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November 12, 2013
Piling Up Tax-Free Wealth
By Shamus Cooke
As U.S. corporate profits soar to record highs, food stamps for the neediest were
quietly cut. The politicians who are demanding endless cuts to social programs —
Democrats and Republicans alike — insist that the U.S. is broke, all the while
conveniently ignoring the mountains of tax-free wealth piling up in the pockets of the
This newest flood of cash for the nation's wealthiest 1% is a blatant government
subsidy: the Federal Reserve continues to pump out an extra $75 billion a month, the
vast majority of which fattens the already-bursting overseas bank accounts of the rich.
Since Obama has been president this pro-corporate policy has helped funnel 95
percent of the nation's new income to the wealth-soaked rich.
And while it’s true that the global super rich have an estimated $32 trillion
[!] stashed away abroad in off shore tax havens, an even newer way to avoid taxes
has gripped the endlessly-greedy minds of U.S.-based billionaires.
Instead of shielding themselves behind the classic 'C' corporation structure — and all
the burdensome taxes and regulations associated with it — two-thirds of new
corporations have "evolved" into pseudo-legal "partnership" structures, commonly
referred to as "pass throughs,” the idea being that the corporate-partnership instantly
passes the profits through to the shareholders, no corporate tax necessary.
The most common form of pass throughs are "innovative” variations of a Limited
Liability Company, a tax structure created in 1975 for narrowly regulated purposes.
But now rich investors are performing accounting and legalistic somersaults to exploit
the tax structure, practices that were illegal before the regulators were "captured" by
the big banks.
The pro-billionaire Economist magazine recently discussed the pass through fad:
"A mutation in the way companies are financed and managed will change the
distribution of the wealth they create...The corporation is becoming the
distorporation...More businesses are now twisting themselves into forms that allow
them to qualify as pass throughs."
So, for example, imagine that nine rich guys get together and call themselves a pass
through corporation of some variety. They do this because they want to avoid
personal liability in case things go awry. Their partnership only buys and sells stocks
and goes on to make billions, while paying zero corporate taxes. When their risky bets
go bust and the partnership is sued by hoodwinked investors, the company instantly
declares bankruptcy, since all profits were quickly "passed through.” The partners
(the nine guys) cheerfully go home to swim through their sea of cash.
In real life shady pass throughs make massive wealth. Richard Kinder, who co-
founded the biggest pass through, named Kinder Morgan, personally received $376
million in dividends last year alone [!], according to the Economist.
The pass through fad is on track to becoming the dominant way that the super rich
get together to make huge amounts of money — pass throughs were 63 percent of all
corporate profits in 2008, and are likely higher now, since many of the big private-
equity companies making a killing by the cheap fed dollars are organized under pass
through umbrella structures.
There is a huge society-wide risk for this type of behavior, which resembles the
reckless gambling that destroyed the economy in 2008. As an ever-larger share of
wealth is poured into these risky, non-regulated vehicles, the potential grows for them
to self-destruct and pull down the broader economy with them. Pass throughs —
which include most private-equity firms — function "efficiently" when the government is
handing them cheap money; when interest rates go up, the pass throughs go bust,
with predictable outcomes.
"But wait," the billionaire will protest, "we pay individual taxes, which help fund social
services.” Not necessarily. If the billionaire investor paid their legal obligation of
"capital gains" taxes, they'd already be paying far less than the average worker. But
the pass-through billionaires excel at avoiding all taxes. The Economist again:
"For a [pass through] partner a payout can be considered merely a return of capital
rather than a profit, and consequently no tax is due until the sale of the underlying
security. When tied to nuances of estate law, this may mean no tax at all."
This type of blatantly criminal behavior used to be actually illegal, but as Wall Street
bought Congress, the rules were either bent or ignored.
The Economist explains:
"The limitations on becoming [a pass through] seem to be tied more to legal dexterity
[!] and influence [buying politicians] than any underlying principle. Politicians want to
extend the benefits of [pass through] partnerships to industries they have come to
favor either on the basis of ideology [of the corporate type], or astute lobbying
[bribery], or a bit of both."
