David Cay Johnston

New data on U.S. incomes, poverty, pensions and philanthropy all show a common economic reality — women are still getting shortchanged. Do men care?

Men’s median total income in 2010 was $1.54 for each dollar women received, my analysis of new U.S. Census data shows. The median — half make more, half less — was $32,137 a year for men, $20,831 for women.

Ignoring investment and other income, at the median men were paid $1.29 to the dollar earned by women in 2010. Men made $47,715 a year, women $36,931, a difference of $207 per week.

Among nonprofit executives and managers, men make much more than women in the same occupations.

Women run a majority of organizations with budgets under $1 million, but as budgets grow the ranks of women shrink. At nonprofits with budgets of $50 million or more, only one in six is run by a woman and as a group those women are paid 25 percentage points less than men, according to the 11th annual nonprofit pay study by Guidestar, a project I long ago urged on its founder.

All of which raises a question: Why do men, especially married men, put up with this? Why aren’t men in the vanguard of demanding equal pay for women?

It is unfair to the women they love. Viewed in purely selfish terms, pay discrimination limits a family’s resources.
And what about fringe benefits? Many couples lose the value of a second health or other benefit plan because plans designed in a one-income era are often incompatible with one another.

TWO GENERATIONS
We have been through two generations since women began to break out of the narrow list of white-collar occupations readily open to them — teacher, nurse, librarian, secretary.

Some women now work in better paid blue-collar jobs that long had a 100 percent male quota, including machinist, mechanic and stevedore.

The first women who fought to become cops are now retired, some with granddaughters patrolling the streets. Women captain jetliners, while men serve coffee to passengers. My wife runs a quarter-billion-dollar charitable endowment, the kind of job she was bluntly told three decades ago a woman would never hold.

While the pay gap has narrowed some, the official data still show that whether they are sales clerks or CEOs, servers or surgeons, women overall make less than men doing the same work.

Yet women are still more likely than men to be poor, especially in old age, the new census data show. Among single women, one in nine lives in extreme poverty with income below half of the poverty line.

Before Ms. magazine was a gleam in Gloria Steinem’s eye, men had quite a deal. Married middle-class men often controlled the purse while enjoying the pleasures of a full-time homemaker who might work a few hours here and there for “pin money” they could spend on themselves. Mothers of small children seldom worked full-time.

EXTRA MONEY AT A PRICE
Married couples with children in 2009 worked 492 more hours than in 1979, a 15 percent increase, census data analyzed by the Economic Policy Institute shows. The extra money comes at a price: less time for the joys of parenting, coupling and community engagement.

Why have men quietly given up all those perks, and the power that goes along with being sole breadwinner, for three-quarters of an extra paycheck? For fathers, that can mean half an extra paycheck or less once childcare costs are covered.

Since most men’s wages have been flat to falling it takes two incomes to get by. IRS data show that average income in 2009 was back at the 1997 level when inflation was taken into account. In 2010 median household income fell again, new census data show.

The women’s movement encouraged self-reliance — not being dependent on the goodwill and good health of a husband — as well as self-realization. Equal pay for equal work was central.

The price of pay discrimination stalks retirement, too, since less pay means less in old age. Among Baby Boomers, the youngest of whom are now 47, single women have a retirement savings shortfall nearly twice that of single men, the Employee Benefits Research Institute estimated.

Among men age 65 or older, median income in 2009 was $25,409, two-thirds more than the $15,209 median for women, the Congressional Joint Economic Committee reported in April. Retired men averaged nearly twice as much from pensions as women ().

Married men and fathers can help close these economic chasms. Will self-interest motivate us to challenge enduring economic discrimination against our wives and sisters, our mothers and daughters? Or will the gender income and pay gaps still be around two generations from now? (Editing by Howard Goller)

PHOTO: A worker installs parts onto the dashboard for the new Chevrolet Cruze car as it moves along the assembly line at the General Motors Cruze assembly plant in Lordstown, Ohio July 22, 2011. REUTERS/Aaron Josefczyk

By David Cay Johnston
The author is a Reuters columnist. The opinions expressed are his own.

