichare 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 (hehas made all deductions), he is liable for $660,980 in taxes under the 1965 or nearly70 per cent flat. But he can still make a charitable contribution for a deductionof $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 $90,000more 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 maintainprofitable control. Again, the earning power of this $300,000 (at least $15,000 ayear) is now tax free itself, greatly increasing its effectiveness. It will recouphis $90,000 out-of-pocket cost in at most six years and thereafter show a tax-freeprofit. He has more income to dispose of now in "philanthropic" patronagethan if he had retained his taxed earnings and invested or spent them, for the proceedsof such retained money would be taxed.

  What does his foundation contribute to? It contributes, as actualcases show, to laboratories seeking cures for various diseases. Surely this is entirelyworthy, and so it is. But what do the corporations make that he controls? They maymake medicines that are sold at a profit for the cure of various diseases, and anydiscoveries 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 takesmoney to buy medicines.

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

Big Killings via Interest

  Interest received, except from tax-exempt bonds, is taxable, Everyman who gets interest from a bank account, a mortgage or on a federal or corporatebond 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 maydeduct the interest paid before computing his income tax, just like the man who deductsfor 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 inthe 70-per-cent bracket is worth to him $70,000. His true interest outlay is only30 per cent of the face amount.

  All such big interest payments are of major advantage to the big operatorsin stocks, real estate and oil lands who borrow a great deal in order to contrivetheir killings, which are sometimes sure things--as in the case of the metropolitanrealty 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 amongthe advantaged, is in the matter of home ownership. While tenants, in the form ofrent, pay all costs, including mortgage interest and taxes of the owner, the homeowner may deduct on his federal tax return interest he pays on his mortgage and hislocal real estate taxes. On a $30,000 house in which he has a $10,000 equity thehome owner may pay 5 per cent perhaps on a $20,000 mortgage, or $1,000; his taxesmay be $500; and he may reasonably figure 3 or 4 per cent for depreciation, repairsand 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 deductthe interest payment of $1,000 and then the real estate tax of $500. At the 22 percent rate for that bracket the deduction is worth $330, bringing his actual rentdown to $2,070 or $172.50 per month. A tenant would have to pay considerably moreper month plus some entrepreneurial profit to the owner; he would probably have topay 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 ofhome owners either. It has much bigger game in mind. With home owners sitting contentedlychewing 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 throughwhich profit-hungry elements churn like armored divisions through Stone Age club-wielders.

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

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

  But this is only the beginning of the story.

  Metropolitan real estate operators, as we have observed, use interestas 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 payingon their profits.

  Congress, although not loving home owners, is surely infatuated withbig real estate and stock-margin operators. And why not? It is these chaps who havethe 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. Heknows he is in some sort of squeeze. But, politically illiterate, he clearly doesnot realize its nature nor does he see that he won't get out of it by obtaining somepetty advantage over the single the childless, the tenants and other fellow rank-and-filecitizens. He cannot understand that it is the very type of person he likesas a legislator that is his undoing. For he prefers "con men" to seriouslyhonest men.

Tax-Exempt Bonds

  One of the biggest tax-exemption loopholes consists of state and municipalgovernment 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 veryrich. Tax-exempt bonds are, clearly, a rich man's investment vehicle and are providedfor this very purpose.

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

  How many such bonds are outstanding? As of 1963 there were $85.9 billionoutstanding compared with only $17.1 billion in 1945 . 30 One can seethey 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 ofwealthy individuals and a few banks and insurance companies.

  The ordinary man would not find such investments attractive, as hecan get from 4 to 5 per cent on savings. The advantage enters through the leverageexerted 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 incomeof $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 bracketit 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 $400,000it is equal to a blessed, flat, cold 33 per cent on a stock! Such a percentage returnin a tax jungle is obviously worth reaching for.

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

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

     Investment                    Income             Tax$100 million tax-free          $3 million (cash)      None   bonds$100 million oil              $15 million (cash)      None   royalties$100 million growth stocks    $15 million (accrued)   None   earning 15 per cent but   reinvesting all; no   dividend payoutTotal 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 employerspay none at all, year after year. For this, as one must understand, is a democracywhere the lowly pay taxes but many of the rich do not.

  In passing, very few Americans can afford to hire servants, and thereare in fact few servants in the United States, which some naive souls take as proofof how "democratic" the country is. According to the 1960 census, therewere 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 26.4per cent of them were nonwhite. As some large estates harbor huge staffs of servantsit is evident that this number distributes among a very small percentage. of richfamilies. Private household workers "living out" numbered at that time1,600,125, had a median wage of $658, were of a median age of 44.2 years and were57.3 per cent nonwhite. This latter group obviously makes up the part-time help ofsome of the urban middle class.

