David Cay Johnston

Which federal program took in more than it spent last year, added $95 billion to its surplus and lifted 20 million Americans of all ages out of poverty?

Why, Social Security, of course, which ended 2011 with a $2.7 trillion surplus.

That surplus is almost twice the $1.4 trillion collected in personal and corporate income taxes last year. And it is projected to go on growing until 2021, the year the youngest Baby Boomers turn 67 and qualify for full old-age benefits.

So why all the talk about Social Security “going broke?” That theme filled the news after release of the latest annual report of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, as Social Security is formally called.

The reason is that the people who want to kill Social Security have for years worked hard to persuade the young that the Social Security taxes they pay to support today’s gray hairs will do nothing for them when their own hair turns gray.

That narrative has become the conventional wisdom because it is easily reduced to a headline or sound bite. The facts, which require more nuance and detail, show that, with a few fixes, Social Security can be safe for as long as we want.

SHIFTING TAX BURDENS

Let’s look at how Social Security taxes have grown in the last half century — a little-known tale of tax burdens shifted off the rich and onto workers. From 1961 through 2011, the year covered in the last Social Security report, Social Security taxes exploded from 3.1 percent of Gross Domestic Product to 5.5 percent.

Income taxes went the other way. The personal income tax slipped from 7.8 percent of the economy to 7.3 percent, with most of the decline enjoyed by people in the top 1 percent of incomes. The big drop was in the corporate income tax, which fell from 4 percent of the economy to 1.2 percent. Notice that the corporate income tax fell by 2.8 percentage points, an amount almost entirely offset by a 2.4 percentage point increase in Social Security taxes.

The effect has been to ease the taxes of the wealthy, while burdening the vast majority of workers. Considering how highly ownership of stocks is concentrated, the benefit of those lower corporate taxes went overwhelmingly to the top 1 percent and, especially, the top 1 percent of the top 1 percent. Considering that the Social Security tax is capped, most of the burden of the increased payroll tax went to the bottom 90 percent.

Now let’s look at how that $2.7 trillion Social Security surplus arose. In 1983, President Ronald Reagan sponsored an increase in Social Security taxes, changing the program from pay-as-you-go to collecting much more taxes than it paid in benefits. The idea was to have the Boomers prepay part of their old age benefits. The extra tax was supposed to pay off the federal debt and then be invested in federal bonds. Instead, Reagan ran huge deficits, violating his 1980 promise to balance the federal budget within three years of taking office.

FINANCING TAX CUTS

In my view, building the Social Security surplus has had two major effects.

One effect was to finance tax cuts for those at the top, whose highest tax rate fell during the Reagan years from 70 percent to 28 percent, and for corporations, whose rate fell from 50 percent of profits to 35 percent. Those with less subsidized those with more.

The other effect was a huge increase in consumer debt, as Americans saddled with higher Social Security taxes took out loans to cover other needs. Stagnant wages played a role, but the $2.7 trillion Social Security surplus is also a factor in a $1.5 trillion increase in consumer debt since 1984.

It is no wonder consumers have gone into debt. Paying a tax in advance is expensive. Indeed, the first lesson in tax planning is that a tax deferred for 30 years is effectively a tax avoided, provided the money is invested wisely. The reverse is also true. A dollar of tax paid in 1984 cost $2.20 in today’s dollars, and that’s before counting the interest that could have been earned.

With the coming bulge in retirees, Social Security will start to pay out more than it takes in 2021, according to projections in the latest annual report. Under current law the program would be able to pay only about three-quarters of promised benefits starting in 2033. But that scenario can easily be avoided through a combination of four policy changes that would ensure full benefits continue to be paid, though I fear Congress will continue to do nothing.

One would be restoring the Reagan standard that 90 percent of wages are covered by the Social Security tax, which now applies to only 83 percent of wages. If we went back to the Reagan standard, the Social Security tax would apply to close to $200,000 of wages this year instead of $110,100.

Two would be raising the Social Security tax rate by two percentage points. That tax hike could be smaller or even avoided if, three, we reignited the growth in wages. Median wages have fallen in 2010 back to the level of 1999. And, four, it would help just as much if we created millions more jobs, which since 2000 have grown at only a fifth the rate of population increases.

Under current tax rules, the Social Security shortfall for the next 75 years is $8.6 trillion.

But there is a much bigger problem that needs our attention. If we continue national security spending at current levels, with no future increases, the total cost would be $63 trillion, based on the figures in President Barack Obama’s latest budget. Unlike spending on Social Security, much of the national security spending goes overseas. And that makes us worse off.

Each year the Internal Revenue Service receives tax returns that show more income than was actually earned, in some cases twice the actual earnings.

That seems bizarre at first blush. After all, why would anyone tell the tax man they made more than they did?

The answer is that Congress has created an incentive for the poorest of the working poor to report more than their actual incomes. Doing so can be worth more than $3,000 to impoverished working parents under a form of negative income tax known as the Earned Income Tax Credit that sends government money to the working poor.

But it is not the working poor themselves who make up phony numbers. The problem is with unscrupulous income tax preparers, the IRS Taxpayer Advocate, Nina E. Olson, and others who work with the poor tell me.

Ginning up nonexistent income lets dishonest tax preparers charge larger fees and helps attract new clients as word spreads of their success at getting big refunds.

Just last month the Justice Department sued to shut down what it characterized in court papers as a nationwide chain of tax fraud mills that reported inflated incomes and often did not tell people it was filing tax returns for them.

