I recently received an email blast from Senator Rick Scott (R-FL) with the headline: “Sen. Rick Scott is Fighting to Rein in Washington’s Out-of-Control Spending and Debt Crisis.”
I responded via his “contact me” page: “Here’s a novel idea. Get the wealthy to pay appropriate taxtes. Situation solved.”
Within a couple of hours, I received a response: “Thank you for contacting Senator Ric Scott’s office. For updates from Senator Rick Scott, we encourage you to follow @SenRickScott on Twitter.”
At least I got a response. I guess that’s good.
The issue of taxation seems to be at the heart of every good and bad debate in Washington. Of course, that was the first debate in our new country – taxes. We wanted freedom from England which collected our taxes but gave us no say in how the country was run.
The Founders knew that the country needed revenue through fair taxation which considered the good of the country as a whole. I’m not sure there really are options to taxing those who live in a country/state/community to pay for the common services that they receive – road, bridges, and the power grid to start.
Is it fair?
I don’t know. As complicated as taxation is, I suspect there isn’t anyone who really knows. We rely heavily on our elected officials to protect our interests. When we hear that they are not, in fact, protecting our interests, we become incensed.
The battle cry “raise taxes” or “lower taxes” grips our visceral emotions and makes it seem very personal. OMG, I pay enough taxes. Or…OMG, the wealthy don’t pay enough taxes. Or…OMG, corporate America isn’t paying its fair share.
Hopefully, everyone is at least aware of the recent ProPublica report about the amounts of taxes paid by the likes of Bezos, Gates, and Buffet. Whatever your “leaning” this is an important piece of information. You can decide whether you agree or not, but if you don’t even read it and all you do is listen to whatever Fox or CNN tell you is wrong/right with it, shame on you.
What I do know
I might not know about the complications of our tax code. But I have learned quite a bit about how the wealthy avoid taxes.
For most of my career, I was responsible for pay. As I became more senior, I gained responsibility for executive compensation. In corporate America, the aspiration to become a bonus-eligible leader is huge. It is at that point that the non-cash compensation kicks in. And the wealth that comes with the avoidance of taxes.
When new leaders were promoted into this level, someone in my team would meet with them to explain their new status. One of the first suggestions was to find and meet with a good tax advisor. In lower levels, the taxation avoidance usually came with deferral of bonus payments. It worked like this: you defer a percentage of your bonus (before you know what it is so they can’t claim “receipt”) to be put into an interest-bearing account. The money stays there until you retire when your tax bracket is significantly lower.
Okay, that’s actually pretty cool. In reality, most employees who participate in a 401k have the same tax-deferral opportunity.
As you advance in the corporation, you gain access to stock awards called long-term incentives because they grow in value as the company grows in value. The idea is to keep executives in the company by limiting the ability to cash out the stock. You may have additionally retirement options, more lucrative deferred compensation, protections (if we let you go, we’ll pay you $X or if we are bought, we’ll pay you $X), trusts that back the compensation and ensure that they retain value, and other tools that the lawyers and finance people think up.
So, bottom line
What this all means is that executives don’t really make much taxable income. When you hear about millionaires and billionaires, that doesn’t mean cash in a saving account. It means assets.
Employees (regular ole’ people as well as executives) receive a paycheck and are taxed in a bracket that is based on the IRS tax rates for the fiscal year. It is deducted from our paycheck.
But for executives, that’s not where their real earning are. Their assets aren’t taxed until they retire. Their assets, however, are real wealth. A lot of money is paid to folks who can shield assets from taxation and allow the rich to get richer.
Then there are the corporations
Most publicly held companies – those that offer stock to the public – have very bright individuals who do the same thing for corporate assets. They find legal ways (intended and loopholes) to allow the company to pay the least amount of taxes possible.
Many of the loopholes involve off-shoring their assets to avoid paying U. S. taxes. This is a target of the White House American Jobs Plan. To close the loopholes that allow those who earn the most substantial amounts of money to avoid paying taxes.
Taxes are complicated, yes. Have the complications, however, masked a deeper divisiveness that is crippling the average taxpayer and advantaging the wealthy? Absolute fairness is probably a pipe dream. But should fairness fall somewhere on the continuum that helps the common person?
Can someone please help me with why we can’t see the unfairness?