  Even suburban families with two or three children in the $25,000 income-bracketfind they cannot pay for a servant after taxes, educational and medical costs, caroperation and ordinary running expenses. And even part-time servants in the UnitedStates 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 afterpersonal deductions each has $500,000 of taxable income a year, is cognizant thateach Must pay, if married, an income tax of $320,980 or 60-plus per cent. Accordingto one line of doctrine this "reduces incentive" to work like crazy forthe dear old company; another doctrine feels it has little dampening effect on executiveperformance. 31

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

  In conducting a business, as anyone can see, an executive naturallyincurs 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 longestablished of inviting him for a meal and perhaps a convivial drink or two.

  But controversy over expense accounts does not relate to these factsof ordinary business life, which may be termed "proper expenses." The controversycenters on "improper expenses," which are a much-criticized way of directingtax-free revenue into the hands of a corporation executive or representative, eithergiving him money he would not otherwise have had or relieving him of paying for luxuriousrecreation and diversion out of his own pocket and thereby reinforcing his personalfinances while he has fun, fun, fun.

  The controversy over expense accounts has succeeded in removing someof the more ludicrously blatant abuses, but in essentials the expense account remainsa perfectly legal tax-evading racket. In the 1930's, for example, wealthy peopleformed 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 hireher husband at a generous salary to manage the place. His ample salary was a deductibleexpense before taxes! 32

  In such cases standard corporate methods were applied to personalfinances. 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 fieldis still rather wide open to free and fancy improvisation.

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

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

  Those sheltered readers who may consider this story farfetched anduntrue 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 recognizedby the New York Times (August 14, 1967; 24:1) in its allusion during a surveyof contemporary prostitution "to the socially prominent woman who grants herfavors 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 plyingthis trade at this social level. At $500 per seance, and with only one such choiceseance per week, such a practitioner would gross $26,000 per year tax free. For thepoliticians have yet devised no way of levying a tax on this traffic or bringingit into the range of reportable income. The quest for tax-exempt income naturallyturns the thoughts of some pecuniary-minded women in this direction.

  Proper business expenses would be those defrayed by a salesman intraveling 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 entertainmentfor actual or potential customers, unnecessary entertainment for colleagues and businesspeers when the sole business topic is ordinary shop talk, and in providing executiveswith a wide range of recreational expenses. It is a succession of Roman holidaysfinanced by the public.

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

  Under the entertainment feature, corporations make lavish gifts tocustomers, 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 estimatedto 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 claimsfor deductions but has often lost in the tax courts to corporate-minded judges. Theowner of a large dairy and his wife were allowed to deduct the $16,443 cost of asix-month African safari as an "ordinary and necessary" business expensebecause the showing of movies of their trip resulted in presumably beneficial advertisingfor the dairy. A well-known actress was allowed to deduct the cost of expensive giftsto 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, hadshe not made the gifts, have had to pay out most of this money to the government--thatis, the general public. As it was, she garnered for herself some personal good willwith it. 35

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

  Congress allowed such expenditures to remain tax deductible but stipulatedthat the maintenance of facilities like yachts, hunting lodges and tropical resortswould 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, Congressnow required itemizing of expenses; previously itemizing was not necessary. But itemizedlists are not difficult to supply.

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

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

  "Some skeptics," says Stern, "foresee this major exceptionresulting 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--oreven the heavyweight title fight."

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

  Said one businessman, a member of a coterie of business acquaintanceswhose companies picked up their lunch bills serially: "I haven't paid for mylunch 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 paymost of the recreational-entertainment bill of executives and some of the recreationalbill of customers, and to siphon directly tax-free money into the pockets of uppersales personnel who are given expense accounts, no questions asked, of up to $700to $900 per week. 36 They pay no tax on such largesse.

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

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

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

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

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

  What if a business executive and his wife (he can't do without herpresence) journey to Rome where there is a business conference of half a day abouta possible oil deal of $250 million? Now the man and his wife tour the Mediterraneanfor three to six weeks. Does one now measure the pleasure component by time, by intensityor by magnitude of outlay? If it is the latter, then it is a flea-bite in relationto the magnitude of the possible deal; if it is by time, then close to 99 per centof the component has been pleasure. If the whole trip cost $12,000, how can thisbe reasonably questioned as an adjunct to a possible $250-million deal? The factis, of course, that big deals can be, and have been, arranged with the expenditureof just 10 cents for a phone call. A large deal does not necessarily require expenseoutlays commensurate to its size, does not need to be arranged in a palace in thepresence 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 addingnothing of value to the economy and as conveying a damaging image abroad of the Americanbusinessman's way of life. 38 But he is a minority of one in the businesscommunity, as far as the record shows.

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

  Although all these establishments are regarded as play areas of therich, not many rich people would patronize them if they had to pay for them withtheir 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, heprefers that it is other people's money.

  This whole area, where the mere serving of a meal may be a ceremonyrivaling the High Mass of the Catholic Church, is underwritten by the general publicin 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 ordinarilyroyally 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 thenation's total of business suffer? Would the buyers refuse to buy and the customersat home go unappeased?

