Scott Klinger

Working people are forced to sacrifice for the common good. Why aren't the titans of capitalism?

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The Cavernous Divide

Two magazine covers stood out in poignant contrast on newsstands last week. Forbes magazine released its 29th annual listing of the world's billionaires. Time magazine's cover story wondered "How to End Poverty."

It was a good year for the global billionaires' club. Their ranks grew to 691, up 17 percent from the previous year. Collectively, the wealth of the world's billionaires reached $2.2 trillion, up more than 57 percent over the last two years.

Poverty is growing as well. Time reports that nearly half of the world's 6 billion residents are poor. Over one billion of them subsist on less than $1 a day. In the United States, according to the U.S. Census Bureau, the number of impoverished Americans rose 3.7 percent in 2003. The number of children living in poverty rose 6.6 percent.

Forbes seeks to explain the billionaires' success by noting that a majority of those on the list are "self-made." Forbes' web site features an interactive quiz that asks, "Do you have what it takes to become a billionaire?" and proceeds to explore things like marital status and hobbies. The idea is that many billionaires made it on their own.

But to suggest that membership in the growing billionaires' club requires only a combination of hard work and character traits ignores some dramatic shifts in global economic rules that explain the cavernous divide that has developed between the very rich and the very poor.

Tax rates have fallen on upper-income citizens and corporations worldwide. Fifty years ago in the United States, the highest marginal income tax rate was 91 percent; today it is 34 percent. As recently as 1979, taxes on capital gains from the sale of stock, real estate and businesses were 35 percent; today they are 15 percent. Corporate taxes as a percentage of the U.S. economy have shrunk from 4.1 percent of Gross Domestic Product in 1965 to just 1.5 percent in 2002. While corporate taxes have declined throughout the world, they have plummeted in the United States, leaving only Iceland among industrialized countries with a lower corporate tax burden.

Several of the wealthiest billionaires capitalized on public assets and made their fortunes by buying formerly public assets. This was the case with Mexican Carlos Slim Helu, the world's fourth richest man, who used inherited wealth to buy a substantial share of Mexico's privatized national telephone company. U.S. billionaires Bill Gates, Paul Allen and Steve Ballmer of Microsoft, and Larry Ellison of Oracle would not be in Forbes' top 20 billionaires had the U.S. government not invested tens of billions of public dollars developing computers and the internet.

Some billionaires' fortunes rest upon paying their employees poverty wages. Such is the case for the Walton family (numbers 10 through 14 on the Forbes list.) Wal-Mart is the largest private employer in the world. Many of its U.S. workers are so poorly paid that they must rely on food stamps and other forms of public assistance to get by. Such forms of government aid represent an indirect government subsidy to corporations whose business model does not include paying employees enough to live on. Worldwide, billions are gained by outsourcing service, production and manufacturing functions to workers who labor in sweatshop conditions in countries like China.

The role of government policy in determining who has wealth and who does not continues to expand. During the recent debate on the bankruptcy bill, federal lawmakers refused to close the "asset protection trust" loophole increasingly used by millionaires and billionaires to shelter mansions and other assets from creditors in bankruptcy. Those same lawmakers weakened protections that protect the family homes of ordinary people from creditors during bankruptcy.

Forbes is wrong; none of the billionaires did it alone. The chasm between rich and poor is not a divide between who has intelligence and drive and who does not. Rather it results from a society whose rules allow some to amass wealth greater than could be enjoyed in a thousand lifetimes, while they deny others enough money to scrape through just one lifetime.

Taxing Mom and Pop

Why can the large national chain store afford to offer lower prices than the locally owned small business? Taxes are part of the answer. Small businesses pay too much in taxes, and big businesses pay too little. Why should Annie's Family Restaurant pay a higher share of their revenue than McDonald's?

More than 117 million people, representing 56 percent of the American labor force, work for businesses that employ less than 500 people. Small business owners face many challenges when competing with global giants. Major corporations get deeper discounts on everything from merchandise to health insurance for their employees to fees charged on credit card transactions to interest rates on borrowed money.

Why then should the federal government add to the woes of small business owners by taxing the largest businesses at rates that are in many cases less than half the rate paid by small businesses? Most small businesses are sole proprietorships and, as such, the owners pay taxes at their personal tax rate. A married small business owner whose store made between $56,800 and $114,650 in profits in 2003 would have been taxed at a 25 percent rate. A more successful small businessperson, one whose business generated more than $312,000 in profits, would pay tax at a 35 percent rate.

In contrast, the federal corporate tax rate is 35 percent, but few large corporations pay anywhere near that amount. Armies of corporate lobbyists, tax attorneys, and accountants have won new laws and mined the existing tax code for clever deductions and tax credits that have dramatically reduced the tax rate of America's largest businesses. The nation's corporations were estimated to pay less than15 percent of their net income in federal taxes last year, according to Citizens for Tax Justice, a widely respected non-partisan research organization.

The American personal income tax is a progressive system that taxes those with the highest incomes at the highest rates. The American corporate tax system has evolved in an opposite direction, whereby smaller neighborhood businesses pay higher tax rates than giant continent-hopping multinationals. When big businesses don't pay their fair share of taxes, small businesses that remain the economic backbone of our society suffer, putting tens of millions of jobs at risk.

As federal budget writers struggle with exploding deficits by cutting programs that serve human needs, corporate subsidies continue to grow unabated -- more than $125 billion each year -- $42 billion more than the federal government spent on education in 2003. These corporate handouts are not going to struggling businesses that need taxpayers' help to survive, but rather to some of the most profitable and successful businesses in the nation: drug manufacturing, insurance, oil drilling, and commercial real estate to name a few.

In the 1980s, revelations that dozens of American businesses with billions of dollars in profits were paying no taxes at all drew public anger. In response, President Reagan in 1986 cracked down on corporate tax shelters and reduced corporate subsidies to a fraction of what they had been. A generation later, the problem has reemerged, once again weakening the competitive position of small business and starving the federal budget of much needed revenues.

Last fall, President Bush called for a reduction in the tax rate paid by small business owners to 32 percent, a small step toward a progressive corporate income tax. The President recognizes, at least in theory, that a lower corporate tax rate on small business would help balance the many other cost advantages available to larger businesses. The problem is that the President failed to address the reality that large companies would still, on average, pay corporate taxes at less than half the rate of small businesses.

Corporate tax reform, properly done, can reinvigorate America's small businesses, restore public confidence in the fairness of the tax system, generate much needed revenues to sustain education, housing, health care and other needs upon which business and citizens depend. The largest businesses will have to pay more, but the millions of other businesses in America would end up paying a lot less.

Scott Klinger is the co-director of Responsible Wealth, a national network of affluent Americans advocating a fairer economy.

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