The U.S. tax debate tends to focus on the top 1 percent — their share of income taxes and their tax rates. Anti-tax groups encourage this focus, now embraced by the Occupy demonstrators on Wall Street and across America.

Problem is, the top 1 percent is a very misleading measure of who pays federal income taxes. It mixes doctors and billionaires, masking the taxes paid by the middle class and the affluent.

Everyone seems to know that about half of Americans paid no income taxes in 2009 and that the top 1 percent paid about 37 percent of the income taxes.

But how many people know that households making less than $75,000 collectively paid more federal income tax than those making $1 million or more?

Or that income taxed at the next-to-lowest rate, 15 percent, brought in more government revenue than all capital gains taxes plus the two top brackets, which apply only to the top 2 percent of earners?

Or that almost half of the top 1 percent made less than $500,000? Or that five out of six made less than $1 million?

The fact is that the government relies far more on the bottom 99 percent than the top 1 percent for federal income taxes.

In 2009, the income entry point for being in the top 1 percent was slightly less than $344,000. To most Americans that is an unimaginable deal of money. But let’s put that in perspective.

DISPARITY AT VERY TOP
The median income taxpayer — half made more, half less — made slightly less than $33,000 that year (and their average adjusted gross income was under $15,300, or less than $300 per week). The median income taxpayer would need 10.6 years to earn as much as someone at the low end of the top 1 percent.

Far greater disparities exist within the top 1 percent.

The top 1 percent includes people who made many hundreds of millions of dollars and perhaps some with incomes of more than $1 billion, official government data will show when it is released in two years.

Economically, those just entering the top 1 percent have nothing in common with those in the top tenth of the top 1 percent. Someone at the entry point for the top 1 percent would need 29 years to make $10 million, and more than 2,900 years to make $1 billion.

The point is that while all those in the top 1 percent are certainly well off, the vast majority still go to work every day.

Almost half of the top 1 percent, or 1.4 million taxpayers, make $344,000 to $500,000. More than 1.1 million make $999,999 or less.

The bottom half of the top 1 percent rely on salaries for about two-thirds of their income. They get modest income from capital but rely mostly on their labor, giving them more in common with Joe Sixpack than Warren Buffett.

ONE IN A THOUSAND
A much better measure than the top 1 percent would be the top tenth of 1 percent. The government does not break out this group, but Emmanuel Saez, a University of California economist, and others have.

The Saez analysis of tax return data shows that through 2008, the top one-in-a-thousand taxpayers had average income in recent years that ranged between $5.2 million and $7.5 million annually. Just investing that much in corporate bonds will produce enough interest income to keep someone in the top 1 percent.

Furthermore, inside the top 1 percent, those with the highest incomes pay the lowest tax rates.

The top 1 percent paid an average income tax rate of 24 percent in 2009, IRS data shows. That is almost exactly the rate paid by those making $500,000 to $1 million. Those who made $1 million to $10 million paid a higher rate, 26 percent. But those making more than $10 million paid a significantly lower rate, 23.3 percent.

The top 400 taxpayers paid a much lower rate. On an average income of $270 million each, their effective federal income tax rate was 18.1 percent in 2008, the latest year for which we have IRS data. A single worker earning less than $90,000 pays a higher rate than that.

In a country with more than 300 million people, 400 taxpayers is a minute number. Yet those 400 made 1.3 cents out of every dollar of the country’s total adjusted gross income, almost doubling their share of national income since 2002.

Continuing to focus on the top 1 percent will mislead us about who pays federal income taxes. That focus should be on the middle class and the upper middle class, and then on the top tenth of 1 percent. And on whether our tax system is helping create wealth and jobs or destroying them.  (Editing by Kevin Drawbaugh)

Anyone who wants to understand the enduring nature of Occupy Wall Street and similar protests across the country need only look at the first official data on 2010 paychecks, which the U.S. government posted on the Internet on Wednesday.

The figures from payroll taxes reported to the Social Security Administration on jobs and pay are, in a word, awful.