  While it is true that all this may make business more pleasant andexciting, it would make everything more pleasant and exciting if such tax-supportedantics were available to everyone. If two scholars have lunch and incidentally discussthe 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 taxdeductible on the ground that they might some day become patients or clients? Whatif 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 forlife? Does not the government really owe them billions in view of the magnitude oftheir task? Why should not the ordinary office worker's lunch be tax deductible?Is not the lunch an "ordinary and necessary" expense ancillary to carryingon business?

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

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

The Stock-Option Racket

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

  The essence of the stock-option scheme is that it allows its designatedbeneficiaries, few in number, to purchase stock at steeply reduced rates. Some priceis arbitrarily set at which a favored group of executives, often including largehereditary owners, may buy stock after a certain date. The benefiting executivesare 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 matterhow hard they schemed the value of the company would not increase; it increases onlyas the company participates in an expanding economy, which has nothing to do withthe efforts of the executives (with some exceptions).

  The way it works is as follows:

  Certain high-salaried executives are told that they may within threeyears buy a block of stock in the company, if they wish, at $5O a share. It is nowselling at $45. After three years, let us say, the stock has risen to $125. As theyeach 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 theymay retain the stock and pay no tax at all.

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

  The option plan clearly allows its preferred beneficiaries to buystock at a discount and hold on to it, paying no tax, or to sell it and pay a relativelylow tax on the increment. An executive need not, indeed, put any of his own moneyinto the deal at all because most issues listed on the Stock Exchange are good fora bank loan at 50 per cent of their market value at any time. If the option priceis 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 themto lift off the low-tax capital gain. Smooth, smooth, smooth. . . .

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

  If a group of executives elect to keep their stock, as did the leadingexecutives of General Motors over the years, they may in time become independentlywealthy. Alfred E. Sloan and others of the well-known executives in Du Pont-controlledGeneral 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 asdifficult as shooting fish in a barrel. And much of the gain involved stems fromthe reduced or nonexistent tax. If these acquisitions of value were taxed at thesame rate as the corporate salary, it would be virtually impossible for big corporationexecutives to become tycoons on their own account, as a few have become. It is thetax-exempt feature, paid for all the way by the public, that enables them to emergeas financial kingpins, ,vithout performance of any commensurate service.

  Specific cases under these general observations fully support everythingthat 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. Fiveyears later Mr, Watson exercised the right to buy 3,887 shares, when the market pricewas $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 overdirect income amounted to $950,000.

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

  What is made from stock options often exceeds regular salary by awide margin. Charles H. Percy, head of Bell & Howell and more recently Republicansenator from Illinois, in the 1950's got $1,400,000 in option benefits, twice hissalary; L. S. Rosensteil of Schenley Industries made $1,267,000, 2-1/4 times regularsalary; and W. R. Stevens of Arkansas-Louisiana Gas Company got option benefits tentimes 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 naturalfor 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 Motorexecutives $109 million and for Alcoa officials $164 million. 39

  There are various arguments on behalf of the option system, all ofwhich 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 averagingmore than sixty years of age and thirty-five years of service.

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

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

  Another argument is that the options enable companies to compete forexecutive talent. But as more and more companies come to have option plans no competitiveadvantage actually accrues.

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

  Still another argument is that the option plan enables officials tobecome stockholders and thus have a strong personal interest in the company. Butmany officials sell out their option stock as quickly as they can and in fact holdno continuing ownership in the company. They are simply profit-hungry.

  It is further contended that the options make company officials workharder to make a good showing. But there have been cases, as with Alcoa, where thestock 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 downor the company deteriorates.

  Again, it has been charged that company officials, in order to kitethe 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 entirelytemporary 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'sanalysis. The option schemes are simply a method of passing tax-free or low-tax moneyinto favored hands and are often voted into effect by their own direct beneficiaries.But they always dilute the equity, reduce it, of nonparticipating stockholders. Whenan option plan is introduced into a company the book value of all nonparticipatingstock is shaved or clipped, much as gold and silver coins used to be clipped by moneydealers before governments introduced the milled edge.

  In some cases minority groups of stockholders have successfully goneto court to have option plans of big companies either set aside or modified. Thishas 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 groundsof fraud. 42 But most small stockholders cannot afford to go to courtand many big stockholders go along with the option plan on the ground that if officialswere not able to chisel in this way they would find some other arcane and possiblymore subversive way of nibbling into the property.

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

  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 servantswho for their own profit undercut their master's interest. Companies in the corporatejungle 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 disagreewith Mr. Stern, who believes that the corporation pays some tax. Whatever a corporationpays out in cash bonus is so much paid out of net return or added on to price; itis not merely an additional cost of operation reducing a true taxable income. Ona stock option the corporation has no out-of-pocket expense at all. But while notcostly to the corporation, the stock option is costly over the long term to the nonparticipatingstockholders.