Asked about the allegations, Instant Tax Service general counsel Todd Bryant said they were baseless, with a handful of problem cases mischaracterized as the norm.

The IRS and the Justice Department identified a problem with tax preparers inflating incomes years ago.

Abusive tax preparers have been found at big firms as well as underground operations. Failing to get tough on the abusers makes it hard for the vast majority of honest preparers to prosper, as clients who know nothing about the complexities of tax naturally gravitate toward whoever has a reputation for getting the biggest refunds.

A PROBLEM THAT’S FIXABLE

Congress could fix the problem of exaggerated incomes and at the same time help end America’s shameful No. 1 ranking among modern nations in child poverty. Sadly, I don’t expect that, given the focus in both parties on tax cuts for corporations and, among Republicans, on more tax cuts for the rich. Indeed, across the country anti-tax Republicans have called for ending the Earned Income Tax Credit.

Milton Friedman, the Chicago School economist and Nobel Prize winner, devised the negative income tax concept decades ago. Friedman demonstrated that people on welfare who go to work could be worse off because of taxes on their earnings. Properly applied, Friedman’s negative income tax idea can ensure that working makes people better off.

President Ronald Reagan hailed the Earned Income Tax Credit as “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress.” He was right. Last year it lifted 3.3 million children, and an equal number of adults, out of poverty.

Now consider a family with three children that earned $6,000 last year. That may seem extreme, but that was the average wage for a third of American workers in 2010, as I reported in October.

This family will get $2,711.

However, the family’s check more than doubles, to $5,751, when a tax preparer falsely inflates their income to $12,800.

Why does the family making $12,800 get more than twice as much as the $6,000 family? Because Congress set the maximum tax credit for a family with three children at wages of $12,800 to $20,800.

DEVIOUS TAX PREPARERS

The problem of inflated incomes is not with conniving poor people, but with devious tax preparers, everyone I asked about this said.

Nancy Abramowitz, who runs the American University Washington College of Law’s tax clinic for poor people, said she could not recall any individuals who had inflated their own income to increase the tax credit. “It’s always unscrupulous preparers,” she said.

Since employers verify wages, tax preparers usually inflate incomes by creating a phony Schedule C, the tax form used by many small businesses, because it is not verified except in an audit.

Here are four ways Congress and the IRS can fix this:

• Congress should lower the threshold for securing the maximum credit for families with children from $12,800 to the average wage of the bottom third of workers, currently about $6,000.
• Congress should pay for the prosecution of as many corrupt tax return preparers as it takes to stop this fraud, including $3,000 rewards to taxpayers who turn in corrupt preparers. Any action by the IRS, not just convictions, should generate a reward check. The reward I propose equals the maximum fraud loss from a single case, making it cost-efficient provided Congress requires the IRS to be generous, not stingy, in rewarding whistleblowers.
• Congress should delay tax credit refunds for 45 days after a tax return is filed. Olson, the IRS taxpayer advocate, told me that speeding refunds encourages fraud. The United States is unusual in trying to refund money instantly, instead of taking time to make sure payments are proper before cutting checks.
• For the next few years the 40 percent of IRS correspondence audits that now deal with the Earned Income Tax Credit should concentrate on faked Schedule Cs that inflate incomes.

The focus should be on making work rewarding, not on hurting the working poor.

Across the United States more than 2,700 companies are collecting state income taxes from hundreds of thousands of workers – and are keeping the money with the states’ approval, says an eye-opening report published on Thursday.

The report from Good Jobs First, a nonprofit taxpayer watchdog organization funded by Ford, Surdna and other major foundations, identifies 16 states that let companies divert some or all of the state income taxes deducted from workers’ paychecks. None of the states requires notifying the workers, whose withholdings are treated as taxes they paid.

General Electric, Goldman Sachs, Procter & Gamble, Chrysler, Ford, General Motors and AMC Theatres enjoy deals to keep state taxes deducted from their workers’ paychecks, the report shows. Foreign companies also enjoy such arrangements, including Electrolux, Nissan, Toyota and a host of Canadian, Japanese and European banks, Good Jobs First says.

Why do state governments do this? Public records show that large companies often pay little or no state income tax in states where they have large operations, as this column has documented. Some companies get discounts on property, sales and other taxes. So how to provide even more subsidies without writing a check? Simple. Let corporations keep the state income taxes deducted from their workers’ paychecks for up to 25 years.

It was not always this way. Letting companies keep their workers’ state taxes apparently began in Kentucky two decades ago as a way to retain jobs.

Last July when I wrote about six big companies that pocket Illinois state taxes I knew there was more to this. But I had no idea how pervasive these diversions were until I read an advance copy of the 39-page report by Good Jobs First.

CORPORATE SOCIALISM

Deals cut with the states over the past two decades diverted $5.5 billion from public purposes to private gain, the report says. Close to $700 million more was diverted last year, Good Jobs First estimates.

New Jersey approved $73.2 million in new deals in 2011 on top of $178 million diverted that year alone under previous deals. I calculate that at nearly $80 per household in corporate welfare based on New Jersey’s 3.1 million households.

These deals typify corporate socialism, in which business gains are privatized and costs socialized. They also mean government picks winners and losers, interfering with competitive markets. Leaders in both parties embrace these giveaways because they draw campaign donations from corporate interests and votes from people who do not understand that they are subsidizing huge companies.