These are important and powerful figures. Maybe the reason the government does not announce their release — and so far I am the only journalist who writes about them each year — is the data show how the United States smolders while Washington fiddles.

There were fewer jobs and they paid less last year, except at the very top where, the number of people making more than $1 million increased by 20 percent over 2009.

The median paycheck — half made more, half less — fell again in 2010, down 1.2 percent to $26,364. That works out to $507 a week, the lowest level, after adjusting for inflation, since 1999.

The number of Americans with any work fell again last year, down by more than a half million from 2009 to less than 150.4 million.

More significantly, the number of people with any work has fallen by 5.2 million since 2007, when the worst recession since the Great Depression began, with a massive taxpayer bailout of Wall Street following in late 2008.
This means 3.3 percent of people who had a job in 2007, or one in every 3330, went all of 2010 without earning a dollar. (Update: the original version of this column used the wrong ratio.)

In addition to the 5.2 million people who no longer have any work add roughly 4.5 million people who, due to population growth, would normally join the workforce in three years and you have close to 10 million workers who did not find even an hour of paid work in 2010.

SIX TRILLION DOLLARS
These figures come from the Medicare tax database at the Social Security Administration, which processes every W-2 wage form. All wages, salaries, bonuses, independent contractor net income and other compensation for services subject to the Medicare tax are added up to the penny.

In 2010 total wages and salaries came to $6,009,831,055,912.11.

That’s a bit more than $6 trillion. Adjusted for inflation, that is less than each of the previous four years and almost identical to 2005, when the U.S. population was 4.2 percent smaller.

While median pay — the halfway point on the salary ladder declined, average pay rose because of continuing increases at the top. Average pay was $39,959 last year, up $46 — or less than a buck a week — compared with 2009. Average pay peaked in 2007 at $40,764, which is $15 a week more than average weekly wage income in 2010.

The number of workers making $1 million or more rose to almost 94,000 from 78,000 in 2009. However, that was still below some earlier years, including 2007, when more than 110,000 workers made more than $1 million each.
At the very top, the number of workers making more than $50 million rose in 2010 to 81, up from 72 the year before. But average pay in this group declined $4.5 million to $79.6 million.

What these figures tell us is that there was a reason voters responded in the fall of 2010 to the Republican promise that if given control of Congress they would focus on one thing: jobs.

But while Republicans were swept into the majority in the House of Representatives, that promise has been ignored.
Not only has no jobs bill been enacted since January, but the House will not even bring up for a vote the jobs bill sponsored by President Obama. His bill is far from perfect, but where is the promised Republican legislation to get people back to work?

Instead of jobs, the focus on Capitol Hill is on tax cuts for corporations with untaxed profits held offshore, on continuing the temporary Bush administration tax cuts — especially for those making $1 million or more – and on cutting federal spending, which mean destroying more jobs in the short run.

At the same time, nonfinancial companies are sitting on more than $2 trillion of cash — nearly $7,000 per American — with no place to invest it profitably. This money cannot even be invested to earn the rate of inflation.
All this capital is sitting on the sidelines waiting for profitable opportunities to be invested, which will not and cannot happen until more people have jobs and wages rise, creating increased demand for goods and services.

More of the same approach we have had for most of the last three decades and all of the last ten years is not going to increase demand, create more jobs or enable overall prosperity. In the long run, continuing current policies will make even the richest among us less well off than they would be in a robust economy with government policies that foster job creation and the capital investment that grows from increased demand.

On top of this are the societal problems caused by something the United States has never experienced before, except during the Depression — chronic, long-term unemployment.

Having millions who want work go years without a single day on a payroll is more than just a waste of talent and time. It also can change social attitudes about work and not for the better.

The data show why protests like Occupy Wall Street have so quickly gained momentum around the country, as people who cannot find work try to focus the federal government on creating jobs and dealing with the banking sector that many demonstrators blame for the lack of jobs.