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

  Among the advantages of controlling a company are these: (1) Dividendpayout rates may be determined, and for large stockholders the smaller the payoutrate and the larger the tax-free reinvestment rate the richer they become by evadingtaxes on dividends. (2) Cut-rate stock-option plans may be adopted, with the controllersparticipating and, indeed, increasing their degree of control by diluting the equityof nonparticipants. (3) In making outside investments with company money, propertiespersonally acquired for song can be unloaded on the big company at a high price,thereby making concentrated personal profit but spreading the inflated price amongmany other persons. (4) Personally beneficial expense-account features can be arrangedsuch 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 placedon the payroll, often at a substantial figure, thus allowing others and the publicto pay for their support. And this is only the beginning.

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

Depletion and Depreciation Allowances

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

  One of these is the oil depletion allowance. And at the outset itmust be made clear that this depletion allowance applies to far more than oil. Whileit began with oil it now includes all the products of the earth except, asCongress finally stipulated, "soil, sod, dirt, turf, water, mosses, mineralsfrom sea water, the air or similar inexhaustible sources." But it does includefarm crops, trees, grass, coal, sand and gravel, oyster shells and clam shells, clayand, 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" andis available "though no money was actually invested." 43

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

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

  1. The original investment by a company or individual in drillinga well--and under modern discovery methods three out of five wells drilled are producers--iswholly written off as an expense, thereby reducing an individual's or corporation'stax 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 dollarhe 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 consideredanother outlay, or development cost, for the oil that is in the well. Thiscost is purely imaginary, as the only outlay was in drilling the well, but it isnevertheless 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 27-1/2per cent (the figure was arrived at in 1926 as a compromise between a proposed arbitrary25 per cent and an equally arbitrary 30 per cent) of the gross income from the wellbut not exceeding 50 per cent of its net income. If after all expenses, real andimaginary, a well owned by a corporation has a net income of $1 million, the depletionallowance can halve its ordinary liability to a corporation tax and it may maintainprices as though a full tax was paid. Through controlled production of some wellsas against others, the tax rate can be reduced still further so that leading oilcompanies 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 $5million 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 percentagedepletion in 1947, another $2 million was deducted as developmerit costs. 45The process continues, year after year, through the life of the well. Income oftenfinally exceeds investment by many thousands of times.

  A widowed charwoman with a child, taking the standard deduction whichleaves her with $1,500 of taxable income pays taxes at a much higher rate, 14 to16 per cent, than do many big oil companies and oil multimillionaires in the greatland 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 writtenoff at 91 per cent while the income is taxable at 45.5 per cent. For a corporationthe expenses may be written off at 52 per cent while the income is taxable at 26per cent." 47 A company may work this percentage a good deal lowerand 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. Eisensteinexamines in detail all the excuses given for permitting the depletion and in detailshows them all to be without a shadow of merit. Instead of reproducing any of hisanalysis here, I refer the interested reader to his book. The depletion allowanceis a plain gouge of the public for the benefit of a few ultra-greedy overreachersand is plainly the result of a continuing political conspiracy centered in the UnitedStates Congress.

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

  Even more sweeping results are obtained by means of legally providedaccelerated depreciation, long useful in real estate and under the Kennedy tax lawsapplicable 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 maytake, up to 7 per cent of the investment, and treat it as a deductible item. On aninvestment of $100 million this would amount to $7 million annually.

  Because Stern traces, step by step, the process by which accelerateddepreciation operates in the real estate field to eliminate taxes entirely the readeris referred to his book. 48

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

  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 realestate 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 percent, 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 percent. Thus, capital gains are a tax-favored way of obtaining additional income bythe small number of people in the upper tax brackets.

  Something to observe is that 69 per cent of capital gains go to 8.7per cent of taxpayers in the income group of $10,000 and up; 35 per cent go to the0.2 per cent of taxpayers in the income group of $50,000 and up. 51 Thecut-rate capital gains tax, like many of these other taxes, is therefore obviouslytailored 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 millionincome group; $1.63 billion in the $50,000-$200,000 income group; $1.6 billion inthe $20,000-$50,000 income group; and $1.3 billion in the $10,000-$20,000 incomegroup. Only $2 billion was in the less than $10,000 income group. 52 Itis, plainly, people in the upper income classes who most use this way of garneringextra money.

