The Maryland Millionaire Count, Tax Scams, and Train Wrecks
Your tax dollars at shirk | Image by Win McNamee/Getty Images via Photo Journal
The Sun has some predictable drivel today regarding the state’s all-important “millionaire” head-count. Seems it’s gone down. By 30 percent! And this is a terrible thing! And it’s all because of taxes and Democrats!
As the Sun reports, last year the stated number of “millionaires” in the state, for tax purposes, was 4,910. The year before that it was 7,067. The drivel part comes next:
Sen. David R. Brinkley, a Frederick County Republican on the Budget and Taxation Committee, acknowledged that some taxpayers fell to lower income brackets because of the economy but insisted that some fled the state’s higher taxes. As a financial planner, he said, he advised one millionaire client to move to Florida.
Way to advise there, Sen. Brinkley!
The problem with the story is it takes at face value Brinkley’s claims—just as the media usually does—that slightly higher tax rates on wealthy people cause terrible unintended consequences for normal people. This is not entirely the reporters’ fault; one can’t light a Cohiba with a $100 bill these days without getting smoke in the eyes of half a dozen “economists” who’ll insist that lower taxes on the rich are always the solution to every problem. But the story lacks context and carries no challenge to a crazy theory that’s embedded in the criticism of tax-the-rich policies.
First, the context. The 7,067 millionaire count from 2007 represents about .3 percent of all state filers. The 4,910 count from 2008 is about .2 percent. Statistically, about .25 percent of American filers admit to $1 million or more in income. So Maryland’s numbers are still in line with national norms.
But these numbers represent a fraction of those who actually netted $1 million or more.
We know this because the IRS, in a roundabout way, estimated what it calls the “tax gap.” It totals about $300 billion a year—or it did, anyway, last time they calculated, in 2001.
Tax lawyers like to say the poor cheat and the rich merely avoid. The 2001 figures suggest that the rich cheat plenty, too, with more than $110 billion in missing income—tax receipts imputed to non-farm business, rents and royalties, sales of business property, and the like. These are not all millionaires, but they are not EITC filers, either. And since these figures don’t count the money stashed in secret accounts in the Cayman Islands and Zurich—all of which is incorrectly assumed to be “legal” in this exercise—they likely understate the amount of tax cheating that the millionaire class does.
Critics of the millionaire tax say they’ve never heard of a poor man hiring a worker. Only the rich do that; therefore, to render the wealthy less so by taxation is to destroy jobs.
The theory presumes that the wealthy hire people out of charity. In this model, jobs are bestowed upon lucky workers by the industrious entrepreneur, who derives his own wealth from some magical practices (having nothing to do with the workers he may hire) which are anyway unfathomable to outsiders.
To hear self-proclaimed capitalists make this argument is irritating, because it suggests they don’t understand how our economic system is supposed to work. They have the process exactly backwards.
In a capitalist system, investors make money not despite hiring workers, but because they hire workers who, if they are adequately managed, create value in excess of the wages and benefits they are paid. This value is called “profit,” and the business’ owner gets to keep that, after paying taxes.
In a properly functioning capitalist economy, rich people don’t “create jobs” for workers; workers, upon having jobs, create rich people.
That’s how the system works, in theory.
But the reality is different from the theory. In today’s marketplace, the super-rich have become richer in large part by destroying jobs. They amass staggering wealth by gambling, and fraud, and they depend very dearly on government policies (especially very low taxes on so-called “capital gains”) to protect what they have and allow them to grab more. In “capitalism” as it is actually practiced today, jobs really are a kind of charity, often superfluous to the amassing of multibillion dollar fortunes.
Today’s millionaires and billionaires make their money by creating contracts—and a lot of those are, at their core, tax dodges. Consider the “lease-back” scam that gained popularity in the late 1990s.
In a lease back, a government entity—typically a town, county, or utility cooperative—agrees to lease its physical asset to a for-profit corporation (usually a bank or insurance company), and then pay them to “lease back” the asset. In this way, municipal sewers, power plants, subway trains, and fleets of garbage trucks have found their way onto the books of financial services companies that have no use for them, except as tax write-offs. They share this windfall with the government entities to entice them into the deal, leaving as the only losers the rest of the tax-paying citizens. Brokers in these deals typically receive a huge chunk of the expected proceeds up front—tens of millions of dollars—for arranging the contracts.
The deals were always fraud, and now some of them are coming back to bite the municipalities and non-profits that made them, while leaving the bankers unscathed. This week’s BusinessWeek cover story explains this in depth, discussing derivative contracts sold to Detroit and reprising the saga of the Hoosier Energy Rural Electric Cooperative’s deal with John Hancock Financial Services, which was previously unearthed by Gretchen Morgenson of the New York Times. As Businessweek writes:
Around the same time the Hoosier agreement was finalized, the IRS began cracking down on leaseback deals. The federal agency in a memorandum called them a “sham” that lacked any business purpose beyond tax evasion and amounted to a circular exchange of assets and cash. Legally speaking, a transaction that merely reaps tax rewards and has no other economic purpose is often considered an abusive tax shelter. Although the IRS hasn’t ruled on Hancock’s tax breaks, U.S. District Court Judge David F. Hamilton concluded in an opinion last fall that they looked “abusive.” Hancock says it believes it’s entitled to the tax benefits.
Hancock is now trying to get out of the contract, and that could cost Hoosier $120 million. The small utility is raising electric rates and deferring maintenance and environmental upgrades on its power plants in case it has to pay. The guys who wrote the 3,000-page contract “earned” $12 million from the deal.
Similar deals are costing other municipalities more than money, BusinessWeek says:
In recent years the Washington Metropolitan Area Transit Authority tied up a third of its subway fleet—almost 300 cars, some 30 years old—in a series of pacts with investors, some of which required keeping the same equipment running until 2014. To avoid violating the terms, the transit authority rejected a 2006 recommendation by the National Transportation Safety Board (NTSB) to replace or retrofit older cars. The NTSB warned at the time that in the event of a crash the old cars posed a higher risk of injury to passengers than newer models. One of the old cars was involved in a wreck in June that killed nine people. A spokeswoman for the transit authority said it lacks the funds to replace the cars.
Of course, this would probably not trouble many of the alleged 2,157 alleged “millionaires” who allegedly might have left Maryland because of an alleged income tax on their honestly-reported, honestly-earned income.
Everyone knows mass transit is for peasants.