Will official Washington look at the numbers and change course? Or do voters need to change their elected representatives if they want to put America back on a path to widespread prosperity?
(Editing by Kevin Drawbaugh)

By David Cay Johnston
The opinions expressed are his own.

Last year a fourth of the nation’s oil pipelines earned excessive profits, at up to seven times the rates allowed these regulated monopolies, according to an explosive analysis prepared by a former general counsel for the U.S. Federal Energy Regulatory Commission.

R. Gordon Gooch, the former counsel, alleges in his Oct. 3 study, for instance, that Sunoco’s Mid-Valley Pipeline, which carries crude oil from Texas to Michigan, earned a 55 percent return on assets. That is seven times its authorized profit margin, based on a calculation derived from an accounting report the company filed with FERC.

Three other regulated monopoly pipelines earned more than 40 percent on their assets, while another three earned more than 30 percent, an examination of their FERC filings by Reuters shows.

To put that level of profitability into context, overall nonfinancial businesses earned a 6.7 percent after-tax profit on their assets last year, the latest Bureau of Economic Affairs report shows.

In a competitive market, profits are unlimited except for the discipline of competition. Because there is no market to discipline monopolies, Congress created FERC, which sets prices, known as rates, for pipelines and some other energy monopolies.

FERC is supposed to balance the interests of customers and owners, making sure customers are charged only “just and reasonable” rates and that owners earn “just and reasonable” profits on top of recovering actual costs.

‘JUST AND REASONABLE’
The test of whether that standard is met is revealed each year on a document, filed to FERC under oath, known as Page 700. Line 9 shows how much it cost a pipeline to provide service, including a generous allowance for taxes and its profit. Line 10 shows actual revenues.

The two lines ideally should match, except for minor timing differences. When they do, it indicates the “just and reasonable” standard has been met. If Line 10 is larger, it shows extra profits.

Last year, 47 of the nation’s 175 regulated monopoly oil pipelines reported significantly larger figures on Line 10 than Line 9, as Gooch details in his analysis.

Gooch submitted his findings as part of a FERC rulemaking procedure. He was FERC general counsel from 1969 to 1972. Then he enjoyed a long career as a litigator in pipeline rate cases on behalf of oil companies, known as shippers, who pay pipeline companies to transport their liquids, crude and refined.

Having covered these issues for four decades, I think Gooch’s position here is solid as can be.

The rulemaking at issue would affect how costs are calculated on annual Form 6 reports, of which Page 700 is the most significant part.

“If this rulemaking is adopted as is,” Gooch wrote, “there will be no effect on the unlawful revenues, no risk to the public utilities at all. In fact, their ability to collect unlawful excess profits with impunity may be enhanced.”

FERC spokesperson Mary O’Driscoll said that since Gooch’s analysis was filed in a rulemaking proceeding, the commission will respond in the proceeding. She said, “The commission is not going to speak outside of the proceeding.”

None of the five FERC commissioners responded to my telephone calls to their offices. Only Sunoco Logistics, controlling owner of Mid-Valley Pipeline, returned my calls.

‘APPROVED BY FERC’
The key defense to the excess profits charge is shown in what Sunoco Logistics told me. Spokesman Joe McGinn said its rates “are approved by FERC and follow all FERC rules and guidelines.”

And that is the scandal. Not just that companies are earning excess profits, but that FERC seems to look the other way and enable this.

Gooch argues that the rulemaking proceeding he commented on in his analysis would institutionalize excess rates and make it difficult for a court to stop oil pipeline owners from collecting more profit than is lawful.

Retired now, Gooch has become a full-time reformer trying to stop what he sees as rules designed to destroy the “just and reasonable” tenet of utility regulation.

The issues here are not academic. Unless controlled, monopolies can cause massive economic damage. Excess profits amount to a tax on the public for private gain.

Utilities have been promoting the theory of deregulation because they know it lets them, as monopolists, escape the rigors of both regulation and competition.

Consumers bear the burden of these excess profits every time they pump gasoline or fly in a jetliner.

Accounting reports show that oil pipeline profiteering has gone on for years under administrations of both parties.