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

  The theory behind the low-tax capital gain is that risk money fordeveloping the economy is put to work. If the capital gains tax were applied fora limited period, say, to new enterprises, giving new employment, the theory mightbe defensible. But, as it is, it applies to any kind of capital asset, to seasonedsecurities 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 riskhere is that it may go down somewhat in price for a certain period; but there isabsolutely no risk that the enterprise will go out of business. The theory on whichthe capital gains tax discount is based is that there is total risk; yet mostcapital gains are taken in connection with basically riskless properties. There wouldbe some risk attached to buying the Empire State Building for $1; one might losethe dollar in the event a revolutionary government confiscated the property. Butthe amount of risk attached to paying a full going market price for the buildingis in practice only marginal. One might conceivably lose 10 per cent of one's moneyif 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 alreadyrich with fictitious depreciation deductions. Depreciation is supposed to extendover the life of a property. Yet excessively depreciated properties continue to sellat much higher than original prices. When so much capital value is left after excessivedepreciation has been taken, there must be something wrong with the depreciationschedule. What is wrong with it is that it is granted as an arbitrary and sociallyunwarranted tax gift to big operators. It is pure gravy.

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

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

  In a case cited of a new $5 million building the tax savings to an81-percent bracket man amounted to nearly $1 million in five years.

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

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

  Depreciation charges, deducted from before-tax profits, are an increasinglyimportant 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 corporateearnings 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 biggersales, earnings and dividends for stockholders.

  "At no time during the 1948-57 period did depreciation fundsamount to more than 80 cents for each dollar of after-tax earnings, Government recordsshow," 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--theyear that the price-earnings ratio climbed so sharply--depreciation for the firsttime 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 everydollar of corporate earnings there was nearly another dollar of cash for expansionprograms or other such programs."

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

  While this tax-deductible depreciation feature is not present withthe purchase of stocks, the leverage of a loan at interest, as in the case of thereal estate mortgage, is often present. For at least half the purchase price of thestock 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 banksupplying half the money, the investor's share is $25,000. The interest he pays onthe $25,000 of bank money is itself deductible. If the stock in six months doublesin value and is sold, the price realized is $100,000. As the bank loan is paid offand the initial investment is recovered there remains a profit of $50,000 or 200per cent. On this there will be paid a capital gains tax of $12,500, leaving theprofit 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 manyhave done so. A post-tax profit of 150 per cent in as much as five years will amountto 30 per cent tax-free per year, which is not in itself a poor return. Comparedwith 5 per cent from a bank or a high-grade bond, which is taxable, it is an excellentreturn, 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 knownand not even suspected by most persons, is gained by having one's Congress pass aspecial 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 sessionsinto the tax laws the experts in the Treasury Department have no inkling of whatthey may mean. In order to ascertain their meaning they must wait until a certainreturn comes in, citing the relevant section of the law as authority for some unusualstep being taken. Then it is seen, in a flash, that the return fits the law as neatlyas a missing piece fits into a jigsaw puzzle.

  One such case among many described by both Eisenstein and Stern concernedLouis B. Mayer, the movie mogul. The experts in the Treasury Department were mystifiedupon first reading Section 1240 of the Internal Revenue Code of 1954, written inthe 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 itsgenerality. But what it meant specifically was the following: Louis B. Mayer, andonly Louis B. Mayer, may receive all future profits in the company to which he willbe entitled after retirement in one lump sum and this lump sum will be taxed at 25per 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 weregenerated he would have had to pay maximum taxes on them each year. The special billfor 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 asa spokesman for the United States Chamber of Commerce. And the section was so drawnas to be of no use to anyone else, although since then other measures have been passedthat enable certain large lump-sum settlements of pension or income rights to betreated as capital gains.

  A ludicrous sidelight of this and other tax sections is that the statessometimes copy the federal tax laws, as California copied the tax law of 1954. Butmuch of what they copy has no possible applicability to any tax situation that mayarise because some sections are specially tailored to a single situation. Sub-section2 of Section 1240, which reads "such rights were included in the terms of theemployment of such employee before the date of enactment of this title" madeit applicable only to Mr. Mayer, who alone had such particular terms before the passageof the bill. Unless one can show one had a contract containing such provisions beforethe 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 knowwhat they are doing.

  Many such special sections exist in the tax laws. of benefit onlyto a single individual or estate (one-shotters) or of continual benefit to certainindustries; and Stern discusses a number of them. To obtain such special tax sectionsfor oneself one must, obviously, have a "friend at court," somebody whohas 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 coveredeither by one-shot or multiple-shot laws. Sometimes one company is able to squeezeitself 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 pointout that entirely illusory rates are posted here as elsewhere. Many very rich men'sestates pay little or no tax. The public supposition that the big estates are beingdismantled by estate taxes, often repeated in newspapers, is entirely false.

  According to the rate schedule in the law, estates exceeding $60,000are 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 wouldpay 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 estatetaxes. But this is because they have either through personal peculiarity or unusualmoral 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, accordingto what lawyers say. They are unable to understand the steps outlined for them totake or fear they are in danger of losing something.