Michael Press, a Connecticut consultant on tax incentives, says such deals, however troubling, are an inevitable result of the U.S. Constitution setting up competition between the states.

“In an ideal world we would not provide any corporate subsidies,” Press told me. “It looks like corruption. But if you do it right, if you only target those companies whose behavior you change to create jobs or keep jobs in your state then these targeted temporary arrangements are cheaper – much cheaper – and can be more effective than an overall reduction in tax rates.”

The mission of Good Jobs First is making economic development subsidies accountable and effective. In years of working with their data I have always found it sound. While Greg LeRoy, Good Jobs First’s founder, has rooted out all sorts of hidden subsidies over the years, he emphasizes that he is not inherently hostile to them, only to secrecy, waste and what he calls job piracy and job blackmail.

“Job piracy” occurs when one state diverts taxes to lure an employer across state lines. AMC Entertainmentannounced a deal last year to move its corporate headquarters from Kansas City, Mo., to a nearby Kansas suburb. In return, Good Jobs First said, Kansas will let the multiplex chain keep $47 million of state income taxes withheld from its workers’ paychecks, a drain on public finances that did not create any jobs, but does enrich the Wall Street firms that own AMC including arms of J. P. Morgan, Apollo Management, Bain Capital and the Carlyle Group. AMC declined to answer my questions.

“Job blackmail” occurs when a company threatens to close a plant unless it gets tax money.

In Illinois, the law requires companies to threaten to leave before they can keep taxes withheld from paychecks. Motorola Mobility, now being acquired by Google; the truck maker Navistar; the German manufacturer Continental Tire, and three auto makers – Chrysler, Ford and Mitsubishi – get to keep $346.8 in taxes over 10 years because they threatened to leave Illinois. Navistar can pocket $62.1 million even if it fires a quarter of its Illinois workforce, its contract shows. A recent deal gives Sears $150 million, Good Jobs First reported.

PROMISES OF JOBS

Promising to retain jobs can be lucrative. General Electric invested $126 million updating part of its Ohio operations. In return, GE gets a tax credit equal to $115.3 million of its worker taxes, recovering 92 percent of its investment. A sweet deal for GE, but not its competitors.

Gary Sheffer, GE’s top spokesman, said the company told its workers about the deal. In all, he said, GE is investing around $300 million in Ohio and “the resulting taxes the state will receive will far exceed the tax credits provided to GE.”

That response, I think, misses the point – GE should pay its own bills without taking welfare.

Many figures in the Good Jobs First report are from disclosure reports some states make. Others come from news accounts and company announcements.

Total revenue losses are higher than the report states. First, some states hide the costs. Phil Mattera, the research director at Good Jobs First, said he lists the cost as zero for states that hide the numbers.

Good Jobs First wants to end these diversions, but failing that recommends mandatory disclosure to the workers as the first reform. I concur. It’s the first step in ending corporate welfare as we know it.

On March 28, the U.S. Justice Department sought to close a nationwide chain of income tax preparation shops it accuses of fraud. The action underscores the potential for abusive business practices that taxpayers face because Congress has failed to embrace technology that would eliminate most tax returns.

The Justice Department wants a federal judge to shut down Instant Tax Service, whose sole owner is Fesum Ogbazion of Dayton, Ohio, saying he is responsible for “extensive and pervasive tax fraud.” It also sued four of his 276 franchisees. The company has not responded to the lawsuit.

Congress could easily eliminate fraud by abusive tax preparers, as is alleged in the Ogbazion case, and save taxpayers billions of dollars annually, by simply ending mandatory filing of tax returns for most taxpayers.

About 100 million taxpayers — those whose income is entirely from wages and retirement funds, and who do not itemize deductions — should not have to file returns. The government already has the information it needs to calculate the taxes these people owe, once they supply their marital status and number of dependents. It would not take much to automate their income tax payments, as many other modern countries do.

I put the chances of Congress taking such a sensible course at one in 84,000. That’s about the same as the odds of being indicted for a tax crime in 2011, based on an analysis of official data by Syracuse University’s Transactional Records Access Clearinghouse.

Congress will not act because individual income tax returns, which for most people are make-work that creates a drag on the economy, provide tidy revenues for Intuit, the maker of TurboTax software, H&R Block and other legitimate corporations that profit from preparing tax returns. These companies have considerable resources at their disposal to spend on lobbying politicians to keep the tax filing requirement. One sign of their determination: Intuit in 2006 donated $1 million in support of an unsuccessful candidate for California state controller who opposed optional state-prepared returns in California. Intuit has said there are serious problems with the program, which remains in operation, but in my view none of Intuit’s criticisms stands up to scrutiny.

A SIMPLER TAX CODE

Intuit, H&R Block and other tax firms say that they help people pay the least tax and avoid costly mistakes. But these concerns would be easily addressed by simplifying the tax code. In my view, any business that depends on government-induced inefficiency should be swept into the dustbin of history.

Another reason reform is unlikely is that politicians have learned from Republican pollster Frank Luntz over the years that riling up voters against the Internal Revenue Service attracts votes and campaign donations. Actually fixing the problem by ending tax filing for the vast majority would require politicians to come up with other ways to get donors to open their checkbooks. Republican politicians who follow Luntz’s advice seem not to realize they are attacking law enforcement, a strategy that would offend many of their donors if applied to the FBI or street cops.