FERC is a small federal agency whose decisions exert a broad impact on the economy, yet it gets little news coverage. Commissioners and key staff come from, and go back to, the energy industries they regulate.

FERC’s budget is financed not with taxes, but fees paid by the energy industries.

On the “just and reasonable” standard, a controlling decision by the Court of Appeals for the District of Columbia in 1984 instructed FERC that “not even a little unlawfulness is to be tolerated.”

Yet in 2005 FERC granted the SFPP pipeline a rate hike nine times greater than its increased costs, Gooch wrote.

THE OCTOPUS
The SFPP pipeline is a corporate descendant of the railroad monopolies that caused California so much economic damage a little more than a century ago that they were known as The Octopus.

Despite the easy-to-spot evidence of profits that are far in excess of authorized rates, earlier this year the commissioners gave all 175 pipelines the freedom to raise rates by 6.8 percent per year compounded for the next five years.

Sunoco’s Mid-Valley Pipeline was entitled to a profit of $3.9 million in 2010, but comparing the two lines shows an actual profit seven times that large, more than $27 million.

The latest annual pipeline rate hike was approved in a way that makes consumer challenges virtually impossible.

A general rate case would open every pipeline expense, including taxes and profits, to scrutiny. The commissioners avoided that by granting an indexed rate increase to all pipelines with no proof of higher costs required.

This latest index rate increase will generate $3.4 billion more in excess profits over the next five years, Gooch calculated.

Gooch said he filed his analysis because he believes that if the excess profits were brought to the commission’s attention they would have to stop the profiteering.

He said FERC has failed to “redress years of toleration of unlawful conduct by some oil pipelines.”

By filing his report, he said, “it does not seem likely that any commissioner, past or present, would turn a blind eye to unlawful excess profits of some public utilities if the results of the annual report filings had been called to their attention.”

Here are a few of the questions Gooch’s report raises:

What is the point of filing accounting reports, especially under oath, if their contents are ignored?

Why would a government agency help monopolies whose rates it sets earn more than just and reasonable profit margins?

Why have President Obama (and before him Presidents George W. Bush and Bill Clinton) appointed commissioners closely allied with the energy industry instead of consumer advocates?

Why has Congress not investigated FERC?

There are many more questions. This column will be pursuing answers about how FERC not only ignores, but actively helps, monopoly pipelines gouge the public.  (Editing by Kevin Drawbaugh)

This column first appeared on Thomson Reuters News & Insight.

David Cay Johnston explains the twisted tax logic currently being used by politicians:

By David Cay Johnston
The author is a Reuters columnist. The opinions expressed are his own.

Political tax talk is becoming Orwellian: Secrecy is Democracy. Auditors Reduce Collections.  Tax Cheats Will Be Caught With Fewer Auditors.

Let’s start in Kansas, where the Lawrence Journal-World broke the news on Sunday that economist Arthur Laffer, father of curve-on-a-napkin tax policy, is advising the state on a new tax structure. The news is not so much that Laffer is getting $75,000 of taxpayer money, but that Governor Samuel Brownback wants advice only from business leaders; no wage earners allowed behind these officially closed doors.

In Albany, state tax authorities issued a statement asserting they already were pursuing the real estate tax cheats I wrote about last week. Never mind the statistics and lack of public enforcement actions. Maintaining this facade will be more difficult going forward as 300 newly pink-slipped auditors turn a drip of leaks into a stream.

Will Governor Andrew Cuomo, who wants to be president and has declared his eternal allegiance to lowering taxes on the richest New Yorkers, keep looking the other way? Will Lieutenant Governor Bob Duffy, who wants to be governor, mimic the boss?  How long will only the little people of New York feel the full force of tax law enforcement under these two Democrats?

That question is a bit more pointed for Eric Schneiderman, the New York attorney general.

Assemblyman William Colton, an eight termer from Brooklyn, sent fellow Democrat Schneiderman a letter, and a copy of my column, asking for action. Will Schneiderman insist he can only act with Cuomo’s cooperation, as his office hinted last week? Or will Schneiderman add a sharp edge to his carefully polished image as a tough law enforcer?