  An anecdote of record about the late Somerset Maugham, the well-knownand affluent writer, will illustrate the point. It was explained to Maugham thatif he took certain steps to divest himself of nominal control over his assets forthe benefit of his children, with whom he was not on good terms as such are generallyunderstood, 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 feelingof alienation who do not avail themselves of the many profitable loopholes in theestate-tax law. Henry Ford, it appears, was one such, and only the last-minute recourseto the Ford Foundation saved control of the company for his family. Ford was obviouslyeither a tenaciously grasping person, indifferent to his family, or simply couldnot understand the ins and outs of the law, which one assumes were thoroughly explainedto 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 abouta billion dollars would have been, right off, tax free. As matters now stand, onehalf of the taxable value of all estates where there is a surviving spouse is taxexempt.

  A $100 million net estate, instead of paying $67,566,150 under theposted rates, therefore seemingly pays only $32,566,150. This is quite a bit butit 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 amendmentsto the estate-tax law and, to make a long story short, we may simply show in thistable 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 actualpayments in each bracket as reported by the Treasury Department. From year to yearthe actual rates vary slightly.

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

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

                                                     Percentage    Adjusted Gross   Scheduled Rates   Actual Rates      of        Income         (Per Cent)       (Per Cent)    DiscountUnder $3,000              20              19             5$ 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 likethe actual rates on a $100 million estate. For, being sensible and knowing that hemust some day die, he has long before death begun transferring assets to his wifeand children. Let us suppose he has two children.

  He can transfer $100,000 a year to each of them at a gift-tax costof $15,525 each or 15.5 per cent, with the sums held in trust. In thirty years $9million 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-controlledfoundation, entirely tax free up to 30 per cent of annual income.

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

  But he can do even better than this. He can transfer to members ofhis family, at extremely low gift-tax rates, properties of grossly understated valuewhose true value he alone knows. Such, let us say, would be mineral-bearing but unexploitedlands, since privately surveyed and "proven." If such land had been acquiredat $100,000 it could be transferred for purely nominal taxes, and this big assetwould be in the hands of his heirs long before his death. Times of downswings inthe market, as during the Depression, are a good time to make corporate gifts. Overdepreciatedreal estate or foreign property, with a low book value but a high actual value, isanother good thing to transfer by gift. The heirs can sell it at full value withoutpaying 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 availthemselves of these provisions apparently feel they have no moral authority overtheir heirs or believe their heirs will take these properties and leave them in thelurch, as Mr. Maugham publicly feared. While such a possibility, may exist in somefamilies, even it can be guarded against by a knowledgeable tax lawyer.

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

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

  What he leaves to his wife can be left in a life trust, he namingthe ultimate beneficiary but giving her the right to change this. By doing this hehas clearly reduced the taxable amount by one half. His children ultimately takefrom the mother's estate, so at least two-thirds of the fortune is preserved. Butmuch better than this can be done by means of lifetime distributions in the formof 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 leastthree generations. The dead man can assert his will for at least 100 years. If thefinal recipients, having full control over the property, now replace it in trustaccording to family doctrine, the holdings can be preserved in trust for anotherthree 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 Englandit is nevertheless practically possible to practice serial entailment, as ClevelandAmory reports many of the old Boston families have done. Serial entailment is achievedif the third-generation recipient, loyal to family teaching, replaces the propertyin trusts.

  Estates, in fact, are not broken up by the tax laws; they grow largerthrough 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 grabbingproperty face a shrunken hunting ground.

  The whole point is this: Plenty of escape hatches exist in the estate-taxlaw 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 forcesopen their hands. For the heirs of such, the tax outlook is rather bleak, althoughby no means so hopeless as often reported. There is always the foundation escapehatch, and the foundation, all else failing, can give remunerative employment tomembers of the family, who become philanthropols or, somewhat paradoxically,philanthropist-politicians.

  In summary, it should be noticed that the rich, who contrary to ErnestHemingway 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 withoutconsiderable elitist prompting. Congress alone would not have had the Kafka-esqueimagination to devise this labyrinth of fiscal illusion. The public itself did notdemand these tax laws.

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

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

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

Taxpayer Terrorization

  While the tax rates gouge the general populace, the Internal RevenueService in recent years, by all accounts, has been conducting a highhanded reignof terror against small delinquent taxpayers, often confused by the crazy-quilt taxforms. "Tax disputes more than any other have given many harassed citizens aglimpse of the other face of Uncle Sam when he scowls," writes Washington politicalcolumnist Jack Anderson. The face of Uncle Sam that many citizens now see closelyresembles 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 taxdebtors, poor but loyal Americans, many of whom were in debt for reasons beyond theircontrol. Uncle Sam garnisheed their wages, seized their property, confiscated theirbank accounts, and deprived them of their jobs, stripping them of almost everythingthey possessed except the mere clothes on their backs. . . . More than one hard-pressedtaxpayer has found himself in trouble because of a trivial or unintentional errorin an old return, the failure of an employer to withhold the correct tax, or a personaltragedy that cleaned him out of the money he set aside for Uncle Sam. The files atInternal Revenue are stuffed with complaints from taxpayers who say they have beenhounded, bullied, and browbeaten by collectors whose methods would put a loan sharkto shame. Many a widow's last mite has been snatched from her. Men have been strippedof their livelihood and, along with it, their only means of paying the government."