Short of ending tax filing for most Americans, Congress could license tax preparers — instead of only requiring that they identify themselves with a unique number. We don’t trust amateurs to inspect elevators or audit charities, so why do we let just anyone charge for preparing tax returns? This is especially true given that U.S. Taxpayer Advocate Nina E. Olson has thoroughly documented false and fraudulent reporting by tax preparers who are exempt from IRS professional conduct rules because they are not accountants, enrolled agents or lawyers.

The case of Instant Tax Service appears to be particularly egregious. The Justice Department alleges that the company charges its customers, who are mostly poor and unsophisticated, as much as $1,000 for 15 minutes of tax preparation. It “encourages its franchisees to lie to the IRS about anything,” the department said in court papers.

The government’s complaint quoted Ogbazion, the company’s owner, as saying that “every tax return being done is pretty much fraudulent” at a franchise in Los Angeles. Ogbazion did not revoke the franchise, but did sue it for royalties, the department said. According to the Justice Department, Ogbazion said he did not pay attention to customer complaints because, if he did, he “wouldn’t be able to sleep at night.”

Ogbazion’s business and personal phones are disconnected. At the one listed number that was answered a woman said he was no longer reachable there. Ogbazion also did not respond to messages to his work and home email addresses.

100 MILLION UNNECESSARY RETURNS

The Justice Department brings a high-profile tax case pretty much every year as the mid-April tax deadline approaches. But this misses the much bigger picture: More than 100 million unnecessary tax returns are filed each year, costing billions of dollars in software or preparation.

Meanwhile, the way Congress has written tax laws, and the way courts interpret them, makes it hard to pursue tax cheats. The average time for each criminal tax prosecution the Justice Department completed last year was 740 days, more than double the 345 days in 1992. Last year, the Justice Department completed only 3,656 criminal cases in which tax was the main charge, the analysis by Syracuse University’s Transactional Records Access Clearinghouse shows. No wonder the odds of a criminal tax indictment, while still minute, were 75 percent higher two decades ago.

The Justice Department relies on a law enforcement theory known as general deterrence. The strategy is to bring widely publicized cases to keep people in line. But the IRS criminal division website lists just 79 criminal cases in 2011. Figuring the others requires perusing 90 websites run by local U.S. Attorneys. Many convictions get little or no news coverage, which means zero general deterrence.

Canada, with a ninth of the U.S. population, listed all 204 tax convictions last year at the Canada Revenue Agency’s website. Claude St-Pierre, Canada’s director general for tax enforcement and disclosures, told me that posting all convictions is both a deterrence strategy and an effort to educate Canadians so they do not get lured into tax scams.

Congress should fund more prosecutions, many more, so the Justice Department does not have to reject 40 to 50 percent of criminal referrals by the IRS. Following Ottawa’s lead, the IRS should prominently post every criminal conviction and every request for a civil injunction (a much less expensive law enforcement strategy than prosecution) at its website.

The real solution, though, is to get rid of the archaic, frustrating make-work for 100 million taxpayers whose only benefit is profits for tax preparation firms.

Politicians in both parties are betting that allowing more gambling will make them winners at the polls by raising revenue without appearing to raise taxes.

Governors Andrew Cuomo of New York and Steve Beshear of Kentucky, both Democrats, each want seven casinos.

In Kansas, where the state owns casinos, Governor Sam Brownback, a Republican, wants more gambling money to pay down state debts.

In Minnesota, Governor Mark Dayton of the Democratic-Farmer-Labor party wants more gambling to finance a new stadium for the privately owned Vikings football team.

Florida legislators are mulling three casinos, one in Miami. Illinois lawmakers may allow a casino in Chicago.

In Texas, Governor Rick Perry says he opposes more gambling. Yet eight years ago he called the legislature into special session to allow gambling at the gas pumps to help finance schools. He lost that bet.

Egging on these and other politicians is anti-tax crusader Grover Norquist, who has made “tax” the vilest four-letter word in American politics. Norquist wrote Texas politicians a letter in January saying that more gambling is better than more taxes.

As a longtime student of gambling companies and their regulation, I find these developments troubling. People who want to play should have an honest place to wager. But states should only allow, not encourage, gambling. Basic government services should not depend on gambling revenue, as Perry’s school finance proposal did.

No matter how much gambling the law allows, taxes on the money players lose will never be enough to finance the government services on which jobs and private wealth creation depend.

$24 BILLION IN 2010 REVENUES

Gambling generated $24 billion for the states in 2010, about 2 percent of their total revenues, data collected by the Rockefeller Institute of Government shows. Thanks to its lottery, New York got the most gambling revenue, $2.7 billion, more than Nevada and New Jersey combined.

Tax revenues from gambling are down in both West and East Mammonopolis, in part because of a weak economy. In the west, Nevada gamblers lost $3.8 billion last year, down 12 percent in real terms from 2000, according to the University of Nevada. In the east, Atlantic City players lost $3.3 billion last year, down 39 percent from their inflation-adjusted loss of $5.4 billion in 2001, according to the state of New Jersey. The only growth is in betting near home, which the industry calls “convenience play.” Slot machines took more money from players in Pennsylvania than Atlantic City last year.

Nelson Rose, the Whittier College law professor who developed the theory that America is riding its third historic wave of gambling, says, “we are decades away from market saturation” for convenience gambling.

The first two gambling waves ended in scandals, the first between 1820 and 1840 because of dishonest games, the second in 1890 because the nationwide Louisiana Lottery corrupted politicians.