In Washington the mantra that spending, not revenue, is the problem was repeated endlessly last week. The idea that cutting tax rates, especially at the top, will pave a path to renewed prosperity is promoted by just about everyone in national politics except President Barack Obama and the few Capitol Hill Democrats who do not fear liberal as a political epithet.

Fact is, falling revenue is a problem. In fiscal 2011, which ended on Sept. 30, federal income tax revenues were smaller than in 2001, a recession year when the George W. Bush tax cuts began.

In fiscal 2001 the individual income tax brought in $994.3 billion and in just-ended fiscal 2011 it brought in an estimated $956 billion. That’s 4 percent less money before taking into account 10 years of inflation.

Per capita the federal income tax brought in 31.5 percent less in real terms in 2011 than in 2001.

LESS IS MORE
The dominant political response to the fall in tax revenues? More tax cuts.

Bipartisan support is building for reducing corporate tax rates by at least 10 percentage points, from 35 percent to 25 percent or less. So is support for allowing repatriation of profits for companies that shifted them overseas to reduce taxes. The last time Congress did that, in 2004, it was sold with a promise it would create 660,000 jobs. Instead the benefiting companies fired more than 100,000 workers, several studies have shown.

There is also a bipartisan plan to further reduce already enfeebled tax law enforcement. The Senate plans to cut the IRS budget by $450 million, the House of Representatives by $600 million, meaning firing thousands of auditors.

Fewer auditors will not benefit the vast majority, whose taxes are taken out of their paychecks before they get their money. But it will give aid and comfort to high-end tax cheats, who rely on complexity, secret offshore accounts and lack of political will to chase them.

If cutting the government revenue department makes sense, then why not go whole hog and get rid of the IRS? That is what Herman Cain, a top rival for the Republican nomination, promises if voters send him to the Oval Office.

Cain’s 9-9-9 tax plan would scrap the current tax code and replace it with 9 percent levies on corporate profits, on income and on spending. The already rich would only be taxed on their spending since capital income would be tax-free, part of the little known flat tax premise that labor should be taxed, but taxing returns to capital discourages saving.

Under Cain’s plan, employers could not deduct the cost of wages paid to workers, not exactly a job creation scheme. Edward Kleinbard, the former chief of the Congressional Joint Committee on Taxation, said the Cain plan is effectively a 27 percent payroll tax.

Cain’s plan also imposes a one-time 9 percent tax on existing wealth, which may surprise his wealthy friends. He also would double-tax interest income, though, as Kleinbard noted, that must be a mistake.

Under Cain’s plan workers would have far less to spend after taxes. Cain insists that critics don’t understand. But as the chart illustrates, rich investors would pay less, helping their wealth snowball. The Cain campaign did not return calls seeking more information.

Give Cain credit though. Unlike Governor Brownback he is operating in the open. Unlike Cuomo, Duffy and Schneiderman, he is out front.

Unlike Orwell’s Winston Smith, no one from the Ministry of Love will turn you in for beatings until you accept that 2+2=5. The oligarchs and their elected enablers are just trying to convince you that tax deals made in secret are democratic, lower tax rates mean more tax revenue and that the ministries of tax are doing all they can to find the cheats. (Editing by Howard Goller)

By David Cay Johnston
The views expressed are his own.

Pay close attention to the Occupy Wall Street demonstrations in New York and around the United States, especially if the protests endure through the cold months into the election year spring or if the New York police are ordered to violently end the demonstrations, which would ensure they spread.

The protests show signs of sparking a major change in U.S. politics by creating common ground among people with wildly divergent views. The key to their significance will be whether they foster a wholesale change in political leadership in 2013 or whether Americans return a vast majority of incumbents in both parties at all levels of government.

Occupy Wall Street differs fundamentally from the many demonstrations I have covered over more than four decades. Instead of people with similar specific interests — anti-war, anti-rape, Tea Partiers — these demonstrators come with widely varying views, experiences and backgrounds, yet unite around a common theme: bankers are ripping off America.