  A committee of twenty-two tax lawyers and accountants appointed byChairman 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 affluentenough to be able to hire a lawyer he on the average, in appeals, has 85 per centof the tax assessments sharply reduced or eliminated.

  "Only a small percentage of individuals whose deductions aredisallowed, whether right or wrong, do use existing systems to challenge IRSauditors," writes William Surface. "Why not? 'The small taxpayer's firstand 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 itis, rather than face the tiers of faceless bureaucracy. The small taxpayer is facedwith staggering disadvantages in his dealings with the Federal Government in comparisonwith large, corporate taxpayers.'"

  The bigger taxpayers proceed otherwise. About 10 per cent of thoseassessed additional taxes request an "informal conference" with the auditor'ssupervisor, and about half of those who do this win some concession. In 1965 a totalof 26,301 corporations and individuals who were assessed additional taxes, or 1 percent, appealed their cases to the Appellate Division, an autonomous body. No lessthan 85 per cent of the cases so appealed each year have their cases settled forabout $200 million a year less than what IRS originally assessed. Beyond this thereis the Tax Court, where an average of 8,500 appeals from IRS rulings are heard eachyear. "Four out of five cases that reach Tax Court are settled without trialfor 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 mostpeople readily knuckle under in fear of being suddenly confronted, apparently, byan unbenign Uncle Sam. Anderson, Surface and various congressmen blame it on pettybureaucrats in IRS, with which judgment I emphatically disagree. IRS people are civilservice employees, all of them small people. They only follow instructions from higherup. They act only in response to orders passed down along a chain of command fromthe White House and the Secretary of the Treasury. When they get very tough and arbitraryit 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, governmentaland corporate, often tend to be overzealous in carrying out very mild orders, thusgiving the organization eventually a bad name. Mild orders from on high tend to gainstrength as they are passed down, and at their point of final execution are oftenbrutal.

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

  Whereas the Bourbons, drunk with power, proceeded forcibly againstthe peasants en masse to collect unfair taxes, in modern states, includingthe United States, the full force of sovereignty is brought to bear against singleindividuals. Intimidated in advance by any sort of authority, the ordinary citizenhere 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 guiltyto a lesser charge.

General Remarks

  What has been put down so far represents only part of the story ofshoving the tax burden onto the patriotic labor force by the finpols and corp-polswith 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 profitablemisappropriation, largely on the excuse of "defense," more recently of"welfare," is put very conservatively; a thorough direct examination ofwhat is obtained by the expenditures would probably show a larger percentage.

  A careful comparison of the fiscal situations in the United Statesand eighteenth-century France, which was under candid autocratic rule, shows thatthe American populace is being short-changed far more efficiently than was the Frenchpopulace under Bourbon rule. Indeed, the American process is more effective becausemost of the people are not even aware they are being trimmed under the twin bannersof anti-Communism and anti-Poverty; most rank and file citizens would be the firstto deny it vehemently while bursting into strains of Yankee Doodle. The French werefully aware of the process because many of their taxes were collected by force, oftenafter pitched battles between the peasants and the troops. The American process ofmaking the labor force shoulder most of the tax burden takes place in much subtlerways, 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 beforereceived, 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 revenueit says it needs, even for waging fierce undeclared wars of its own bureaucraticmaking. What revenue the government decides not to take from the influential finpolsit must take from the poor and needy over which the pubpols weep and waillike 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 attendantcost 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, thoseshrinkages 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             $ 1.5intangible oil and gas      drilling deductions                                .5Excessive expense account  Deductions                                         .3Real estate depreciation                             .2Dividend credits                                     .5Capital gains deductions          6.0               2.4Estate tax evasions              12.5               2.9Interest on tax-free bonds        2.0               1.0Undistributed 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 billionof taxes which it might properly pay. Nor is this all, because it participates intax loopholes available to others.