While the third wave has yet to crest, a potential new scandal lurks in proposals to initiate legal online betting.

The U.S. Justice Department issued a formal opinion in December that the Wire Act, a law long-thought to bar Internet gambling, applies only to sports betting.

This means that states running the Powerball and Megamillions lotteries can operate multistate online poker and other Internet betting.

But how will states know if online players are adults? My 1992 book “Temples of Chance” named 13- and 14-year-old children who Atlantic City casinos plied with liquor, limousines and luxury suites. How will the states keep underage gamblers using their own money –- or Mom and Dad’s credit cards — from online poker?

WHO BENEFITS?

Another issue is who benefits from more gambling and who may be maneuvered into supporting it. Consider the way Cuomo has framed a casino expansion proposal.

New York has nine racetracks with slot machines, called racinos. By proposing only seven casino licenses, Cuomo initiated a variation on musical chairs, where two or more operators will end up without a license when the music stops. Want to bet whether this approach encourages political donations and quiet favors?

The giant Asian gambling company Genting Group won the contract for the Aqueduct racino in Queens last year. Now, Cuomo has tapped Genting to build the nation’s largest convention center there, which it says it will do without subsidies.

I doubt many people would fly to New York to visit mundane Ozone Park, an hour’s subway ride from Manhattan’s Broadway shows, Fifth Avenue shopping and Times Square.

At the same time, Cuomo is proposing to close the Javits convention center in the heart of the city, alarming Manhattan hotel and restaurant owners, as it should.

Now let’s connect the dots.

Genting would make more money if instead of a convention hall in Ozone Park it erects a large open space for a full-blown casino with baccarat, blackjack, craps, pai gow and poker. But a casino requires legislative and voter approval, which may not be easy to get.

Cuomo, by threatening to close the Javits center, has given Manhattan hotel and restaurant operators an interest in persuading state legislators and voters to make sure Ozone Park becomes a huge casino complex and Javits stays open. That way their income from Manhattan conventioneers would not be at risk.

I find it most curious that any politician trying to avoid tax increases would consider a casino operator whose profits will go to Malaysia instead of staying in-state.

People in New York, and elsewhere, should ask: What value do offshore casino operators add? Why not license American gaming companies? Or local investors? What motivated Cuomo to shun Indian casino operators, like the Oneida Nation with its well-run Turning Stone casino near Syracuse?

And all Americans should ask what the odds are that more gambling will promote an industrious, thrifty society. And does it make sense for your tax savings to depend on how many of your neighbors make a losing toss of the dice?

The aftermaths of the Great Recession and the Great Depression produced sharply different changes in U.S. incomes that tell us a lot about tax and economic policy.

The 1934 economic rebound was widely shared, with strong income gains for the vast majority, the bottom 90 percent.

In 2010, we saw the opposite as the vast majority lost ground.

National income gained overall in 2010, but all of the gains were among the top 10 percent. Even within those 15.6 million households, the gains were extraordinarily concentrated among the super-rich, the top one percent of the top one percent.

Just 15,600 super-rich households pocketed an astonishing 37 percent of the entire national gain.

The different results in 1934 and 2010 show how a major shift in federal policy hurts the vast majority and benefits the super-rich.

NEW POLICY BOOSTS THE RICH

Starting in 1933, government policy aimed to improve the lot of the vast majority through such policies as massive government-financed jobs and construction programs. But since 1980 policy has focused on helping the already rich get richer still with such policies as lower taxes and fewer audits.

The updated figures illustrating income changes, all in 2010 dollars, come from analysis of the latest IRS data by economists Emmanuel Saez and Thomas Piketty.

Saez received the 2009 John Bates Clark Medal, awarded to the economist under 40 who has made the greatest contribution to that field, and a 2010 MacArthur genius grant.

Their data expands on what I reported first last fall – median pay fell in 2010 to its lowest level since 1999.

Saez and Piketty show that the vast majority’s average adjusted gross income, of which wages are just a part, was $29,840 in 2010. That was down $127 from 2009 and down $4,842 from 2000.

Most shocking? The average income of the vast majority of taxpayers in 2010 was just a smidgen more than the $29,448 average way back in 1966.

At the top, the super-rich saw their 2010 average income grow by $4.2 million over 2009 to $23.8 million. Compared to 1966 their income was up on average by $18.7 million per taxpayer.

We should expect this pattern of concentrated gains weighted toward the very top to continue unless we change our policies.

Saez shows that the top one percent’s share of real income growth is increasing with each economic expansion and it matters not whether the president is a Democrat or Republican. The top one percent enjoyed 45 percent of Clinton-era income growth, 65 percent of Bush-era growth and 93 percent of Obama-era growth, though that is only through 2010.

While markets are a factor, I think the evidence makes clear that government policy is at the core of the differing fortunes of the vast majority and the super-rich.

Inaugural addresses of Franklin Roosevelt and Barack Obama bring this into sharp focus. Both spoke of the need for restoring confidence, while denouncing greed and irresponsible conduct. Roosevelt in 1933 specified “callous and selfish wrongdoing” by bankers abusing a “sacred trust.” Obama vaguely referred to the “consequence of greed and irresponsibility on the part of some.”

Roosevelt said that “our greatest primary task is to put people to work.” Obama, again less specific, spoke of government that “helps families find jobs at a decent wage.”

Roosevelt brought in trustbusters, reformers and even an expert at Wall Street manipulations to implement policies benefiting the vast majority.