Two secondary themes also emerge in talking to some of the hundreds of people occupying Zuccotti Park. One is that the super rich own the politicians. The other is that the news media, almost across the board, view events through the eyes of the rich.

The protests have grown from a few hundred people to the thousands who marched on Wednesday evening.

WASHINGTON BLAMED
Even Ben Bernanke, the Federal Reserve chairman, sympathizes with the protesters. He told the Joint Economic Committee of Congress on Wednesday:

“Very generally, I think people are quite unhappy with the state of the economy and what’s happening. They blame, with some justification, the problems in the financial sector for getting us into this mess, and they’re dissatisfied with the policy response here in Washington. And at some level, I can’t blame them. Certainly 9 percent unemployment and very slow growth is not a good situation.”

In a television interview Warren Buffett sided with them. While many of the demonstrators seemed ill-informed, he said, the “feeling is real and there is enough basis in that feeling that we want to get rid of that basis,” which he described as unfair taxes and lack of jobs.

Listen to the people packing Zuccotti Park, a privately owned urban space just off Wall Street, and you will hear common themes from libertarians and liberals, truck drivers and college professors, atheists and believers.

Some are articulate, others inchoate. But there is absolute agreement that the super rich, especially the financiers, are sophisticated thieves who steal not with guns, but something called derivatives.

Dan Halloran, a New York City councilman from Queens with an affinity for libertarians like Republican U.S. Congressman Ron Paul, waded into the crowd and kept people interested in his views on the economy’s failings and the need for markets.

“From what I saw on TV I would have thought that everyone here would be a communist, under 30, never held a job,” he said, describing that media image as cartoonish. He said people with whom he had spoken, including those with whom he disagreed fundamentally, were both eager to work and afraid, not knowing what happened exactly, but insistent that they needed work and that their elected leaders seemed not to care.

NO ‘FAIR SHAKE’
Brendan Burke, a truck driver and punk rock musician who studied philosophy in college, said since the protests began almost three weeks ago, “I have heard a thousand different things people are concerned about — inadequate teacher pay, no jobs, the rich not paying their fair share of taxes and all of it was about how we working people are not getting a fair shake.”

Burke said he expected the protests to gather strength because “this oppressiveness has been going on for years; its quiet, the way the bankers constructed this mess — and nothing is being done to them.”

When I went down there on Tuesday, some asked me why no bankers had been indicted. Excellent question with no answer unless you believe the financier class exercises control over the government, enabling financial crimes through incomprehensible rules.

Each person I asked, including some in suits who came by for a gander, said they expected the mayor eventually to order the park cleared, possibly on the pretext of public sanitation. Never mind that the Constitution safeguards the right to assemble peaceably and to petition the government for a redress of grievances without a time limit.

New York’s billionaire mayor found time and money to have police barricade the Wall Street bull, that bronze symbol of faith in growing stock prices. But Michael Bloomberg has spent not even a dollar on portable restrooms to help citizens exercise their constitutional rights while maintaining sanitary conditions in his fair city.

Aristotle taught, “Democracy is when the indigent, and not the men of property, are the rulers.” That ancient insight may be unknown to many of the demonstrators, but the concept imbues Occupy Wall Street, which has the potential to change America from what Aristotle would describe as an oligarchy back into a representative democracy.

PHOTO: A demonstrator sits near a make-shift tent during the Occupy Wall Street protest outside the Federal Reserve Bank in San Francisco, California October 5, 2011. REUTERS/Stephen Lam

By David Cay Johnston
The author is a Reuters columnist. The opinions expressed are his own.

From the way Washington politicians in both parties tell it, you may well think that multinational companies favor low-tax jurisdictions when investing overseas. They don’t.

The multinationals prefer investing in high-tax jurisdictions because it so happens that is where they can earn the highest returns.

Multinational companies then reduce or eliminate those seemingly high taxes by using simple, widely used devices to take profits in low-tax and no-tax jurisdictions.