Lump-Sum Tax Evasions in Which the WealthyParticipate 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              $ .9Nontaxable income from social secur-  ity, unemployment and veterans'  benefits, etc. (except for unemploy  ment benefits, the wealthy partici-  pate to some extent)                    11.9               3.6Rent equivalent (deducted mortgage  interest, etc.) on owned homes  (greatest advantage to wealthy as  residents and as real estate opera-  tors)                                    6.5               2.0Itemized deductions (most profitably  used by wealthy)                        43.0               11.9Income-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 WealthyProbably Have Little Participation
                                      Shrinkage of         Cost to                                        Tax Base           Treasury                                    (billion dollars) (billion dollars)Fringe benefits (some participation by  well-paid executives)                  $ 9.0               $3.0Interest on life insurance savings         1.5                 .4Sick pay and dividend exclusions  (some participation by wealthy)           .9                 .3Standard deduction                        12.0                2.6Unreported dividends and interest  (mostly small people)                    3.7                 .9            Totals                       $27.1               $7.2

  According to this approximate computation, which would vary in detailfrom year to year, there is a total tax diversion from the Treasury of $52.7 billiona year. This diversion must be compensated for, with national budgets now risingabove $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 paymost of income and excise taxes. The rates on the lower incomes are far higher thanthey 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 thewealthy participating by individual proportions most extensively) evades paying $23.4billion (for which most of their members pay elsewhere). The wealthiest class asa whole evades directly a total of $22.1 billion, which it unloads on the impecuniousand less pecunious classes.

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

  If anyone believes there is suggested here too high a figure of whatis really owed in taxes by the wealthy, it should be recalled that the upper 10 percent of the population owns all of the nation's productive private propertywhile 1 per cent of the population owns more than 70 per cent of it. Such being thecase one would not reasonably expect that a single employed person who is paid $1,000in a year--about $20 a week--would be obliged to pay a tax of $12. Nor would oneexpect 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 electionsnow require the spending by the political parties of more than $100 million. Thisis without considering the many costly local elections in off years or parallel withthe national elections. The rising figures, often cited, are considered stupendous.These campaign funds are supplied by the wealthy and the propertied who, it shouldbe clear, get a manyfold return on what they pay for. As the political parties (indefault of effective popular participation) are to all practical purposes theirs,they obtain preferential treatment from government. So it has been all down throughhistory. The United States is not an exceptional case. It is a typical historicalcase, contrary to what the Fourth of July orators would have one believe, exceptthat 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 thewartime tax laws; in 1945 the total stood at 49,751,000. 61

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

  By far most of these taxes are withheld from salaries and wages, earnedincome. In 1962 there was withheld $47.583 billion compared with $15.317 billionnot withheld; in 1963 it was $51.839 billion against $15.205 billion.62The income tax has been transformed largely into a permanent wage tax, a Gargantuanpolitical joke on the workers.

  One often hears of tax-cheats, individuals and organizations, thatare proceeded against unceremoniously by the government. As this chapter should makeblindingly clear, however, the greatest tax cheat (perhaps in all history) is theUnited States government itself, which by means of the federal tax code stupendouslycheats 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 abemused 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 putinto 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 prospectof 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 ofthe advantaged.

  A colossal historical inequity like the American tax structure, amechanism subtly fastened on a people with a view to extracting from them the produceof their labors not necessary for subsistence, is never removed by means of electionsor 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 considerablepower at their command to defeat all substantial reforms.

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

  These remarks, needless to say, are purely descriptive, intended tobring out the very serious purpose underlying these laws. This earnest purpose, whichis to run a vast society in a certain way for certain hereditary beneficiaries andtheir retainers and emulators, cannot be lightly pushed to one side, particularlywhen it is well wrapped in the accepted ideology of freedom. Anyone who proposedsuch action at this time, indeed, would be very foolish, as the populace is hardlyaware-and shows no signs of wishing to be aware--that it is fastened in a straitjacketonly slightly less tight than in many other ideologically unhallowed societies thatcould 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 whetherhe fails or succeeds he will get a sound political education. 63

  (Note: The reader should not suppose that this chapter is a full treatmentof the tax situation. It touches only the highlights and allots no space at all tomany publicly costly ludicrous oddities such as the decision allowing Kathleen Winsorto pay 25 per cent capital gains taxes for the sale of her book Forever Amberbecause under a tax-court ruling she was not a professional writer and had writtenthe book "primarily because she enjoyed the research and writing which wentinto its composition. . . ." The interested reader should refer to sources citedand pick up enlarged bibliographies from them. He will soon see that everything inthis 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 suchas England, Western Germany or Japan do not have similar tax structures. The sourceof 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 otherfavors in return for personal emoluments. This the legislators do, in stages andby bits and pieces, resulting in an increasingly peculiar tax structure that maybe subtly undermining the capitalist system itself.

  Capitalists clearly would be paragons of unusual virtue if they didnot, for inner competitive reasons, take full advantage of the fact that a politicallyinept public had placed into strategic offices men who are deviously accommodatingon a quid pro quo basis. If capitalists--and a gullible public--were facedby a preponderance of true public men in office they would hardly seek to have writteninto the laws these various tax monstrosities. But the kind of electorate one findsin the existing political system is unable to insure the presence in office of apreponderance of true public men. Instead the electorate gives us people of the stripeof Senator Thomas Dodd, Congressman Adam Clayton Powell, Bobby Baker, the late SenatorRobert Kerr, Judson Morhouse, Senator Everett Dirksen et al. The basic causesobviously lie out in the broad electorate.)

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