FINANCIAL INSIDERS

By contrast, while Obama called Wall Street executives “fat cats,” he surrounded himself with financial insiders with the exception of Elizabeth Warren, the Harvard bankruptcy expert now seeking election to the U.S. Senate. His administration has failed to prosecute the central figures in the frauds that created our economic distress.

Government policy can change again and for the better. We can create a growing economy with widely shared prosperity.

We need to increase spending on education and research to maximize returns from human capital. We need to create jobs rebuilding our decaying infrastructure so people and goods move efficiently. We need to honor markets, letting mismanaged banks and insurers receive their just desserts in U.S. Bankruptcy Court.

We need to adjust our focus away from financial sector profits to people. We need to reform taxes to discourage capital withdrawals and offshoring and, instead, encourage reinvestment of profits at home.

If we don’t, the vast majority will see their incomes go on eroding slowly while those at the top enjoy an ever-larger share of national income and wealth. The inevitable result will be economic, political and social instability – not a pretty picture for anyone.

If President Barack Obama can persuade Congress to reduce the corporate income tax rate to 28 percent from 35 percent, he will move tax rates closer to what other modern countries charge.

But his plan to treat “manufacturing” as a special category, with a 25 percent tax rate, brings us to what I call Obama’s hamburger problem.

The problem is how to define manufacturing. To paraphrase Justice Potter Stewart on obscenity, I know manufacturing when I see it; I just don’t know how to define it in tax law.

Assembling automobiles is considered manufacturing. So what about assembling two hot protein discs with special sauce, lettuce, cheese, pickles, onions — all on a sesame seed bun?

The notion of hamburger-making as manufacturing may seem silly, a bit like the 1981 U.S. Agriculture Departmentproposal to classify ketchup as a vegetable for school lunches. But classifying activities as manufacturing or not becomes crucial if manufacturers pay taxes at a reduced rate.

Imagine all the high-paying jobs Obama’s plan would create. Companies of all kinds will want to hire more tax accountants and lawyers making the case their client’s business activity is manufacturing. These are not the sort of additional jobs America needs.

There could also be more work for economists, engineers and historians whose expertise would be tapped for creative ways to expand the definition of manufacturing. We have the prototype for the reduced manufacturer’s tax rate in the Domestic Production Activities Deduction, a law implemented in 2005 which comes with a plethora of complex eligibility rules that already create more work for tax professionals.

DRAG ON ECONOMY

Scrutinizing tax returns to determine what is and is not manufacturing would further require a diversion of IRS auditors, lawyers and specialists from the more important job of hunting for calculated tax evaders. Inevitably there would be litigation aplenty, a boon to trial lawyers but a drag on the economy.

Building an automobile obviously involves manufacturing. Rocks must be refined to turn their useful elements into steel and aluminum. Much of the added value will be in the engine and transmission, where steels made with special alloys must be heat-treated and machined to endure enormous, and rapid, twisting forces. Increasingly cars are built with plastics, sophisticated chemical compounds that must be created from base materials and then molded or extruded.

But should mere assembly of an automobile qualify as manufacturing? Does fitting the already manufactured pieces together qualify as manufacturing? And what if the parts were all manufactured in, say, Japan while the only activity in the United States was assembling them into a whole?

Would tax law define manufacturing as the process of making a car as a whole? Or would companies lobby for laws that break it into parts with profits earned at different stages of production taxed at different rates? Would that, in turn, mean accounting practices that load costs onto one stage of production to take profits at the 25 percent rate and losses, such as an assembly line, at the 28 percent rate?

Imagine a car company that reports a $200 million profit to shareholders. Now imagine that it reports a $300 million manufacturing profit taxed at 25 percent and a $100 million assembly line loss at the 28 percent general corporate rate. The company’s profit would still be $200 million, but its blended tax rate would be just 23.5 percent.

Hamburgers may seem like pure assembly, but a case can be made that they are more like manufacturing than assembling a car from finished parts made overseas.

Your local hamburger joint starts with raw meat, fresh or frozen. If it comes in lumps then someone must make the meat into uniform discs or squares. Then the protein must be fried, grilled or broiled. Only then can the meat, lettuce and whatnot be assembled.

Eight years ago the Bush administration used this very example to warn about the unintended consequences of tax incentives for manufacturing.

The 2004 Economic Report of the President asked, “when a fast-food restaurant sells a hamburger, for example, is it providing a ‘service’ or is it combining inputs to ‘manufacture’ a product?”

The comment, put in a box on its own page to draw attention to the issue, also noted that “sometimes, seemingly subtle differences can determine whether an industry is classified as manufacturing. For example, mixing water and concentrate to produce soft drinks is classified as manufacturing. However, if that activity is performed at a snack bar, it is considered a service.”

Taxing different corporate activities at different rates is a bad idea unless you think we need more national income spent on gaming the tax system. Let’s not go there.

PHOTO: Russia’s President Dmitry Medvedev (2nd  L) and U.S. President Barack Obama (R) eat their hamburgers during lunch at Ray’s Hell Burger in Arlington, Virginia, June 24, 2010.     REUTERS/Kevin Lamarque

With President Barack Obama and leaders in both parties favoring lower corporate tax rates, Washington seems poised to enact change next year. They need only resolve details like how much the rates should be cut, which tax avoidance strategies should be barred and whether to give manufactures a discounted rate.

If the corporate tax rate is cut, should the rates for dividends and long-term capital gains be increased?