Such practices create “stateless income,” in the words of Edward Kleinbard, whose new scholarship on corporate taxation deserves our attention.

As defined by Kleinbard, stateless income means profits earned in a country other than where the firm is headquartered and subject to tax only in a third country which imposes little or no tax.

Kleinbard shows why stateless income is the most serious threat to the corporate tax base even as Washington politicians blather on about less important corporate tax issues that their remarks show they do not understand.

Kleinbard is a master designer of tax avoidance devices for multinational corporations. During three decades as a Cleary Gottlieb Steen & Hamilton tax partner, Kleinbard also wrote scholarly critiques of tax policy, simultaneously exploiting and exposing flaws in tax regimes.

In 2007 Kleinbard became chief of staff for the Congressional Joint Committee on Taxation. Since 2009 he has been a professor at the University of Southern California’s Gould School of Law.

HARD FACTS

In three lengthy new essays Kleinbard tries to open minds to hard facts and logic to steer the corporate tax debate back to policies based on reality — economic, accounting and legal.

To see the essays, click here.

In a global economy in which capital markets are efficient and capital flows across borders at the push of a button, after-tax returns on investment will gravitate toward a mean. Kleinbard uses a global 5 percent after-tax return to model the issues.

Because different countries impose different tax rates this means that pre-tax returns must vary, with companies having to find ways to earn more in high-tax jurisdictions than in low-tax jurisdictions.

Kleinbard cites a hypothetical example with three countries, two of them make-believe, to show the tax algebra.

The United States imposes a 35 percent corporate income tax, Sylvania a 25 percent tax and Freedonia 10 percent. The algebra says pre-tax returns should be 7.7 percent in the U.S., 6.67 percent in Sylvania and 5.56 percent in Freedonia.

A U.S. firm will invest in high-tax Sylvania rather than low-tax Freedonia, Kleinbard wrote in a lengthy essay for Tax Notes. Then the company will game the rules of the three countries to easily report its profits for tax purposes in low-tax Freedonia.

The result is the Sylvania investment earns 6 percent after tax. That is a fifth more than the 5 percent worldwide after-tax return in Kleinbard’s model.

Juicing after-tax profits using the simple, widely used devices to take profits in real places like the fictional Freedonia distorts investment decisions and erodes the U.S. corporate tax base. Kleinbard suggests it also inflates U.S. stock prices.

“TAX RENTS”

That multinationals can earn a fifth higher profit this way exemplifies what Kleinbard calls “tax rents,” meaning benefits derived not from value-adding economic activity, but from exploiting the rules of different national tax systems.

Corporations that operate only in the U.S. should worry about rules that encourage multinational corporations to create stateless income because the result tilts the playing field against purely domestic companies, many of which are family-owned.

“Stateless income tax planning offers multinational firms, but not wholly domestic ones, the opportunity” to earn higher after-tax profits not because they are more efficient, but because of “their unique ability to move pre-tax income across national borders.”

If tax rules let a competitor game the tax system to earn $1.20 of after-tax profit for every $1 a purely domestic company can earn, then it is just a matter of time before the disfavored business deteriorates while the competition flourishes. Thus does government policy, not market competition, subtly determine winners and losers.

Ignoring the reality of tax erodes the tax base, distorts economic decisions and through shortsighted policy enriches the few at the expense of the many.

That corporations prefer investing overseas in high tax countries may seem to defy common sense. But much of tax is counterintuitive and requires careful study of a kind that was once much more common on Capitol Hill. Sadly, as partisanship has grown along with reliance on campaign donors, serious thinking about taxes has been supplanted by ideological marketing that has more in common with advertising than serious policy debates.

Since tax is the largest economic activity in the world, it is crucial that we base our policies on facts, not fantasies, if civilization is to endure. Get tax wrong and the damage diminishes markets, distorts investments, destroys private wealth and endangers social stability.

This column will explain more of Kleinbard’s insights in the weeks ahead, along with those of others whose rigorous thinking and research reveal that much of the Capitol Hill tax debate displays magical thinking.