The rest of society is affected because public services are being starved of funds,
while these new pass throughs face vastly less regulation than the standard C
corporations, and push wealth inequality to new heights while threatening a deeper
Historically, government began regulating corporations because everyone realized
the profound effects these institutions were having on the rest of society; the nation
was becoming more unequal, the labor force more exploited and the environment torn
As the super wealthy organized themselves into corporations they took most of society’
s wealth with them; government realized that a semi-functioning country would need to
tax these institutions and regulate their behavior, since the "natural" behavior of the
capitalist — greed — was capable of pushing the rest of society into the dregs.
The new pass through fad is also indicative of the current state of U.S. capitalism;
instead of investing profits in a company to buy machines or hire new workers, all the
cash is either sitting in overseas bank accounts, or is being instantly funneled, via
pass throughs, into the hands of ever-richer billionaires, who are proving to everyone
that there is no bounds to the amount of cash they can accumulate. Where there are
barriers to accumulation (regulations and taxes), they will supersede them while
paying politicians of both major parties to ignore it or make it legal.
This dynamic occurs, in part, because the wealthy are basically refusing to invest in
the real economy, as they fear the unstable economic conditions are not safe enough
to make long term investments, which they believe won't yield long term higher rates
of profits. Safer to speculate on risky stocks, pocket the money and be the first one
out when things go bust, as they did in 2008.
Of course the big name C corporations are up to their eyes in fraud too. Apple made
big news when it only paid 2 percenttaxes on $74 billion in profits
, by "declaring" its profits in Ireland, a corporate tax haven.
This occurs while other giant companies simply use clever accounting tricks to pay
zero taxes, including giants like WellsFargo, Boeing, Verizon and General Electric
. In fact, General Electric even finagled a rebate.
When it comes to oversea tax havens, it's estimated that the U.S. national budget is
annually starved of $280 billion in tax revenue.
Politicians have been struggling with ways to deal with the problem, since even in their
mind some amount of tax collection needs to happen, if only to fund the military,
provide more subsidies to corporations, and please the public by appearing to try to
reduce the billionaire's obscene behavior.
One popular idea among the politicians is to declare a corporate "tax holiday,” where
the trillions of off-shore profits can be ceremoniously brought back to the U.S. while
the feds look the other way. The idea is that, once the money is actually back in the U.
S., the wealthy will want to spend it on something which will eventually help the
economy — trickle down economics at its finest.
What seems certain to happen is that lowering corporate taxes will be a central piece
of any "grand bargain" that eventually emerges, since there is a clear bi-partisan
consensus that corporations need to pay lower taxes.
Some argue that if corporate taxes are low enough — and regulations removed — the
corporations will reward the nation by not stockpiling their profits abroad and not
creating pass through loopholes.
Of course all of this implies that the wealthy have a stranglehold over the U.S.
economy. It's telling that politicians want to deal with corporate tax evasion by lowering
the corporate tax rate, instead of actually sending the IRS after them and throwing
them in jail, as they do with working and middle class people.
The above dynamics create an ever-increasing wealth inequality that claws at the
thinning strings holding society together. The bankruptcy and social disintegration of
Detroit is a foreshadowing event for the rest of the country, unless this dynamic is
When the next crash happens the nation will have learned its lessons: the big banks
and wealthy investors who destroyed the economy in 2008 are back at it, encouraged
by Obama's pro-corporate behavior and the Federal Reserve’s money flooding.
It's becoming increasingly obvious that breaking the power of the super wealthy is the
first step towards balancing the budget, job growth, protecting the safety net, and
creating a semblance of a rational society. Until then the U.S. will lurch from one crisis
to another, while blaming everyone but the real culprits.
Shamus Cooke is a social service worker, trade unionist, and writer for Workers
) He can be reached at email@example.com