That issue was inadvertently put on the table by a leading free market organization, the American Enterprise Institute. The AEI, as part of its support for cutting the corporate tax, promoted the idea last month that workers, not investors, bear the burden of that tax. In taking that line, however, the AEI has undercut its own argument for tax relief for investors. Indeed, it shifts the debate toward higher taxes on capital gains and dividends and lower taxes on wages.

We’ll follow that logic later. But first, who bears the burden of the corporate tax? Is it the owners of a corporation, through a lower return on their investments, or is it workers, through lower wages? This question is endlessly debated by economists.

Many people assume corporations just pass the corporate tax on to consumers through higher prices. This is true for monopolies, such as corporate-owned electric utilities, whose prices are set by governments. But it is not true in a competitive market.

The idea that owners bear the tax burden took hold after economist Arnold Harberger wrote a 1962 paper that quickly became a classic of tax economics. I studied his work in more than one economics course in the late 1960s and into the mid-1970s.

When that paper was written, the United States dominated industrial production, the legacy of the devastation of World War Two on the economies of Japan and Europe. As global manufacturing increased, Harberger, who taught at the University of Chicago, refined his theory. In later works, Harberger wrote that while the corporate tax burden falls on owners in a closed economy, in a global economy, where capital flows freely, the burden shifts toward workers, who cannot move so easily.

TAXES & THE MIDDLE CLASS

AEI economist Aparna Mathur makes this case in the current issue of the organization’s online magazine, in a piece headlined “How Taxing the Rich Harms the Middle Class.”

“Workers bear a large portion of the burden” of the corporate income tax, Mathur told me. She suggested that half or more of the cost falls on workers, and perhaps all of it.

Her views, to which AEI drew my attention amid the debate on cutting the corporate tax, grow from research between 2006 and 2010 by Mathur and Kevin Hassett, AEI’s director of economic policy studies. In their latest paper they looked at official data on manufacturing wages from 65 countries. They concluded that higher corporate income tax rates depress wages.

Mathur noted that if capital stocks are depleted, because taxation encourages new investment to shift to lower tax countries, the result must be falling wages. In this she and Hassett rely on economic theory going back at least to Adam Smith.

On the face of it, the AEI argument suggests workers should be joining the calls for Congress to cut corporate income tax rates. But, if the argument is correct, then workers should also be calling for cuts in their own income taxes and an end to reduced rates on dividends and capital gains.

Here’s why. Investors often complain they are taxed twice on their profits: once through the corporate income tax and again through taxes on their dividends and capital gains.

But if the AEI’s argument is correct — that workers bear the burden of the corporate income tax – then investor complaints that they are taxed twice are false. Under the AEI argument, it is workers who are taxed twice: first through lower wages due to the corporate tax and then through levies on their wages, however low they may be.

Double taxation of investor returns was the logic used to justify the capital gains tax cuts in 1997 under President Bill Clinton and in 2003 under President George W. Bush, who also included dividends.

Without double taxation of corporate profits, that justification evaporates. Workers can now use AEI’s arguments to bolster their arguments for higher pay and lower taxes. I put this to Mathur of the AEI, who agreed that it is reasonable to conclude that double taxation is falling on workers. But, she said, lowering taxes on workers would not encourage investment.

Let’s debate this thoroughly before Congress changes the corporate income tax again, lest more relief go to those who do not deserve it at the expense of those who do.

If you make more than about $33,500 a year, your federal income tax burden is probably lighter than you think.

The portion of your income that you pay in taxes is your “effective tax rate.” But when politicians and pundits talk about effective tax rates, the data they typically use relies on an incomplete measure for income. Use an incomplete measure for income and your tax rate calculation comes out high.

In a new analysis the Tax Policy Center, a nonpartisan Washington research organization, used a wider measure of income to calculate effective tax rates. The rates are much lower using this broader measure of income.

The Tax Policy Center computer model of the tax system, which estimates how changes in the law would affect tax burdens, has repeatedly made projections that subsequent events showed were accurate. The center is a joint project of two Washington research organizations, the Urban Institute and the Brookings Institution. The George W. Bush administration went out of its way to praise the reliability of the center findings even when they were not helpful to administration policy.

The incomplete measure is called “adjusted gross income,” or AGI. This is the number on the last line of the front page of the standard tax return.

To get a fuller picture, the Tax Policy Center used what it called “cash income” to calculate effective tax rates. This included municipal bond interest, government benefits and many of the other items that are excluded from AGI. Use this fuller measure of income and the share of income that goes to taxes falls.

SIGNIFICANT VARIATIONS

In its new analysis, the Tax Policy Center found that the discrepancy between these two ways of measuring tax rates varies significantly between different income groups.

For the middle fifth of taxpayers, those with cash income between $33,542 and $59,486 a year, the average tax burden is 4.1 percent of adjusted gross income but only 3.2 percent of cash income. So these middle-income people are paying almost one percentage point less of their income in federal income taxes than they might imagine based on the popular debate.

One percentage point may seem small, but for people in this income group it means they are actually paying one fifth less in income tax than they might think.

The percentage point discrepancy widens as incomes increase. For the next fifth of taxpayers, those earning between $59,486 and $103,465, the average federal income tax is 8.2 percent of AGI but only 7 percent of cash income, a difference of 1.2 percentage points. For the top fifth, those earning more than $103,465, the average federal income tax is 17.3 percent of AGI but only 14.9 percent of cash income.

