Getting to the Top Line

The dirty secrets bag of tax reform is finally being opened for just a little peek inside, and one of the major taboo subjects is slipping out.  The now discussable (though possibly not yet actionable) secret of just what is included or not included in that little line marked “Adjusted Gross Income” is being revealed in a variety of ways.  A lot of blather is going on about general tax rates and deductions, but those things mostly affect only what is entered on that “AGI” line.  The very rich do not need many tax deductions and general tax rates to them are almost a matter of indifference, because much of their income does not make it to that AGI line in the first place.  Millions of dollars of income, often the majority for the wealthy, disappears without ever making it there.  I first was sensitized to that about 50 years ago, when I learned the esoteric trivium that tax differed on turpentine producers depending on whether the tree from which pine resin was drawn was alive or dead.  There was an exclusion from taxable income for one or the other (I forget which) because it affected the personal income of Senator Russell Long of Louisiana, the author of that particular piece of legislation.  That of course was not even the toe nail of the camel in the tent.

Larry Summers, the former Treasury Secretary, Economic Adviser, Harvard President, etc., rats on his fellow wealthy elites by listing in a recent Washington Post column some of the more conspicuous secrets of hiding income available to the very wealthy.  For example, valuation practices in the tax code make investment partners able to end up with over $50 million in untaxed IRA’s, limited for the rest of us to a $5,000 annual contribution.  Only 1 billion in tax dollars is raised from the 1.2 trillion passed through inheritance and gift each year, a less than 1 percent rate.  “Like kind exchanges” (which are really sales of large  properties) by real estate investment operators are excluded from capital gains taxes,  this after the investors have already received depreciation allowances for appreciated property values unavailable to most home owners.  And wealthy investors and companies can shield most of their income by causing it to appear in low-tax jurisdictions like Bermuda, the Cayman Islands, Ireland, etc.

Ray Madoff of the Boston College Law School points out that much of the income of the wealthy is not even required to be reported to the IRS, much less taxed. Aside from the inheritances and gifts cited by Summers, Madoff’s list includes payouts from trusts and distributions from life insurance.  It is the kind of exclusions from income listed by Summers and Madoff (and there are many, many more) that make the taxable income of the wealthy so much less than their true gross income that taxing what shows up on the tax form is often only a trivial exercise.

We live in such separate bubbles these days, aware only in minimal ways of the lives of those far up or down the socioeconomic scale from us.  Few of us know what it’s like to live on food stamps, even for a week, or the life that can be led when virtually all income is sheltered not only from taxation, but from any societal responsibility at all.  One of our societal shames is the sense many of the wealthy have that their wealth must remain hidden.  It can only come from a sense of shame, whether admitted or not, that they receive far more from society than they contribute. 

One thing that should unite us is visibility across the tax systems sufficient to know that loads are being borne fairly.  It is part of the glue that holds us together.  That we no longer have.  Summers and Madoff are right in their insistence that true tax reform will require a more open and visible income reporting system.  Any citizen receiving the benefits of our society should be responsible enough not to hide what he or she takes and contributes in relationship to that done by others.  We have lost something worthwhile since the days when Socrates, after receiving an unfair death sentence, refused the opportunity for exile instead, on the grounds that, having accepted the benefits of citizenship, he was obligated to accept its adverse actions as well.  Nothing like a death sentence, only reasonable disclosure and fair taxation is being asked of us today.  The time for dirty secrets should be gone.