For the top tenth of one percent – whose combined income comes close to equaling that of the bottom 50 percent of taxpayers – the disparity is even greater. The tax rate is 23.6 percent of AGI but only 19.8 percent of cash income, a difference of 3.8 percentage points.

UNDERSTATED DISPARITY

As valuable as the Tax Policy Center’s report is, the center acknowledges that it understates the disparity for people at the very top. The reason for this is that the computer model cannot capture certain kinds of income that are only available to the very wealthy. For example, Congress considers the personal use of corporate jets to be income. But, under rules Congress set in 1985, only a small fraction of the real value is included in AGI. Unfortunately, the Tax Policy Center’s model does not capture the remainder as part of cash income.

For the 40 percent of Americans on the bottom of the income ladder, using AGI to measure income also distorts the effective tax rate calculation, but in a different way.

On average, people in the bottom 40 percent receive money from the federal income tax system rather than pay money into it, so their effective tax rates are negative.

This is because the first $19,000 of income for a couple was free of income tax last year. At the same time, they may have received cash payments such as the Earned Income Tax Credit for the working poor or the Child Tax Credit for parents of children. These tax credits are not included in AGI, but the Tax Policy Center counts them as cash income.

The payments the poorest fifth of taxpayers – those who made less than $16,812 last year – get on average from the tax system amount to 12.3 percent of their AGI. But, when calculated against cash income, these payments amount to only 5.8 percent. So, the AGI method overstates the amount this group is getting from the tax system.

For most of us – those in the middle class and above – our effective tax rate is lower than politicians say. So smile a bit today. The cost of civilization is not as high as you’ve been told.

With so much attention placed on Mitt Romney’s verbal blunders, much less has been given to his written plans for the economy and taxes.

The Republican frontrunner’s 160-page “plan for jobs and economic growth,” which he released in September, contains some sound ideas. He would encourage more Americans to save and invest. And one of his proposals would strengthen America’s status as a technological powerhouse. See the plan here.

But there’s a side to the plan that would raise taxes on the poorest 125 million Americans while tilting tax cuts further toward the rich.

President George W. Bush cut taxes for almost everyone who paid income taxes. Romney would make the Bush tax cuts permanent. But that’s only a first step.

He would also raise taxes on poor families with children at home and those going to college. Romney does this by reducing benefits from the child tax credit and the earned income tax credit and by ending the American Opportunity tax credit for college education.

Without these tax breaks, the poorest fifth of taxpayers would pay $157 more in taxes in 2015 than under current policy, the Tax Policy Center says in its analysis of Romney’s plan. The second poorest group would pay $82 more, according to the center, whose past work has been praised by Republicans and Democrats alike.

TAX CUTS

While Romney would make these two groups — the poorest 125 million Americans — pay higher taxes, the top 60 percent all would get tax cuts. The top tenth of one percent would save, on average, $464,000 a year, the Tax Policy Center’s analysis says.

His plan gives one third of his tax cuts to the top tenth of one percent of taxpayers. By comparison, Bush gave this group only one eighth of his cuts.

Romney would also eliminate estate and gift taxes, a policy that I believe would damage the spirit of striving that has served us so well until now, replacing it with a new era of dynastic wealth.

Romney’s campaign did not answer specific questions about his tax proposals, referring me instead to the plan itself.

On the more positive side of the ledger, Romney’s plan would let households earning less than $200,000 a year collect capital gains, dividends and interest tax-free. That would encourage more Americans to build cash nest eggs and to own stocks and bonds above and beyond their retirement plans.

Unlike today, when a shrinking minority of Americans has savings accounts and bonds, in the 1970s a majority earned interest. Back then, a couple could collect $400 of interest and dividends tax-free.

Romney’s plan would give unlimited tax-free interest, dividends and capital gains to about 98 percent of households. (I have recommended the same tax break be given to everybody, but with a $1,000 cap, twice that for married couples, on tax-free capital income.)

NO TAX BREAK

Given the news coverage of the low tax rate Romney paid in 2010, and expects to pay for 2011, people could easily assume he would get a huge tax break under his own plan. That is not the case.

Under his plan, high-income taxpayers would continue to pay 15 percent on their capital income, about the same rate Romney paid in 2010 and expects to pay for 2011.

As a taxpayer, Romney would do much better under rival Newt Gingrich’s tax plan. Gingrich would let everyone collect capital gains, dividends and interest tax-free. Had that been the law in 2010, Romney’s tax bill would have been cut by at least 97 percent, my calculations show.

Another provision in Romney’s plan would be to raise the ceiling on the number of visas issued to holders of advanced degrees in math, science and engineering who have job offers in those fields from U.S. companies.

While this seems like a smart idea, it does have a downside. Software engineers and others already complain that foreign workers on visas are depressing their wages, and Romney’s plan would likely make it worse. But employers will love it.

Romney, whose father was born in Mexico, would also let foreign-born students stay in the United States, provided they earn advanced degrees in engineering, math or science. And he would open the doors to wealthy people because he believes they are “job creators.”

Those last two provisions seem very smart. It is also exactly what happens in Canada, where one in five Canadians is an immigrant.

These are serious issues with potentially far-reaching implications. This is what the media should be examining, instead of verbal trivia from the campaign trail.

PHOTO: Republican presidential candidate Mitt Romney speaks at a campaign event at an RV dealer in Loveland, Colorado February 7, 2012. The Colorado caucuses take place today. REUTERS/Rick Wilking